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Strong domestic market argues for set-asides

Who's really to blame for low prices? Freedom to Farm, new technology, the American farmer, government subsidies? Arguments can be made for all four.

Everyone agrees that global over-production of all our agricultural commodities is at the core of today's low prices. Used to be that we could count on at least one major disaster in the world per year to reduce overall production and increase export demand.

Remember when the Indian and Pakistani cotton and corn crops would occasionally be completely wiped out by worms? Crop failures like that don't seem to be happening much anymore, what with pest-resistant crops available over there.

On one hand, this is good. Crop failures in a poor country often result in losses of crops, livestock deaths and much human suffering. It's hard to blame technology under those circumstances. Nonetheless, consistent production is as much to blame for over-production as anything else.

Then there are our U.S. farmers who often are their own worst enemy - whenever prices of a commodity rise to high levels, they react by planting more of the commodity than the market can handle.

Low prices are supposed to cause production to contract, which is supposed to increase demand and bring back profitable prices. This hasn't happened in the United States and elsewhere, in part because government subsidies and price floors, here and around the world, offset the impact of the market on plantings when prices are low.

The problem, as we all know, is that we are producing more grain, soybeans, and cotton than can be sold at profitable prices. For University of Tennessee economist Daryll Ray, this begs a question, "What would happen if other businesses behaved in such a way."

For example, Ray muses, Ford Motor Co. "would run all its vehicle assembly plants at full capacity all the time - three shifts a day - while actively seeking technological advances to further expand output. It would continue to do this even though the price required to unload the large supply of cars would cover only a fraction of the full cost of producing a car. Then, rather than reducing output to meet demand at a profitable price, Ford's executives (Congress) would implore their stockholders (taxpayers) to fork over billions of dollars to compensate for the low prices they receive for the cars (grain)."

Of course, Ford doesn't operate that way, Ray notes. "It adjusts both short-term output and long-term capacity to meet market conditions and to meet price and profit targets. It intends to have more productive capacity than it usually needs and it has no qualms about leaving a portion of it idle on average. Most importantly, Ford would not allow the price of its cars to approach the variable cost of producing a car."

But U.S. farmers don't have the ability to influence their price and profits by adjusting output. At least not anymore.

Neil Harl, an agricultural economist at Iowa State University, likens the USDA's secretary of agriculture role to being the CEO of agriculture, "who could do for agriculture what agriculture couldn't do for itself." But Freedom to Farm stripped the secretary of programs to influence crop output and marketings.

All this has led to more discussion of the possibility of set-asides to control agricultural production. But there are concerns here, too. For example, will set-asides adversely impact our ability to supply our products around the world? And with so much talk about the growing world economy and such, could we be giving up too soon? And, I wonder, how much impact can U.S. policies for controlling prices have now that we are truly in a global economy?

Well, we may need to rethink some of our positions on the value of the export market, according to Ray. He has produced figures that show that domestic usage, not exports, has driven sales in U.S. corn and soybeans.

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