White House Report Cites Problems in Commodity Subsidies

By IDFA Senior Vice President Chip Kunde

The White House just released its 2006 "Economic Report of the President," which contains some salient points for agriculture. Compiled by the president's Council of Economic Advisers, the annual report provides the Bush Administration's interpretation of current economic issues and the role of its proposed policies. It is only the third time in three decades that the Council has dedicated an entire chapter to agriculture.

There are two key findings for U.S. agriculture: 1) Most farmers do not benefit from commodity subsidies; and 2) Support to agriculture can be provided in many forms that are potentially less market-distorting than current farm subsidies.

Though the report does not directly address dairy programs, it provides support for more market-oriented farm policies to allow U.S. agriculture to compete "in a global marketplace that has been freed of domestic support and barriers to trade."

The report notes that today's agriculture commodity support programs are rooted in New Deal legislation that followed the Great Depression of the 1920s and 1930s. The programs put in place at that time, including the Federal Milk Marketing Orders and Dairy Price Support Program, were designed to sustain prices when a large portion of the U.S. population was engaged in farming. But "changing economic conditions and trends in agriculture since then suggest that many of the original motivations for farm programs no longer apply," the report states.

"A more economically efficient farm policy would reflect contemporary economic conditions, environmental needs, and public values," it concludes.

The report suggests a shift to policies that are cost-effective and give farmers greater opportunity to respond to market signals.

"Revising government policy to better meet these objectives would help unleash more of the innovative energy that has long characterized American agriculture," the report states.

The Council of Economic Advisers believes that market solutions are best for risk management. For dairy, this would include having robust risk management tools for farmers and more liquidity in the dairy futures markets.

"Management of the risks faced by large commercial farms — who receive the biggest share of U.S. subsidy payments — may be best served by crop or revenue insurance and forward pricing through participation in futures and options markets," the report said.

Clearly, the use of forward contracting as allowed under the now-expired USDA dairy pilot program would be another good example of a useful risk management tool, especially for smaller farmers who cannot use the futures and options markets the same way larger farmers can (due to issues of margin calls and trading large contracts, for example).

Coming on the heels of the President's FY 2007 budget, which promoted greater efficiencies in federal agricultural programs, this report signals a continued willingness by the administration to challenge the status quo and look toward a future where innovation on the farm and at the plant are encouraged and rewarded. IDFA will urge policy makers to consider the economic analyses and observations supplied in this report as they begin work on future federal farm policy. For more information, contact me or IDFA Chief Economist Bob Yonkers, at (202) 737-4332.

Posted February 21, 2006