To summarize, when confronted with the high cost of farm programs at each of these 3 decision points, the U.S. chose to keep a common framework for most program crops but to allow program parameters to be customized for individual crops. The U.S. also chose to reduce price support levels even when it meant reversing previous decisions to raise them. In short, U.S. farm policy has trended toward more program flexibility and greater market orientation.
Explaining Program Flexibility and Market Orientation -The Role of Price Prediction and Elimination of Set Asides
The assistance provided by fixed supports depends on market conditions and the level at which Congress sets the fixed support. In setting a fixed support, Congress essentially determines a politically acceptable target that falls within budget constraints. In essence, Congress makes a forecast based on information available when it sets a fixed support. The fixed support will end up providing no assistance if market price ends up higher than expected when the fixed support was set. On the other hand, the fixed support will end up making frequent and potentially large payments if price ends up lower than expected when the fixed support was set.
It is well established in the academic literature that predicting price is difficult to do accurately. Thus, it should not be surprising that the occurrence and amount of payments from fixed supports can vary strikingly among crops. A solution for this outcome is program flexibility, thus, in part, customizing the program to each crop’s situation, and making the program more market oriented. As noted above, the U.S. has chosen this solution when the cost of farm supports became too high.
A relatively recent policy change further enhanced the importance of prediction accuracy. In the Federal Agriculture Improvement and Reform Act of 1996 Congress eliminated acreage set asides. While Congress gave farmers greater freedom to make planting decisions, it also eliminated a policy instrument that could be used to adjust farm programs and their cost on an on-going basis. In particular, if market price was lower than expected, set aside could be increased to reduce supply and thus reduce the cost of the fixed support program. In short, eliminating set asides increased the importance of Congress making an accurate prediction when setting fixed supports.
Performance of the price counter-cyclical program, since being enacted in the Farm Security and Rural Investment Act of 2002, is consistent with the preceding discussion. Over the 2002/03 through 2010/11 crop years, of the 9 crops included in Figures 1 through 3:
- only 1 received payments in approximately half of the years: rice (44%)
- only 1 had a share of payments within 10% of its base acre share: corn (36% vs. 33%)
- 2 received payments in more than three-quarters of the years: cotton and peanuts
- cotton accounted for 50% of all counter-cyclical payments, but 7% of all base acres
- peanuts accounted for 6.5% of all counter-cyclical payments, but 0.6% of all base acres
- 3 received no counter-cyclical payments: oats, soybeans, and wheat