Feeding the Factory Farm by Elanor Starmer - Rural America / In Motion Magazine

The passage of the 1996 Farm Bill marked a huge shift in U.S. farm policy -- arguably the biggest since the 1930s. In the ten years since, the market prices of soybeans and corn have dropped sharply. That’s bad news for the average corn and soybean farmer. But for the companies that purchase the crops as bulk inputs, such as industrial livestock operations using them for feed, it’s been a financial windfall. They can now buy corn and soybeans at reduced cost, and turn them into higher value products like meat or corn syrup.

Researchers at Tufts University wanted to know how much industrial livestock companies have saved from being able to purchase corn- and soy-based feed on the market at a price lower than what the feed costs to produce. Below is a summary of their findings.

Farm Policy in a Nutshell

Since the 1930s, U.S. farm policy has tried to buffer farmers from the vulnerabilities they face each year. Unpredictable weather, pests, the planting decisions of thousands of other U.S. farmers -- and, in more recent years, of millions of farmers around the world -- all affect farm prices, but are forces out of the individual farmer’s control. To moderate this volatile market, federal policies have been employed to control supply (including by taking land out of production and creating strategic crop reserves) or to keep farm income stable (by setting a market floor price, or by paying farmers the difference between a target and lower market price).

Over the last twenty years, however, government policies that help balance supply and demand in agriculture have been phased out. Farm policy changes begun in the 1985 Farm Bill and completed by the 1996 Farm Bill, known as “Freedom to Farm,” eliminated a price support, food, feed and fiber reserves, and all authority to help farmers curb overproduction, creating an increased dependence on subsidy payments. The effective supply management mechanisms such as adequate reserves and set-asides that had maintained more balanced supplies and crop prices were dismantled through these Farm Bills. Supporters of the changes argued that they would help farmers respond to international price signals and compete on export markets. Opponents pointed out that agriculture is different from other sectors: if prices fell once the price floor was eliminated, farmers would tend to produce more, not less, leading to chronic overproduction and even lower prices. This is because agriculture has high fixed costs such as land, and it makes economic sense to the individual farmer to offset the costs with as much production as possible, particularly when prices are low.

This argument gained traction when, between 1997 and 2005, corn and soybean prices dropped by 32% and 21%, respectively. Meanwhile, production rose 28% and 42%, respectively. The price crisis provoked the passage of a series of emergency payments to farmers, which became Counter-Cyclical Payments in the 2002 Farm Bill. CCPs rise when prices fall, and vice versa; and since prices have continued on a downward trend, subsidies have skyrocketed. Today, we confront a perplexing system. Farm income that was once supported by higher market prices for U.S. farm products is now supported by large, unsustainable taxpayer subsidies.

Who Wins?

It’s clear that taxpayers don’t win under the new system -- but neither do family farmers. Farm subsidies make up for some of the loss in market prices, but they alone don’t make most full-time farms profitable. Family farmers must now rely heavily on off-farm income to keep their operations running. Even consumers lose out: research from the American Corn Growers Association shows that food prices have risen over 250% since 1975, while returns to farmers have been stable or declining. The real winners under the new system are the industrial livestock companies and other agribusiness operations that can now purchase corn, soybeans, and other farm products at a lower cost. The broiler chicken industry is one example of an industry that has gained from the policy changes that took place in 1996.

When Price and Cost Don’t Compute

Broiler feed is 60% corn and 25% soybean meal. Tufts University researchers wanted to compare two things: the market price of these feed components and what it actually costs to produce them. To find the latter, they used USDA cost-of-production estimates for corn and soybeans, and added a very small amount to the estimates to account for government-paid input costs. Using these numbers, they constructed a “true cost” broiler feed -- essentially, what the feed would cost if its corn and soybean meal components were priced at their full costs of production. They compared this “true cost” feed to the market price that broiler companies paid for feed before and after the 1996 Farm Bill. Among the main findings:

Market prices for feed were often lower than the feed’s true cost even before the 1996 Farm Bill was passed; remember, it was actually the 1985 Farm Bill that eliminated floor prices. But the ’96 bill, which removed all remaining supply control policies, made this gap much larger. Between 1986 and 1996, broiler feed was priced an average of 10% below its true production cost. In the 1997-2005 period, that gap more than doubled, to 21%.
Feed is a huge expense for broiler producers -- about 60% of total production costs. If broiler companies had paid true cost for their feed between 1986 and 1996, their overall production costs would have been 6% higher than they were. From 1997-2005, if they had paid true cost for feed, their production costs would have been 13% higher on average than they were. Put another way, broiler companies currently get a 13% discount on their operating costs because of farm policies that allow the market prices of feed crops to fall below production costs.
This 13% discount translated into average monetary savings for the broiler industry of $1.25 billion PER YEAR between 1997 and 2005. In the 10 years before the 1996 Farm Bill, savings averaged a “mere” $377 million per year -- a difference of $850 million per year. There’s no question that the broiler industry won big with the passage of the 1996 Farm Bill.

Current Farm Policy Stacks the Deck Against Family Farmers

Few family farmers still produce broiler chickens; 95% are now produced by vertically integrated livestock companies. But in hog/pork production, there are still family farmers trying to compete with industrial operations. Preliminary estimates in the study suggest that companies with “landless” hog confinement operations also get a 13% discount on total operating costs because of the price effects of U.S. farm policy -- a discount that independent, diversified family farmers don’t receive. A diversified crop/livestock farm will have to pay full cost of production for its feed, while industrial operations can buy feed on the market for much less. This makes industrial operations look more cost efficient. But the true costs of industrial livestock production are being shouldered by others: taxpayers, the environment, and farm communities.

Diversified family farmers would be better served by a 2007 Farm Bill that ensures them a fair price for the crops they produce. This policy will benefit taxpayers by reducing the need for farm subsidies. It will end the unfair cost advantages enjoyed by industrial animal factories. And it will ensure that the true beneficiaries of U.S. farm policy are family farmers, not factory farms.

About the author: Elanor Starmer is a research assistant at the Global Development and Environment Institute at Tufts University, and will complete a dual Master's degree in agriculture policy and development economics in May 2007.

A presentation of the research in this article was presented by Elanor Starmer at the October 2006 annual meeting of the Missouri Rural Crisis Center.

Published in In Motion Magazine, February 11, 2007

Also see:

National Family Farm Coalition President’s Response to
Administration’s 2007 Farm Bill Proposal
by George Naylor
Churdan, Iowa
Rethinking U.S. Agricultural Policy
by Daryll Ray, Daniel De La Torre Ugarte, Kelly Tiller
Agricultural Policy Analysis Center
The University of Tennessee
Knoxville, Tennessee
National Family Farm Coalition (off-site)