Saturday, June 5, 2010

How Corn Became King: Part 2

I briefly mentioned that government had a role in helping corn become the giant mega-crop that it is today. The price of corn has steadily fallen over the years (factoring in inflation), and today the price of a bushel of corn is about a dollar below what it costs to grow it. Government farm programs were once designed to limit production and support prices, but were quietly reprogrammed over the years to increase production and drive down prices. During the Nixon administration, the government began to subsidize corn at the expense of farmers.

America's original farm policy, forged during the Depression, rescued farmers from the failures of growing too much food. Essentially, it attempted to create a reserve for storable commodities. The government established a target price based on the cost of production, and if the market price dropped below the government's target price, the farmers could either continue to dump corn on a weak market (further weakening it) or take out a loan from the government (using the crop as collateral) that allowed the farmer to store his grain. When prices recovered, he then sold the corn and paid back the loan. If corn prices stayed low for a long period of time, the farmer could elect to keep the loan money and forfeit his crop.

This system kept corn prices from from collapsing since surpluses were held off of the market. The loans actually cost the government very little since most were repaid. When bad weather or some other disaster affected the crops and turned a low yield, the prices on the market remained steady due to the corn stored in the granary.

In the 1950s, several groups of people began calling to dismantle the system: food processors and grain exporters, people who thought America had too many farmers, and people who didn't see why farming should be treated differently than any other sector of business. By the 1970s, the detractors got their wish.

Earl Butz, Nixon's second secretary of agriculture, is one of the main causes for the current "plague of cheap corn." In the 1972, Russia suffered a devastating loss of crops, and, as a result of Butz's urging, purchased 30 million tons of American grain. The sale coincided with a bout of bad weather for the farmers in America, and pushed prices up. By 1973, housewives were protesting costs, farmers were killing chicks because they couldn't afford feed, and the cost of beef was almost beyond the reach of the middle-class.

Butz sprang into action to drive prices down: he pushed farmers to plant "fencerow to fencerow" and to "get big or get out" because he believe that the bigger a farm, the more productive. He got rid of the granary reserve and dismantled the New Deal price supports through loans with direct payment. By changing from loans to direct payments, the government "removed the floor under the price of grain.
Instead of keeping corn out of a falling market, as the old loan programs and federal granary had done, the new subsidies encourage farmers to sell their corn at any price, since the government would make up the difference. Or, as it turned out, make up some of the difference, since just about every farm bill since has lowered the target price in order, it was claimed, to make American grain more competitive in world markets. (Beginning in the 1980s, big buyers of grain like Cargill and Archer Daniels Midland [ADM] took a hand in shaping the farm bills, which predictably came to reflect their interests more closely than those of farmers.) Instead of supporting farmers, the government was now subsidizing every bushel of corn a farmer could grow- and American farmers pushed to go flat out could grow a hell of a lot of corn.
There are some farmers' organizations that have adopted the idea of cheap corn, but not many. Since the early 1970s, farm income has declined as steadily as corn prices, forcing millions of farmers deep into debt and thousands into bankruptcy. While the government and other businesses claimed the new policies would help Americans to better export grain, the export rates haven't budged. A study at Iowa State University estimated that it costs about $2.50 to grow a bushel of corn in Iowa. The grain elevators only paid out $1.45 in 2005. (Can anyone find updated numbers?) It doesn't take a genius to see that farmers are losing money, rather than making it.

George Naylor has deduced a reason why farmers still continue to plant even though they lose money, and he has been asked to speak at meetings on the farm crisis, as well as testify at hearings. He states, "Farmers facing lower prices have only one option if they want to be able to maintain their standard of living, pay their bills, and service their debt, and that is to produce more." So if the price of corn falls, and the farm family needs more money, then they just produce and sell more corn, yet, of course, the more corn they produce, the more that prices continue to fall. Naylor also states:
The free market has never worked in agriculture and it never will. The economics of a family farm are very different than a firm's. When prices fall, the firm can lay off people, idle factories, and make fewer widgets. Eventually the market finds a new balance between supply and demand. But the demand for food isn't elastic; people don't eat more just because food is cheap. And laying off farmers doesn't help to reduce supply. You can fire me, but you can't fire my land, because some other farmer who needs more cash flow or thinks he's more efficient than I am will come in and farm it. Even if I go out of business this land will keep producing corn.

We're on the bottom rung of the industrial food chain here, using this land to produce energy and protein, mostly to feed animals. Corn is the most efficient way to produce energy, soybeans are the most efficient way to produce protein. What am I going to grow here, broccoli? Lettuce? We've got a long-term investment in growing corn and soybeans; the elevator is the only buyer in town, and the elevator only pays me for corn and soybeans. The market is telling me to grow corn and soybeans, period.
The government also wants him to grow corn. His subsidies are based on his yield, and though the subsidy checks go to the farmer, they're really subsidizing the corporations who purchase the corn in order to process it. The farmers who choose to go into debt for newer equipment and pay more for genetically modified corn, often have to work another job to make ends meet.

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