By John K. Hosemann
Introduction
John Hosemann, who recently retired from the American Farm Bureau, brings some unsettling insights to his analysis of agriculture and the environment. In this essay, he examines the mixed legacy of federal intervention in agriculture and its impact on environmental conditions.
To Hosemann, farm conditions today are the result of many "ad hoc" government policies, many of them put into place to help farmers cope with previous governmental interventions, such as inflationary–and deflationary–monetary policy. The result of all these forces is today’s high-yield, high-technology agriculture, which has both good and bad results.
"As an economist with the American Farm Bureau for more than a quarter of a century, I advised farm leaders against dependence on government subsidies," he says. "At the same time, I cannot ignore the fact that some of agriculture’s environmental improvements stem from just those subsidies. Our farm environment reflects a complex mix of factors, including national and international forces outside the control of farmers."
American agriculture is a marvel. I have been involved with agriculture over the past thirty years and have seen how genetic improvements, better soil management, larger and faster field equipment, and new knowledge about animal nutrition have made much more food available to Americans and the rest of the world. Total U.S. farm production has increased by 80 percent—nearly doubling. At the same time, this abundance has required less labor, capital, and resources.
Although agriculture is sometimes under fire from environmental critics—as this paper will discuss—, the increase in farm production has been accompanied by major environmental improvements. New technologies have limited the environmental damage of greater production. For example, the shift from conventional tillage to no tillage has reduced erosion. Most modern chemicals and fertilizers break down in short periods with sunlight. Larger field equipment and advanced technologies speed up planting and harvesting. The shorter disturbance times and the high yields leave a smaller footprint on the natural landscape, giving more room and time for wildlife to thrive.
Today’s high-tech, high-yield, intensive agriculture was born out of a property-rights based system but also reflects heavy government investment. As an economist with the American arm Bureau for more than a quarter of a century, I advised farm leaders against dependence on government subsidies. At the same time, I cannot ignore the fact that some of agriculture’s environmental improvements stem from just those subsidies. Our farm environment reflects a complex mix of factors, including national and international forces outside the control of farmers. In this essay I will attempt to outline those factors, with the goal of assessing the present state of environmental protection on America’s farms and offering recommendations for the future.
Agriculture Today
To begin with, agricultural production can prosper only in a private property setting. Given the variations in weather, pests, and the natural biological processes, it is essential that farm and ranch operators maintain the capacity to make production and marketing decisions quickly. These decisions can not be made without the right to own, use, and dispose of property. Socialized farming, dramatically illustrated by the failed central planning of the former Soviet Union, is inefficient at best, disastrous at worst. It leads to higher- cost output in terms of lost human capital, slower decision-making, and missed opportunities.
United States agriculture has existed in a private property setting, and that is undoubtedly one reason for its success. However, over the past thirty years, the federal government has increased its role in farming through various subsidies and the regulation of land, water and air. Massive amounts of money were transferred to farmers from taxpayers to try to keep incomes to farmers higher than market forces would allow–over the last thirty years, an estimated $275 billion federal dollars have been transferred from taxpayers to farmers. In addition, the U.S. taxpayer has provided over the same period an estimated $85 billion to support agricultural research at public universities. Other government programs have reduced farm and agribusiness risks through subsidized credit, subsidized crop insurance programs, and subsidized domestic and export sales. Together, these programs have led to more output than would have otherwise been the case.
Most of the government subsidies were adopted in the name of "saving the family farm," a political myth that has guided farm politicians since the 1930s. After almost 70 years of this myth, there are fewer family farms than ever. Indeed, most of the federal farm welfare has gone to larger- scale commercial farms, units with annual sales of $250,000 or more. The average net worth of these units is almost four times that of the average taxpayer, who provides these transfers. The economic returns to these farms are competitive with non-farm businesses of similar size.
The industrialization of agriculture has permanently diverted agriculture from the small-farm Jeffersonian model. This industrialization has been driven by the need for food-processing firms to control all aspects of food production to assure quality for consumers and to meet the demands of federal food safety and product liability laws.
