June 16, 2004

At the end of May, prices received by farmers were the highest since monthly statistics began to be accumulated in 1910.  They also were 99 percent of parity. 

Part of this increase in prices is the result of the strong gains in world economic activity.  With India’s economy surging 10 percent in the past quarter and China’s economy 9.7 percent above previous year levels, the number of people not able to afford an adequate diet has plummeted. 

Moreover, the dollar has fallen relative to the currencies of many of our agricultural competitors, such as Australia, Canada, and South Africa.  Thus, we can sell abroad the crops and some of the livestock that is not needed at home at higher dollar prices. 

Of course, there also have been production problems.  European agriculture has not yet fully recovered from last year’s heat wave.  The cotton and lower wheat and soybean belts in the U.S. have been drenched this spring.  China’s cotton fields also have been reduced as industrialization has removed some agricultural acreage.

As a result of strong world demand and reduced supply, prices at the grocery may be as much as 4 percent above previous year levels at the end of this year.  Those farmers experiencing normal production conditions should be able to buy new equipment and pay down previous loans. 

However, some agricultural commentators may point out that a bushel of wheat only buys as many nails, board feet of lumber and other agricultural necessities as it did almost a hundred years ago.  This is exactly what parity is all about. 

Unfortunately, agricultural policy has been based upon bushels of wheat, head of cattle and other specific measures of agricultural production rather than the more relevant measure of farm income.  We have assumed that a bushel of corn or a bale of cotton should purchase the same quantity of non farm goods as it did a century ago. 

If the ability to produce a bushel of wheat improved in tandem with the ability to produce other goods in the economy, maintaining similar price changes for farm production as for other goods would be relevant.  But that has not been the case. 

Right after World War II, a farmer would be proud to produce 50 bushels of corn on an acre of land.  Today, the average farm produces more than 130 bushels and bragging rights are reserved for those with yields of more than 200 bushels. 

To be sure, the ability to produce other goods and services also has improved.  However, productivity gains on the farm have been twice as rapid as in the overall economy.  American agriculture has been one of the greatest success stories in the industrialized world. 

Agriculture clearly has some unique problems that justify government intervention.  A farmer should not lose the family farm because rain did not fall or an untimely windstorm destroyed production. 

Farmers should not be forced to sell because tight credit conditions cause banks to deny loans or reduce loan balances.  These are problems that clearly justify some community intervention. 

In Europe, governments also argue that family farms must be preserved to insure the viability of the quaint villages that dot the countryside.  (Many of our quaint villages are in New England, where most family farms disappeared a long time ago.)  Indeed, Europe’s desire to maintain agricultural subsidies is one of the major reasons why the Doha tariff discussions have been stalled.

I clearly believe that low cost crop and livestock insurance should be made available by our government.  I also believe that credit availability should be assured to farm communities.  However, supporting product prices or restricting production through acreage quotas is as antiquated as the parity measure that continues to be reported with agricultural prices. 

If this were not an election year, now would be an ideal time to remove some of the farm programs that no longer are justified by prevailing farm conditions. 

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