Agreement has been reached between House and Senate negotiators on a new Farm Bill.
The typical mantra following a tough negotiation is that while the bill isn¹t perfect, it¹s the best lawmakers could do considering the circumstances.
Also, there¹s the threat of a veto from President Bush as he has been quoted saying that the bill is "bloated" with farmer subsidies in a time of record crop prices and is too expensive.
But one wonders how relevant the Farm Bill really is in light of the current food crisis. It¹s real worth, and the bulk of Farm Bill spending, is for nutrition programs. Because of higher food cost, increases in federal spending on nutrition programs, such as food stamps, becomes a high priority for the bill.
According to Cole Gustafson, North Dakota State University Agriculture Economist, and Dwight Aakre, North Dakota State University Farm Management Specialist, future food prices may be more dependent on the decisions of the Federal Reserve Board, Department of Energy and Environmental Protection Agency than the Department of Agriculture.
In light of increasing food prices, what Gustafson and Aakre are advocating is a "broad range of federal policy changes that could be undertaken to increase the quantity of foods produced and moderate the rapid inflation of food prices." According to Gustafson and Aakre, increasing ethanol production has little to do with the rising value of raw commodities is small.
For example, Gustafson and Aakre said even at the current high corn prices, the value of the corn in a box of Corn Flakes, by weight, is less than 30 cents.
Also, they point to several studies by the Federal Reserve Bank of Kansas City and Texas A and M University confirm that the increasing costs for transportation, labor and energy overshadow higher agricultural commodity prices.
Transportation, labor and energy made up 45 percent of the real cost of food compared to 19 percent being the farm value.
One area of public policy Gustafson and Aakre would review has to do with changing the Farm Bill.
In the past, Gustafson and Aakre said provisions of the farm program, such as direct payments and loan programs, could be adjusted up or down to manage U.S. food production goals.
"However, when prices for most commodities are far above support levels, such as now, these provisions matter less to producers," they said.
"Therefore, even substantial changes in farm program provisions would do little to increase overall food production." Gustafson and Aakre said direct payments do not have an impact on what or how much is produced.
"Provisions, such as loan rates, loan deficiency payments, farmer-owned reserve, set-aside, target prices, counter-cyclical payments, deficiency payments, acreage allotments and subsidized crop insurance, could have an impact on the levels and mix of crops produced," they said. "Of this set of farm program tools, only crop insurance is having any significant impact today." Gustafson and Aakre would also like to open up Conservation Reserve Program
(CRP) acreage back to crop production.
According to them, a significant amount of acres went into CRP as whole-farm units during the financial crisis of the late Œ80s and early Œ90s.
"Much of this acreage is very productive, even though it is highly erodible," Gustafson and Aakre said. "Returning these lands to production would increase total food supplies." Gustafson and Aakre also said other USDA restrictions on the drainage of nuisance wetlands, commonly referred to as the Swampbuster Program, are keeping many potentially highly productive crop acres from being adequately drained.
"If changed, it could result in a significant increase in production on those acres," they said.
Gustafson and Aakre also would like to remove the 51-cent-per-gallon blender¹s tax credit for ethanol production, which would lessen the overall demand for corn.
"Removing the tax credit would result in either more corn for food, more meat produced, more of other crops produced for food or a combination of all three," Gustafson and Aakre said. "The bottom line is that saving a bushel of corn from ethanol production only provides two-thirds of a bushel for another use that wouldn¹t otherwise be available. It is not a one-for-one savings." They said ethanol provides 5 percent of the total U.S. gasoline supply.
"Producing less ethanol would raise gasoline prices further, which would exacerbate another price problem the federal government is trying to solve," Gustafson and Aakre said.
They also advocate removing the 54-cent-per-gallon tariff on foreign ethanol and allowing more ethanol to enter the U.S.
"Unlike the removal of the blender¹s tax credit, this policy change would dampen demand for corn acreage, but it also would result in lower, not higher, fuel prices," Gustafson and Aakre said.
They said the eventual impact would be small because ethanol constitutes only 5 percent of U.S. gasoline consumption at present.
"Moreover, climate change implications of this policy are mixed because imported ethanol primarily is derived from sugar cane," Gustafson and Aakre said. "While the carbon footprint of sugar to ethanol is more favorable than corn ethanol, concerns have been raised about the deforestation of additional acres to meet U.S. demand." A thorn in the side of farmers recently is the high cost of fertilizer.
In addressing the problem, Gustafson and Aakre said they would remove the tariff on urea from former Soviet Union (FSU) countries.
According to Gustafson and Aakre, the U.S. imposes a tariff on imports of urea fertilizer from FSU countries that effectively keeps imports from these countries out.
"The FSU countries are the world¹s leading exporters of urea fertilizer," they said. "U.S. farmers are not able to utilize this lower-priced source of nitrogen, which is a key yield-enhancing input for many crops, particularly corn and wheat. Allowing it in would lead to higher overall farm production." Gustafson and Aakre would also raise interest and exchange rates.
"The most direct policy for increasing food supplies is monetary policy set by the Federal Reserve Board and its chairman, Ben Bernanke," they said.
According to Gustafson and Aakre, the Federal Reserve has lowered interest rates in an effort to avoid a U.S. recession, restore confidence in distressed financial markets and aid a struggling housing sector.
"However, lower interest rates have had the unintended consequence of lowering the exchange rate for U.S. currency," they said.
Since 2000, Gustafson and Aakre said the exchange value of the dollar has fallen by almost 40 percent. They said that as the value of the U.S. dollar falls, U.S. food becomes cheaper overseas.
U.S. agricultural exports have risen nearly 40 percent ($62 billion in
2004-05 to $82 billion in 2007), which is about as much as the fall in the value of the dollar, Gustafson and Aakre pointed out.
"Likewise, a falling dollar has made it much more difficult to purchase the 60 percent of U.S. oil that is imported," they said. "Raising interest rates and the exchange value of the U.S. dollar would result in less export demand for U.S. agricultural commodities, but lower the cost of foreign oil purchases."
