Shortly after the latest G-8 summit wrapped up in Japan in early July, speakers at a National Family Farm Coalition-sponsored forum pointed to the lack of a strategic grain reserve as a cause for current agriculture market conditions.
Over the last 25 years “when we've had a severe shock to the market — especially the corn market — we've had stocks in place to moderate price and provide supply to domestic and export customers,” said Daryll Ray, economist/director of the Agriculture Policy Analysis Center at the University of Tennessee. “We can lose sight of that and now we're on unfamiliar territory because we haven't had the same situation in the past.”
Low corn yields in 1983, 1988 and 1993 were ameliorated due to grain reserves.
“And in the cases of 1983 and 1988, we had substantial reserves that made a tremendous difference” after “yields went from 120 bushels per acre down to 85 bushels. Think about that percentage drop.
“Today, we're facing something equally severe. However, we don't have the stocks that we had then.”
The current situation occurred because, over time, there came to be a belief that growers could quickly provide needed grain stocks in a times of shortage. That has proven untrue, said Ray.
What about storage costs for such a reserve? “When you think about spending 25 cents to 30 cents per bushel per year for storing a portion of the crop rather than spending $1 or $2 per bushel in some cases, for (government) payments, we're not being very truthful about how much it costs relative to the damage it can do when it isn't in place.”
Such a reserve would cost “millions of dollars per crop, per year, for the storage. It would be in the high millions — towards $1 billion. But we'd be getting a more stable price structure for farmers here and around the world. (It would allow) those buying our commodities to pay a larger share of the cost of production and have that stock available at times like these.”
The current economic disruption — “it isn't just livestock … it is affecting so many sectors of the economy, both domestic and international — is coming home. Maybe this is a teachable moment and people will understand. We should be preparing for the next go-around.
“In my view, the cost of a farmer-owned grain reserve is peanuts compared to what's been spent and the damage it's done in the past without the storage.”
Some reject the idea of a grain reserve because it puts downward pressure on prices. “That's mostly determined by where the release price is set. If the release price is set too low, sure it'll have a downward pressure very quickly.
“But when you set it high enough, you want downward pressure on prices. Just ask the livestock producers, who are in extreme trouble, right now.”
While some past arguments against a farmer-owned grain reserve “sounded kind of logical and appealing, these last few years have shown they aren't that relevant. We'd have been much better off if we could have raised the price in 1988, 1999, 2000 and 2001 by sopping up some of that excess for times like this.”
Where blame belongs
Like other farmers in the Corn Belt, Indiana grower Troy Roush has seen “some awful weather” this growing season. “In many places, I'm into a third replant with both corn and soybeans. It's been a very challenging year.”
Roush, vice president of the American Corn Growers Association, rejected the charge that ethanol is largely to blame for high feed prices. If that's the case, “how do you explain why wheat prices are high? Why rice prices are high? You certainly can't grow corn on rice land and wheat lands are largely unsuitable for corn. Is ethanol responsible for high steel prices, too? Or could there be other factors influencing commodity prices?”
As for higher food prices, Roush pointed out that farmers receive only about 20 cents of every dollar the consumer spends in the market.
“It just doesn't track true that ethanol or even farmers' take of the total supermarket dollar is responsible for the recent upsurge in food prices. You must look deeper.”
No one should forget, said Roush, that corn buyers have been able to purchase corn — and other subsidized commodities — at prices well below the cost of production. In those times of plenty, “the prudent thing would have been to implement a farmer-owned reserve. If we'd done it then, we'd have stabilized prices above cost of production, saved taxpayers subsidy payments, and, in turn, those reserves would now be moderating the price of corn and providing the benefits of food and energy security.”
Those pushing for the elimination of the Renewable Fuel Standard and “gutting” the Conservation Reserve Program are misguided, said Roush. “If we do that, we'll quickly return to the same old paradigm of farmers producing below cost of production and taxpayers making up the difference. The cost of production will be paid from the marketplace or from the government through subsidies and tax dollars.”
Roush's farm isn't a factory. “I can't turn it off and on with a switch. It's subject to the whims of Mother Nature. I could produce a bountiful crop or, as it appears this year, a meager one. We must have a farmer-owned reserve to stabilize the ups and downs of production and stabilize the marketplace for everyone, not just farmers.”