The resulting concentration of livestock production in beef feedlots, vertical hog and poultry systems, and large dairy production units, has given rise to criticism by environmentalists, some consumers, and those within agriculture who favor small community-based farming and marketing. Yet the larger concentrated animal units are more likely to adopt advanced environmental systems because they can allocate the higher fixed costs (of, say, waste handling and disposal, an example here) investments over greater output. Smaller "family" farms are unable to make similar financial commitments.
Without government subsidies, farm consolidations would have occurred due to economies of scale and the need for "conception to consumption" control of food processing. However, subsidies accelerated the process by disproportionately supporting large farms. Without government subsidies, technology would have advanced, but more of it would have taken place through on-farm trial and error research and experimentation, where the individual farmer took risks, rather than land grant universities and experiment stations. The rate of progress would have been slower. It is virtually impossible to separate the good and the bad impacts of these subsidies on the environment.
As government subsidies supported agriculture, a network of constraining environmental regulations also emerged. Government regulation of land and water shifted from giving technical and educational support to conservation-minded farmers to the imposition of criminal penalties on farmers for carrying out routine farm practices. The cost of regulation to farmers may well be $20 billion per year, or more.
Federal Intervention in Agriculture
To understand environmental conditions in agriculture today, one must understand the modern history of federal intervention in agriculture, and the national and international conditions that shaped it. Perhaps the most important factor was the inflation that started in the late 1960s, when the Federal Reserve Bank essentially printed money to finance federal budget deficits. The goal was to fund both the Vietnam War and the "Great Society" social welfare programs. As typically occurs when the monetary supply is expanded beyond productivity gains, inflation began. It reached progressively higher levels during most of the 1970s.
Commodity prices soared. Soybeans reached an historical high price of over ten dollars per bushel. (Today soybeans are in the four- to five-dollars per bushel range.) Inflationary expectations became the rule in farm business decision-making. Many farmers began speculating in land and machinery, betting that prices would go higher. Viewing inflation as a permanent condition, farmers increased their debt. The bidding for farmland by farmers and nonfarm speculators escalated. Used farm equipment often sold for as much or more than it cost when purchased new. As farmland prices increased, so did the assessed valuation for property tax purposes, and local governments jumped on the inflationary spending bandwagon.
In their zeal to stay ahead of inflation, most farmers pursued short term decision-making to the detriment of the longer term decision-making. This affected the bedrock of land and water conservation: the environment. Aided by government farm programs, farmers clearcut and drained large tracts of forest land, particularly in the Mississippi River Delta region but also in the mid-Atlantic states. In the heartland, taking advantage of rising grain prices, farmers converted pastureland to cropland. Historically, pasture has generally been land with rougher terrain that is more prone to erosion. The inflationary period thus laid the foundation for criticisms of farm land and water resource use in the years ahead.
The inflationary era set in motion political forces which remain today as farmers lobbied for and received higher guaranteed government prices that were repeatedly adjusted for inflation. But the inflation did not last forever. When it reached double-digit levels in 1979, Federal Reserve chairman Paul Volcker applied the monetary policy brakes by allowing interest rates to rise. Interest rates soon reached double-digit levels and began the process of slowing inflation, a process that continued during the 1980s and early 1990s. In fact, controlling inflation became the preoccupation of the Federal Reserve and most politicians and remains the major Fed concern today.
As inflation came under control, farmers benefited from the lower costs of farm inputs, but the long-term economic damage to the farm sector during the inflationary period had been done. Many farmers had leveraged inflated land values into enormous debt loads that could not be serviced out of the output from crops and livestock. In 1986, the federal government bailed out the Farm Credit System (a quasi-governmental subsidized credit system for farmers and ranchers and agri-businesses). Interest rates on farm credit system loans were generally lower than market interest rates because the system could borrow money at the same rate as the federal government), which owned a substantial share of the speculative bad debt on farms. Debt restructuring became commonplace, and farms consolidated, shifting resources to operators with stronger financial positions. Once the economic stagnation of the late 1970s hit, the inflated prices produced a buildup of government commodity stocks. In 1983 the Payment-In-Kind (the federal PIK program gave certificates to farmers for the grain they had put in federal storage. The certificates could be used to redeem the grain to use on farms or to sell.) program was initiated to reduce government held commodity stocks as federal budget deficits soared.1
In addition to a tightened money supply, worldwide supply-driven deflation was beginning. Raw material prices, including farm commodity prices, declined worldwide, and continue in mid-2001 to remain low. The commodity price index was at or near its lowest level in fifteen years. The Federal Reserve preoccupied with fighting inflation, continued to tightened the money supply even further until the late 1990s. Farm prices were caught in this tidal wave of downward economic pressure. Yet American farmers were insulated by government programs. Between 1997 and 2002 under the 1996 farm law, farmers will have received over $104 billion in welfare transfers.
