| Posted November
9, 2006: One of the challenges of developing a coherent
set of farm policy recommendations is developing consensus
on the purpose of agricultural policy. It is much like a story
we once read about the building of a church in a small Kansas
town early in the last century. The contractor was heard to
exclaim, in a fit of frustration, that when you get ten members
of that church together, they have eleven different opinions
on how it should be built.
So it is with the reasons for the existence and nature of
agricultural policy and the need for a Farm Bill. Everyone
has a different diagnosis.
If it is determined that a farm program is needed, developing
a sensible one, requires careful examination of the most common
reasons given for farm policy. In a prior column we examined
the oft-heard argument that the reason farm programs began
in the 1930s was to reduce poverty on the farm, and because
farm household income today is above the national average,
there is no need for farm programs.
While rural poverty was a serious issue in the 1930s, we
looked to the author of those early farm programs, Secretary
of Agriculture Henry A. Wallace to identify the rationale
behind the New Deal farm programs.
The programs Wallace developed were not based simply on alleviating
rural poverty, but on identifying the long-term cause of poverty
among the nation’s farmers—the lack of timely
self-correction in aggregate agricultural markets in response
to changes in prices, particularly lower prices. It was for
that reason that he began to institute supply management programs,
a theme that we will get back to in a moment. Farm programs
deal with a market problem, not poverty per se.
Another reason that is given for farm programs—some
would say the only defensible reason—is to reduce farm
income variability. All economic sectors face income variability
and unanticipated shocks and agriculture is no exception.
So, if income variability is the rationale then why give preference
to farmers? Why focus on farmers and not the retailers on
Main Street in most rural communities? We can’t tell
you how many times we have heard that argument over the past
40 years.
Focusing almost exclusively on farm income variability as
the problem results in solutions that range from direct decoupled
payments, to subsidized insurance programs, to farm savings
accounts, to educating farmers on the use of puts and calls
and forward contracting, to federal emergency payments.
Many of these solutions ignore the extent to which farm income
variability is but a symptom of the basic problem: the lack
of timely adjustment on both the supply and demand sides to
lower prices.
Other economic sectors are able to overcome shocks to a greater
extent and more quickly than agriculture. With a miniscule
level of price responsiveness on the part of aggregate crop
agriculture, the lows are lower and longer than they are in
other sectors.
If the problem in farm income were simply the result of events
like a hail storm, insurance would work well because insurers
would be facing random events whose rate of occurrence is
predictable much like the probabilities that underlie residential
fire insurance. But when the cause of low farm income is systemic,
any insurance against that sort of risk becomes very expensive.
That is the long and short of it. The variability issue comes
down to addressing two types of risk: systemic and random.
Farm programs have historically addressed systemic risk with
the use of policy tools that manage inventory, thereby providing
the price-responsiveness mechanism that aggregate crop agriculture
lacks.
Once the systemic cause of farm income variability is taken
care of, additional tools, including insurance products, provide
means to deal with random risks.
The issue of farm income variability cannot be discussed
realistically as if the only sources of income variability
are random events. Insurance approaches are not equipped to
deal with a series of years in which all farmers experience
“low” prices. 
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