Agricultural Price Supports

AGRICULTURAL PRICE SUPPORTS

AGRICULTURAL PRICE SUPPORTS. Introduced to meet the emergency of the Great Depression, agricultural price supports have persisted as a critical, if controversial, element of farm regulation. The Commodity Credit Corporation (CCC) was incorporated on 17 October 1933 to administer the system of price supports. Farmers received short-term loans, typically lasting twelve or eighteen months, of an amount that was determined by multiplying a fixed price per unit (such as a bushel of corn or a bale of cotton) by the quantity of crop they put up for collateral. The loans also carried a non-recourse clause. If at anytime the market price rose above the fixed price used to calculate the loan, a farmer could pay off the loan and sell the crop on the open market. If the market price dropped below the fixed price, then once the loan expired, farmers could pay off their debt by forfeiting their crop to the CCC. This meant farmers had no reason to accept a lower market price; thus, the fixed price acted as a minimum price on the market.

In 1933, policy makers intended the CCC to provide immediate relief, as prices of cash crops, such as corn, cotton, and wheat, had fallen by more than half their 1929 levels. The CCC, in trying to raise prices and farmers' incomes, worked alongside two other regulatory agencies. The Agricultural Adjustment Administration (AAA) paid farmers to replace cash crops with soil-conserving crops. This reduced the supply of cash crops reaching the markets and helped bolster prices. The Farm Credit Administration (FCA) refinanced thousands of farm mortgages in 1934 and 1935, thereby reducing the burden of farmers' debts relative to their incomes. Together these three agencies provided a measure of relief, but their initiatives did not help those families most in need of aid. In the 1930s, some one to two million farmers earned less than $500 a year. The impact of this trio of regulatory agencies was felt instead among financially secure farmers, but even then, the regulatory agencies proved controversial for their effect on markets.

The controversy surrounding price supports turned on the distinction between their short-term (static) effect as compared to their long-term (dynamic) impact. Viewed in the short term, price supports interfered with markets by raising prices above their equilibrium. The artificially high prices resulted in vast surpluses at government warehouses and worked to sustain farmers who otherwise would not have been able to compete with their more efficient rivals. Viewed from a long-term perspective, prior to the coming of New Deal regulation, farmers had faced the possibility of wide swings in prices for their cash crops. Price supports stabilized the long-term trend in prices and this altered farmers' investment climate. Farmers had always labored in highly competitive markets and this continued with the coming of New Deal regulation. With prices stable, though, farmers showed a new willingness to invest in land and expensive machinery. The competitiveness had not changed, but farmers' responses to it had. Whereas gains in labor productivity in the farm sector had been small prior to 1930, from the 1930s through the 1970s, labor productivity rose more than 4 percent annually—a rate that exceeded almost all other parts of the U.S. economy.

Price supports also conditioned which farmers survived and on what terms. Ironically, as long as prices eluded the goal of New Deal policy makers and tended to fall, price supports and credit programs created conditions that fostered farmers' investments in land and technology. Further, those farmers who could not survive the new terms of competition sold out in the face of rising land prices. Foreclosure came to just a few. Conversely, when prices met the intent of policy makers and rose above the CCC's price support levels in the 1970s, farmers who had accumulated debt found themselves at risk to failure when prices suddenly retreated, and by the mid-1980s foreclosures were concentrated among commercial, debt-ridden operators. During the 1980s, political sentiment swung sharply against price regulation in a variety of industries. Members of Congress debated whether to eliminate price supports, and despite calls for a return to the free market, in 2002 farmers could still count on the CCC's loans.

BIBLIOGRAPHY

Clarke, Sally H. Regulation and the Revolution in United States Farm Productivity. New York: Cambridge University Press, 1994.

Cochrane, Willard W., and Mary E. Ryan. American Farm Policy, 1948–1973. Minneapolis: University of Minnesota Press, 1976.

Johnson, D. Gale, ed. Food and Agricultural Policy for the 1980s. Washington, D.C.: American Enterprise Institute, 1981.

Schultz, Theodore W. Agriculture in an Unstable Economy. New York: McGraw-Hill, 1945.

U.S. Department of Agriculture. Agricultural Statistics, 2001. Washington, D.C.: Government Printing Office, 2001.

———. "Financial Characteristics of U.S. Farmers, January 1985." Agricultural Information Bulletin No. 495 (July 1985).

———. The USDA Web site for its price support division. Available at http://www.fsa.usda.gov/dafp/psd/default.htm.

Sally Clarke

See also New Deal ; Price and Wage Controls .