Another factor affecting the farm economy during the past thirty years was the two major embargoes. Embargoes are government restrictions on exports. The first embargo in the early 1970s was a government response to inflated food prices, especially of soybeans and soy products. The government banned exports to bring prices down and appease angry consumers. The second embargo, in early 1980, was a grain embargo against the Soviet Union for its invasion of Afghanistan. At the farm level, both embargoes caused a drop in prices, which led farmers and their organizations to demand that the government do something to offset the negative price impact.
Farm Policy: Short-Term Political Responses
Against this backdrop, major farm laws were passed. Most of them were short-term political responses to events and policies external to the farm economy. But these federal welfare subsidies put the recipients in a better financial position to funnel some of the subsidies back into political campaigns to reelect politicians who faithfully protect the farm welfare payment system. This special interest perpetual motion machine gives farmers and their political incumbents (both Democrat and Republican) a big advantage at reelection time given the marginal value of the farm vote. Both parties became adept in the vote-getting business.
Welfare transfers to farmers take a variety of forms.2 One of the mainstays of government farm programs until the 1996 low was target prices. Target prices were politically determined price levels. If market prices fell below these target prices, the federal government made up the difference through cash payments based on the production level at the farm. Government loan rates, also set by politicians, are the prices a farmer receives at harvest time for cotton, rice, corn, soybeans, wheat, other feedgrains, and sugar. If the market price is below the loan rate at the end of the contract period (usually 9 or 10 months), the government essentially buys the commodity at the loan rates. The government is stuck with it and stockpiles generally accumulate when prices are low.
Because these price support programs are expensive, efforts have been made to limit their cost over the years. Thus, the 1973, 1978, 1981, and 1985 laws included acreage reduction programs (ARPs). (The 1996 farm law abandoned ARPs, giving farmers the flexibility to plant whatever mix of crops and acreage they chose.) By limiting acres for production, it was thought, federal outlays were controlled.
The basic economic problem with acreage reduction and crop set-asides is that it changes the incentives of farmers. Giving up crop output is costly for the individual farm. So, in response to these limits, individual producers used more fertilizers, pesticides, and new technologies to maximize yields on the acres they were allowed to plant. Thus, acreage restrictions set the stage for potential environmental impacts, particularly the impact of water running off the intensively cropped acres and reaching streams and rivers. Furthermore, when ARPs and other set-asides are returned to production, substantially more soil preparation, weed and pest control are required before planting.
Acreage reduction programs had another impact: They spurred more production by foreign competitors. This had its own environmental fallout, especially over the longer run. Particularly in the southern hemisphere, large areas of forestland and pastures were cleared for crop production.
Conservation Reserve Program: Environmentalists’ Success?
By 1985, environmental critics of farm policy had built a strong case that the federal government’s acreage reduction programs had increased the use of fertilizers and pesticides on the acres that farmers were allowed to cultivate. These chemicals have been alleged to pollute streams and rivers.
To combat this problem, the 1985 farm law introduced the Conservation Reserve Program (CRP). Ironically, this solution was another set-aside program, but one that would pay farmers to take erodible or marginal land out of production.
The federal government rents the CRP acreage from landowners under ten- year contracts, paying farmers for agreeing to keep land fallow for ten years. For the most part, CRP acres return to weed and brush growth without much maintenance and upkeep. An estimated thirty-five million acres annually have been removed from crop production, at a cost of about $2 billion per year without proven real environmental gains.
The CRP was a response not only to the environmental critics but also to farmers who were looking for another way to receive government payments. Hunters threw their political weight behind the CRP, too, because they believed it would expand habitat for hunting. 3 This latter point has been debatable.