In the United States, the wisdom of a strategic petroleum reserve is accepted. “Yet, we don't have a strategic grain reserve. I don't understand that. Are we more concerned about driving cars than eating?”
Developing nations undercut
Regardless of the reasons, consumers in the developing world are hurting from higher food prices, said Patrick Woodall, senior policy analyst with Food and Water Watch. “Cereal and bakery products are projected to double in price this year. The important part here is consumers see cereal prices go up when input prices rise. But they never see the pass-through when input prices fall.
“When the crop prices collapsed in 1996, the grocery store prices didn't come down at all. In many cases, they went up for things like pork chops, ground beef and milk.”
In the developing world, Woodall said, the cereal price index rose 88 percent between March 2007 and March 2008. “That's a giant jump. The World Bank and the United Nation's Food and Agriculture Organization project that an additional 100 million people could face malnourishment because of the current price environment.”
Much of the global cereal trade below the cost of production was a deterrent to “holding onto any reserves at all. So the world ending stocks for corn, wheat and rice have all fallen by more than 40 percent since the 1999-2000 season.”
Woodall says another factor driving stocks down in the Third World is “the World Bank has pressured countries to eliminate their own reserve programs, much like the U.S. eliminated theirs and the EU and China reduced their buffer stock programs.
“Countries like Kenya and Malawi were forced by the World Bank to sell off their reserves. That was partly because of fiscal austerity reasons. But it was also partly to repay debt to the World Bank.”
Woodall said other countries including India, Senegal, Zambia, and Tanzania reduced regional marketing programs. “Those included a lot of regional (storage) programs that were used to take in crops and bring them to market. But also as a reserve against times of crisis for high food prices and a hedge against low supply.”
As these programs have been eliminated to conform with World Bank directives, “we're now in a situation where there's no buffer to protect people from a severe food crisis.”
And word from the recent G-8 meeting is “more of the same bad medicine. The next round of WTO talks at Doha will present a new opportunity. But it's really just more of the same. And more of the same in the current environment won't help farmers and consumers in the developing world or here at home.”
Be smart, store up
This is Iowa farmer George Naylor's thirty-second crop. “It's absolutely critical that people understand (the need) to let a market-oriented farm policy determine farm prices,” said the former president of the National Family Farm Coalition. “Now, it's a global question because we're all tied together through trade agreements.”
Facing a short crop, “no one knows how high prices will go. Of course, on a global scale, the people with the most money will buy food and those with the least will starve. We've gone from ‘Freedom to Farm’ in 1996 to ‘Freedom to Starve’ in 2008.”
The United States, by eschewing a policy of grain reserves and market price supports at the behest of corporate agricultural interests, has “followed a disastrous market-oriented farm policy that has destroyed family farm agriculture in this country.”
Naylor called the WTO backing of liberalized trade and allowing the market to regulate agricultural prices and stocks “insane. It doesn't make sense from the beginning.
“I see the G-8 leaders have (said) there may be a need for reserves after all. Well, it's a little too late to figure that out after we've lost so many farmers around the world and people are starving.”
The current crisis won't be the last to hit agriculture. “We're going to have shocks in the future,” said Ray. “Part of those shocks will be from supply-side weather and pests. Other parts might be demand-side caused by government policy — whether an ethanol policy, the Russians deciding to feed their livestock instead of slaughter them, or a war.
“Things will happen. It isn't a case of just getting past this (current crisis) and everything will be okay. We need to use this as a teachable moment and get ready for the next time.”
What should growers be pushing for? “First, we must prepare for the short-run sort of disturbances. We don't know when they'll occur, but we know they will. That means we need a reserve program.”
Second, “we need preparations for long-term trends in agriculture, whatever those are. If it turns out the supply increases faster than demand — and we know the nature of agriculture is it doesn't adjust to low prices quickly, either on the supply or demand side — we need to provide some price and quantity stabilization.”
To Ray, “that means an element of supply control. As we move into a more globalized environment, reserves need not only be at the country level but internationally coordinated. Obviously, that adds another level of complexity.
“I don't know how long it will take people to get to the point where they understand how agriculture (commodities) differ from bolts, CDs and other stuff. I won't argue with the WTO in regards to (non-agricultural) products. But I do know that people don't riot over wristwatches. They riot over food. And food is so much different, there needs to be different policies for it.”