Quota System, Farm
Quota System, Farm
Farm commodity quotas are defined as government-administered area or quantity allotments restricting what a farmer can produce or market. Such supply controls in the United States initially rested on several presumptions, some or all of which are no longer valid. One was that farmers reacting to market forces were incapable of adjusting their resources and output in a timely manner to maintain their income at a socially acceptable level in response to shocks from weather, foreign markets, and rapid productivity advance. That presumption in turn implied that, in the absence of supply control, farmers were predestined to chronically produce too much and hence to experience perennially low farm prices, incomes, and rates of return on resources.
Another presumption was that the demand for farm commodities was inelastic. That is, a reduction in market quantity would reduce quantity proportionately less than it would raise commodity price, thereby raising commodity receipts and farm income.
Supply controls in the form of quotas or allotments can be voluntary or mandatory, on resources or commodities, whole farm or part farm, on crop area or output, and short term or long term. Under the Agricultural Adjustment Act of 1933, the grandfather of farm commodity programs, government rewarded farmers who voluntarily controlled how much of major crops they planted with commodity price supports or direct payments.
The Agricultural Adjustment Act of 1938 introduced mandatory supply control. The term mandatory, though widely used, was nonetheless misleading because area quotas became binding on all producers of the commodity only if a two-thirds majority supported quotas in a national referendum. Due to generous price supports attending these quotas, farmers widely accepted mandatory controls. However, controls were largely ineffective in boosting total farm income because the area reduced for basic farm program crops was offset by area and production expansion for other crops. Slippage also was large because crop price supports encouraged additional application of fertilizers, irrigation water, and other inputs so that higher yields offset area cuts. Despite ineffective supply control, production was not excessive because of droughts in 1934 and 1936, and demand expansion during World War II.
Generous commodity support prices introduced in the 1940s were continued after the war, generating surpluses in the absence of supply control. Consequently, the government in 1954 introduced a conservation reserve program (CRP) to convert cropland, even whole farms, to long-term soil conserving uses. By 1960, 29 million acres were under 10-year contracts.
Farmers idled inferior cropland under CRP. Surpluses continued to mount due to the slippage factors noted and to statutory limits on the minimum size of specific crop quotas. The U.S. Congress rejected industry-wide mandatory controls in 1962. The next year the government offered wheat farmers the opportunity to accept tight mandatory allotments coupled with high support prices versus free markets. Wheat farmers rejected controls in a hard fought national referendum in 1963.
The government deemed that farmers should not have free markets, however, and enacted voluntary short-term diversion programs whereby each farmer annually could choose to divert part of his land to soil conserving uses in return for price support and payments from the government. Such newly dominant short-term area diversion, of minimal size in previous decades, grew large and averaged 52 million acres in the 1960s, then reached the high-water mark of 78 million acres in 1983. Problems engendered by that 1983 diversion coupled with drought in the same year prompted a reexamination of commodity programs. Critics observed that voluntary area diversion programs were expensive for taxpayers. Furthermore, such programs, by raising commodity prices, lost markets to cheaper substitutes (for example, cotton to synthetics) and to foreign competition. Agribusiness firms that supply farm inputs and process and market farm products thrive on farms’ raw material volume—and they were not getting volume. Livestock producers as well as food consumers were hurt by feed costs inflated by supply controls.
These and other factors led Congress to end most supply controls in the Freedom to Farm bill of 1996. By 2007, supply control remained only under the Conservation Reserve Program (for environmental purposes) and on a minor crop, sugar. The demand for farm output had become elastic due to a large biofuels market. Because quotas reduce farm income when demand is elastic, they are an anachronism of an earlier era.
Termination of controls pleased consumers, agribusiness firms, and livestock producers, but reliance on payments without supply controls introduced new problems. Payments without controls induce farm output to exceed levels in an unregulated market. Whereas programs prior to 1996 cut production by approximately 5 percent from unregulated competitive market levels in the 1960s and 1980s and lesser amounts in other years, the 1996 and 2002 farm bills without supply management raised farm output an estimated 3 percent over competitive market levels. Part of that excess production is being dumped on international markets. Thus, the United States has shifted from World Trade Organization (WTO) acceptable blue box policies (that support farm income but control production) to less acceptable amber box policies (that expand output and exports above competitive market levels). Supply control programs are fatally flawed and are dead, but other, current government programs to support farm income in the United States remain problematic.
Rasmussen, Wayne, Gladys Baker, and James Ward. 1976. A Short History of Agricultural Adjustment. Agricultural Information Bulletin No. 391. Washington, DC: Economic Research Service, U.S. Department of Agriculture.
Tweeten, Luther. 1989. Farm Policy Analysis. Boulder, CO: Westview Press.
Tweeten, Luther. 2002. Farm Commodity Programs: Essential Safety Net or Corporate Welfare? In Agricultural Policy for the 21st Century, eds. Luther Tweeten and Stanley Thompson, 2–34. Ames: Iowa State Press.