The environmental appeal was that by idling these cropland acres, soil and water would automatically improve since there would be no pesticides, fertilizers or soil erosion from the idled acreage. This assumption did not take into account the runoff from remaining acres which were more intensively cropped, however. Furthermore, this theory has not been proven scientifically. The CRP became yet another government program for transferring money. Some of it went to farmers but money also went to absentee landowners, retired farmers, and land speculators.
In fact, realtors selling property around many large metropolitan areas sometimes use CRP payments as an enticement to urbanites to purchase rural properties. The payments come in because the land is not being farmed. In some instances, CRP payments offset the annual property tax payments. As with other federal programs, there is a contradiction: Environmental groups rail against urban expansion but, on the other hand, they support subsidies to encourage it.
In addition to farm program subsidies like the CRP, direct cost-sharing subsidies have supported farmers’ efforts to carry out specific conservation practices such as building stock and retention ponds, grass waterways, and contour terraces.
For example, corn and soybeans are now planted in marginal production areas. With the government’s soybean loan rate higher than the corn loan rate, the incentive is to plant more soybean acres. Minimum tillage and no-tillage technologies coupled with the introduction of genetically modified seeds have enabled producers to produce soybeans, corn, and cotton more cheaply, and government incentives encourage them to do it on some lands with erosion and water runoff problems.
Environmental Regulations Bring Conflict
Major environmental laws have also affected environmental conditions on the farm, although most of these effects came long after passage of the pollution control laws. For farmers, the first major environmental regulations were those governing the use of chemicals in fruits and vegetable production under amendments to the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA, in 1972). Reentry rules were adopted governing the length of time between chemical applications and when hired farm workers could reenter the treated fields. When the Environmental Protection Agency was formed, one of its first acts was a ban on the pesticide DDT in 1972, followed by other bans on chemicals the agency considered harmful.
The first major conflict between farmers and the Clean Water Act was the arbitrary enforcement of wetland rules by the U.S. Army Corps of Engineers in the 1980s. The definition of "waters of the United States" was expanded by the federal government to include, literally, isolated mud puddles in the midst of cropping areas. This expansion of federal control got the attention of farmers because most farmers have producing areas which are wet at least twenty-one days during some part of the year and under the government’s regulatory definition, that could be a wetland.
Gradually, federal environmental involvement in agriculture shifted away from technical support and education to the criminalization of environmental rules, especially under the Clean Water Act and the Endangered Species Act. This shift was at basic odds with the tradition in agriculture of having land-grant universities and the Soil Conservation Service define conservation problems, conduct research on alternative solutions, and use the federal/state Cooperative Extension Service to educate farmers about how to solve the problem at hand. Contour farming, grass waterways, retention ponds, stock ponds, and forestry practices, are good examples of this effort. Farm ponds are often described as man-made wetlands.
Expansion of federal regulatory controls in the 1980s, including restrictions under the Endangered Species Act and the Clean Water Act, gave rise to the property rights movement across the country. Generally those who became most active in the movement were farmers and landowners who had experienced a direct confrontation with federal authorities over some regulatory restriction of their cropland, pastureland or forest land.
Mixed Environmental Results
The shift in federal enforcement of land and water use rules has had the unintended consequence of increasing farm size, reinforcing the natural tendency toward consolidation and the effects of government subsidies. Farm units have grown larger to accommodate the higher scientific, legal, and other costs of federal environmental intervention. Today many larger poultry, hog, and dairy operations have water quality programs that meet or exceed federal and state standards.
Larger farms in general practice superior conservation methods. For example, the one hundred-horsepower tractor (not common on smaller farms in the early 1970s) facilitated deep chisel plowing and minimal tillage. This reduces soil erosion and runoff water from cropland, particularly in regions where the cropland terrain is prone to soil erosion during heavy rainfall. Not all problems have been solved, of course. Scientific handling of waste is still in its infancy in terms of testing the waste for nutrients and testing the soils for nutrient loadings. In some cases, phosphorous and nitrate loadings exceed the levels that can be efficiently utilized by crops. These problems are being highly scrutinized in light of pending federal non-point source water quality regulations.
