Finding where supply meets demand sounds like the job of Adam Smith's invisible hand. In a laissez-faire system, farmers can respond at once to shifts in demand and all will be right in the world, right? Not right.
As Elanor Starmer, a graduate student at Tufts University, put it (I'm paraphrasing), when supply exceeds demand for cars, you can turn off a production line, but when supply exceeds demand in agriculture, you can't turn off a cornfield. And, as a cranberry grower said to me this week, it takes three years after planting to get a good cranberry crop.
Better yet is the story of Kauai's coconut coast - many years ago a naive "haole" (white dude) got it in his head that he would make his fortune with coconuts; he only realized after planting coconut palms up and down the eastern coast of Kauai that it takes a few decades for the trees to grow and produce fruit. Damn you Mother Nature, why didn't you read The Wealth of Nations and why will you not obey?
So how should any individual farmer find the right amount to produce? As much as possible? Less than that? Think about it in terms of game theory:
As a farmer, you can produce one of two quantities - a lot or a little. The amount you produce will have little effect on the overall price. However, all farmers together will either produce a lot (making the price low) or a little (making the price high).
The best outcome is if the market produces a little but you produce a lot. Beyond that, it depends. If you produce a lot but the price is far below the cost of production, you lose a lot. If you produce a little and sell it at a good price, you might still have to pay for a lot of overhead costs that are not spread out over very much production. Ultimately, if things get too bad, you will need to leave your farm.
In other words, there is a lot of volatility in the outcome, and there are quite a few outcomes in which you get screwed.
If we were talking about the market for widgets (whatever those are), this might be okay. Of course it would suck for people who lost their widget businesses, but ultimately society as a whole would not suffer. But if we are talking about farming, then we are talking about our national food supply. We don't want volatility in the national food supply (as well as other public goods like clean air and water, open space, and vibrant communities). We want to know that we as a nation will be able to eat every year.
As the national food supply is a public good, our government grapples to find a way to protect it. In a broad sense, the government has only three methods at its disposal: control supply to keep prices high, establish set prices that purchasers have to pay for farm products, or pay farmers the difference between the actual price and what the government thinks is fair. Historically, the government has attempted to keep prices high by managing redistributing surpluses and by paying farmers to leave a portion of their fields unplanted, and establishing a price floor.
The National School Lunch Act of 1946 made the National School Lunch program permanent; the goal was a win-win scenario - food for kids and a venue to soak up agricultural surpluses all in one. (Mother Jones pointed out that the program has conflicting missions, as the food subsidized for agribusiness is often simultaneously unhealthy for schoolchildren.) In 1954, the Food for Peace Act sent even more surpluses overseas.
The second method to prop up deflated commodity prices was creating a "soil bank" - a certain amount of land that the government would pay farmers to leave unplanted. This was established with the Agricultural Act of 1956 and expanded in 1961. By limiting supply to support prices (together with a de facto price floor, the repayment rate for the Marketing Loan Assistance program), the government put the burden on buyers of commodities to pay farmers enough to keep them in business.
In 1973, the government took a new approach. Instead of aiming to keep prices high, Nixon's Secretary of Agriculture, Earl Butz, decided to set a target price and to subsidize farmers when market prices fell below that price. This was passed in the Agriculture and Consumer Protection Act of 1973.
Why was this so drastically different from the price stabilization approach of the past? Instead of matching supply and demand, we let supply run amok. If a farmer can squeeze 10% more corn out of the same amount of land, then he or she should do it, and so what if it drives the prices down? The target price stays the same. The burden falls on the taxpayers to help the farmers squeak by, which means buyers of commodities get a free pass as prices spiral downward.
Earl Butz told farmers to get big or get out. Both The Omnivore's Dilemma by Michael Pollan and Fat Land by Greg Critser point to him as the culprit for our modern smorgasbord of processed food. We got big all right. Right around the waistline.
When the corn prices fell, we found more and more uses for corn. Ethanol, livestock feed, cornstarch, and high fructose corn syrup are only a few uses for the bushels upon bushels we grow. And once we found a use for it, we ate it, whether we were hungry for it or not. Evolution gave us the amazing ability to keep on eating while the eating is good. Once we gain weight, our bodies do not give it up without a fight - even if we are overweight.
Since the days of Earl Butz, you might think we would have seen the error of our ways and repented, but we have not. The 1996 farm bill further promoted a laissez-faire agriculture system, removing the last remaining supply control policies and causing corn and soy prices to drop an average of 23% and 15%, respectively, below what it cost to produce them during the years 1997 to 2005. Prior to the passage of the 1996 bill, these margins were 17% and 5%, respectively.
In a paper entitled "Feeding the Factory Farm: Implicit Subsidies to the Broiler Chicken Industry," researchers at Tufts University studied the effects of the 1996 farm bill on the industrial broiler chicken industry. Feed comprises 60% of the production costs of broilers, so any change in corn and soy prices also affects the broiler industry in a major way. The price drop in corn and soy resulting from the 1996 farm bill translates into a $1.25 billion per year discount on operating costs for the broiler industry. That discount makes overall operating costs for a broiler CAFO 13% lower than they would be if feed prices reflected what the feed components - corn and soybeans - actually cost to produce.
When Earl Butz said get big or get out, he meant farmers, of course. A family farm that raises its own feed and its own chickens suffers a disadvantage when it competes with the CAFO described above. The family farm pays full price to grow its feed and thus full price to raise its chickens. Because it never receives a government subsidy equal to 13% of its operating costs, the family farm does not compete on a level playing field with the CAFO.
The suits in Washington do not care that our farm policies give an advantage to factory farms so that family farmers cannot compete fairly with Tyson. They don't care that Wisconsin's obesity rate rose from the 15-19% range in 1997 to the >25% range in 2004 either. The losers of our system are the taxpayers (who foot the subsidy bill) and the farmers (often they operate in the red even with the subsidies).
The winners are the corporations who purchase cheap, subsidized commodities, "add value" (and often remove nutrition), and sell them right back to the very taxpayers who subsidized them in the first place. Investing in people and in communities isn't profitable to those in power.
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