Spotlight on Economics: Does a need for new farm policy exist?
By Saleem Shaik, Professor
NDSU Agribusiness and Applied Economics Department
Much has not been made of Frank H. Knight’s 1921 famous distinction between risk and uncertainty.
In Knight's interpretation, “risk” refers to situations where the decision maker can assign mathematical probabilities to the randomness of magnitude with which he is faced. In contrast, Knight's “uncertainty” refers to situations when this randomness of magnitude cannot be expressed in terms of specific mathematical probabilities. Analysis of risk, a concept in relative variation, is not new to agriculture and has been the subject of research at least for a century.
A farm bill refers to a multiyear, multicommodity federal support law in the form of federal farm programs for farm commodities. The federal farm programs were introduced as part of New Deal legislation proposed by incoming President Franklin D. Roosevelt in 1933 to address declines in farm prices and net farm income.
The primary intent of the federal farm programs is to reduce risks faced by the producers at the time of random losses. With reduced risk, producers are willing to adopt innovative production practices/technology to increase their farm production that they would otherwise not be willing to adopt if they faced more risk due to the absence of federal farm programs.
Since 1933, the design of farm policy has changed or maintained the status quo approximately every five years with the authorization of a new farm bill; in 1938, public law (P.L.) 75-430; 1948, P.L. 81-439; 1954, P.L. 83-690; 1956, P.L. 84-540; 1965, P.L. 89-321; 1970, P.L. 91-524; 1973, P.L. 93-86l; 1977, P.L. 95-113; 1981, P.L. 97-98; 1985, P.L. 99-198; 1990, P.L. 101-624; 1996, P.L. 104-127; 2002, P.L. 107-171; 2008, P.L. 110-234; 2014, P.L. 113–79; and 2018, PL 115-334. They have provided protection to producers.
In 1938, the Federal Crop Insurance Corporation (FCIC) was created to provide protection not only against price and income variation but also from the Great Depression. The U.S. Department of Agriculture’s Risk Management Agency (RMA) for the Federal Crop Insurance Corporation administers the crop insurance program in the U.S.
Unlike other insurance policies, federal crop insurance is a unique public-private product sold and serviced by private insurance companies. New crop insurance policies were introduced or existing policies were amended in 1940, 1977, 1980, 1996, 2000, 2002 and 2008.
Although U.S. federal farm policies, including traditional farm and crop insurance programs, rarely are intended to alter the structure of U.S. agriculture, the effect of these programs on the structure has long been an economic as well as a political concern. A fundamental question in the mind of academics, policymakers, commodity groups and, most importantly, producers is: Are farm programs introduced as part of the farm bill addressing the risks associated with farm income and exports?
Second, does a need exist to strengthen the “trade aspect” of the farm bill, given exports are a major component of our agriculture? To address these aspects of the farm bill and risk, let us take a look at North Dakota’s agricultural sector farm income, farm program payments, and exports and their associated risks.
Traditionally, trends and risk or variations in cash income, program payments and exports are used by producers, policymakers and commodity groups to gauge growth in North Dakota agriculture. Research shows an increasing trend for cash income, with a peak of $11.03 billion in 2013, and increasing exports peaking at $4.89 billion in 2014. At the same time, federal government direct-farm program payments also showed an increasing trend, with a peak of $1.178 billion in 2000.
With changes in consumer preferences domestically and, more importantly, global economic and political issues, a need exists to not only take a look at risk defined as five-year deviations (approximately five years for each farm bill) but also a closer look at the relationship between farm policies introduced as part of the farm bill and its importance to alleviate risks faced by the producers.
Even though research shows an increasing contribution of trade with a peak of 48% in 2008 and 2018, the farm bill does not explicitly address the export risks faced by North Dakota producers. For example, recent risks faced by producers include retaliatory tariffs and COVID-19, with high impact to producers’ cash income.
Farm policies introduced as part of the farm bill do not address these uncertainties; however, policies are developed ex-post (based on actual results rather than forecasts) and not ex-ante (based on forecasts rather than actual results). A need exists to introduce farm policies as part of the farm bill to address short-, intermediate- and long-term gross cash income risks.
Second, a need exists to identify the downside risk associated with gross cash income, exports and farm program payments. Are current farm policies and associated farm program payments introduced as part of the farm bill addressing North Dakota producers’ gross cash income risks or variation?
The average gross cash income showed an increasing trend, with a peak during the farm bill period of 2008 to 2014 of $9.48 billion. The farm program payments did not show an increasing trend but peaked during the farm bill periods of 1996 to 2000 at $686 million and 1985 to 1988 at $618 million, while the exports showed an increasing trend.
Looking at the deviations or risk, gross cash income and exports had the highest risk during the farm bill period of 2008 to 2014, but the farm program payments were not the highest, suggesting no link exists between the deviations or risk faced by producers and potential help to the producers from farm program payments. This could be attributed to a lack of linkage between risks faced by the producers and farm policies that are supposed to help the producers at the time of risks.
This also suggests a need to take a closer look at farm policies and have a discussion with producer groups to create future policies that would address uncertainties ex-ante and not ex-post.