A number of experts, including Dennis Avery, Indur Goklany, and others, credit the intensive agriculture in the United States today for improving the overall environment and increasing wildlife habitat. Erosion is down, fertilizer use efficiency is up, conservation tillage is up, and wetland losses are down. On balance, increased crop production and the growth of United States farm exports over the last thirty years has produced an intensive agriculture with such high productivity gains that reduced the need to bring marginal acres into production. These unused crop acres contribute to wildlife habitat. The contribution of U.S. exports to other countries has had beneficial environmental effects also, since those countries do not need to bring their fragile lands into production.
However, there could have been alternatives to the consolidation. The extension service soil conservation service model that worked in the past could have addressed environmental problems. Had farm, ranch, and forest owner/operators been shown there was collaboration between the federal soil conservation service and the federal/state cooperative extension service scientific evidence of problems with water quality, endangered species and farm chemical use in site-specific terms and then been shown economically viable solutions, real environmental and ecological gains could have been made. They would not have had as much pressure to expand in order to spread the high costs of regulatory compliance over larger farm units. By respecting private property, the government would have allowed a national network of different programs and practices to achieve real specific and local environmental and ecological gains at lower costs. Instead, "one size fits all" land, water and ecology rules, (which are by definition, higher cost and inefficient, and with limited results) continue to evoke political controversy over the farm and ranch environment and land ecology and earn substantial ill will among some farmers and ranchers toward the federal government.
As it turned out, there are now federal rules for just about everything done on farms, ranches, and forests. Criminal penalties, imprisonments, lawsuits, and attorney fees characterize the evolution of environmental and ecological policies for agriculture over the last thirty years. This system of punishment gave impetus to calls from producers for even more federal subsidies to offset these negative economic effects. Had the environmental and ecological vision for agriculture and forestry been one of respecting private property and looking to markets and common law, the outcome would have been to solve real environmental and ecological problems where these did exist.
And in spite of these regulations, whatever farmers have done is never good enough for environmental activists who drive the policy process. The policy goal posts continue to be moved. This can happen because there have been no scientific standards defining the problems. "Fishable and swimmable" are political, not scientific standards." 4 It is not possible to achieve zero environmental and ecological impact in farm and ranching activities.
In terms of basic economic impact, the last thirty years of federal environmental and ecological regulations have diverted human capital on farms and ranches away from figuring out how to produce and market lower-cost bushels, bales, pounds, and hundredweights. This waste of human capital is showing up losses of market share to foreign competitors, where environmental standards are less stringent.
The longer-term environmental and ecological picture is still unfolding. Production continues to increase in southern hemisphere countries. Within the United States, there remains the long term land retirement program (the CRP). The fact that the United States has retired almost thirty-five million acres annually for the last several years under the CRP program, and has conducted acreage reduction programs from time to time, has not been without economic costs. An argument can be made that the United States has lost some of its competitive position in the world marketplace by trying to hold domestic prices above world price levels.
The Past Thirty Years: An Assessment
Public policy decisions, particularly those affecting agriculture, are all about responding to the short run, rarely the long run. My thirty-year career spanned a long run by economists’ standards, but I worked in a series of short runs.
Over the last thirty years, an average of $8.5 billion federal dollars have been transferred each year from taxpayers to farmers. In addition, there have been substantial subsidies from state taxpayers to land grant universities. The combination of these direct and indirect subsidies has produced more of everything: more commodity production, more livestock production, more technical innovation, more conservation and environmental and ecological gains.
Government intervened in numerous ways to reduce the risk in farming. Yet much of the risk in farming was government-induced in the first place: rising inflation, declining inflation, deflation, embargoes, food safety rules, the risk and uncertainty of the right to own, use, and dispose of private property, and the criminalization of environmental rules.
The federal (and state) tax monies transferred to farmers over the last thirty years simply fanned the fires of the technological revolution in agriculture that was already underway. Having said this, the present farm program and other risk- reducing programs such as federally subsidized crop insurance which transfers billions of taxpayer monies to large farm operations is, in many instances, at cross purposes with the environment, since they lead to more crops being planted on acres which would likely be in timber or pasture.
On the other hand, along with the high level of federal subsidies to agriculture there has been an increasing number of inefficient and counterproductive environmental and ecological regulations. Had the subsidies not been in place, there still might have been the onslaught of federal interventions in land and water uses.
Time to Revisit Farm Policy
It is now time for policy makers to revisit farm policy, eliminate the welfare transfers, and treat farming as the business that it is. Those who worry about the link between agriculture and the environment should consider redirecting their political energies toward monetary policy stability. Monetary policy stability would shift farm policy decisions back to real farming, conservation, and resource allocations for the longer run. Removing inflationary and deflationary expectations is essential to the long-term husbandry of farm land, water, and air resources.
Throughout the last thirty years, lawmakers and regulators at the federal and state levels have passed laws and enacted "one-size-fits-all" land, water, and air controls that have ignored the basics of food and fiber production and distribution in the United States. These include wide variations in rainfall, climatic conditions, soil types, as well as diverse cropping and livestock patterns and length of growing seasons. Lawmakers have also placed political constraints on biotechnology and farmer/rancher management skills. They have ignored the fact that farming , ranching and livestock production depend on the right to own, use and dispose of private. Because this economic fundamental was ignored, farmers and livestock producers must now confront and spend an inordinate amount of management time dealing with a plethora of costly, inefficient, and overlapping rules which have very little if anything to do with improving the overall quality of land, water, and air resources but do expand government controls over private productive resources.
A more enlightened approach would be to spend limited taxpayer monies on watershed level research to first define water and land quality problems. Retraining federal extension service and soil conservation service personnel to gather scientific site-specific water quality data over time would enable scientific data and subsequent research and analysis to become part of the public debate on agriculture and the environment. If water quality problems are traced directly to farm activity they will have to be dealt with by the farmers in that watershed. A similar approach could be taken for airsheds.
Once the real problems have been identified, then private interests working via an updated watershed district model can evolve the educational and technical support to develop bottom-up solutions that respect private property, market-driven incentives, common law and limited taxpayer resources.
The role of the federal government would be substantially diminished in favor of local and state governments, the units closest to any natural resource problems and those to which the farmer and rancher has more ready access and recourse. Failure to move land, water and air quality policies for agriculture in this direction will mean a continued erosion of the economic foundation of United States agriculture, the rights to own, use, and dispose of private property. With this erosion there will be a parallel decline in the international competitiveness of the farm and ranch sector and a decline in farm stewardship in favor of government environmental edicts.
For good or ill, the structure of agriculture has been permanently altered over the last thirty years via macro monetary and fiscal policies, federal interventions, subsidies and regulations of land, water and air resources. Since the structure is changed, antiquated federal programs should be changed as well.
John Hosemann retired in June 2000 as chief economist and Director of the Public Policy Division of the American Farm Bureau Federation. He was a commodity policy analyst and a research economist before becoming chief economist. Hosemann holds B.S. and M.S. degrees in agricultural economics from Mississippi State University and did doctoral work in the same field at Virginia Polytechnic Institute. He now lives and works on his Wisconsin farm, while continuing to write and speak on policies affecting agriculture.
Notes
1. Under the PIK program, commodities forfeited to the government under the loan program were given back to farmers via PIK certificates. Farmers then sold the certificates to grain handlers or other farmers who used the certificates to redeem the grain from government stockpiles.
2. These include the loan deficiency payments (LDPs), which are paid when market prices fall below government set loan prices; market transition payments (AMATA); market loss assistance payments (MLA) for loss of export markets due to foreign trade restrictions on U.S. imports; supplemental market transition payments for persistent low farm prices; disaster assistance payments for natural and or economic disasters; environmental quality insurance program (EQUIP); wetland reserve program (WRP); and conservation reserve program (CRP). Welfare transfers other than those for conservation and water quality are based on historical production. Therefore, larger output farms receive larger government payments which enable larger farm units to outbid other farms for available land and more advanced technologies.
3. The CRP may be viewed as a political derivative of the government soil bank programs of the 1950s and 1960s, which sought to reduce production in order to raise farm prices.
4. These terms are listed in the Clean Water Act, enacted in 1972, as goals to be reached by 1985.