State’s Farmers Rely Heavily on U.S. Subsidies : Dependency Leaves Them Vulnerable to Political Decisions, Conference Told

One of the major goals of the Food Security Act of 1985 was to wean farmers from government subsidies and make them more responsive to world market forces. In California, however, it has had the opposite effect.

California grain and cotton farmers have signed up for government subsidies in unprecedented numbers. Their increased dependency on government aid will--in the short run, at least--make them more vulnerable to political decisions and less responsive to market forces.

But, according to a recent Sacramento symposium on farm policy, the increased reliance on support programs may represent more an aberration than a transformation as the state’s farmers strive to survive several more years of hard times.

The present appeal of the programs stems from the fact that market prices for basic farm commodities have fallen substantially below the amounts that growers can collect from the government.

Under the 1985 law, farmers can borrow from the government using their future crops as security. The law allows them to place a valuation on the crops--known as the loan rate--considerably higher than current market prices. If prices rise by the time the crops are harvested, the growers would sell the crops and repay the loans. If market prices remain depressed, however, they can forfeit the crop to the government in complete payment for the loan.

No Limit on Loan Sizes

The loan rate thus establishes a guaranteed level of income for financially strapped farmers. Nor, under the 1985 law, is there any limit on the size of loan, unlike the $50,000 cap that limits direct price-support payments to very small farms (and therefore have been little used by California growers).

The increased participation by California farmers in federal programs is most clearly evident among the state’s wheat and cotton growers, since rice growers have benefited from price subsidies for some years. While 28.8% of wheat producers participated in government support programs in 1984, 53.8% signed up this year, Richard Howitt, an agricultural economist at the University of California at Davis, told the symposium.

Among cotton growers, the proportion increased even more dramatically, to 85.1% from 33.6% two years ago.

The 1985 law initially sets loan rates--which are established in terms of a price per bushel, bale or pound--at relatively high levels compared to current market prices, but it is scheduled to scale them back over the five-year life of the program.

The catch, according to Howitt, is that participating growers, in seeking to gain some cash flow stability, have greatly increased their vulnerability to political decisions--such as an unforeseen but sharp reduction in loan rates as a trade-off for some other political benefit.

Must Reduce Planting

In order to participate in the loan program, farmers must take specified amounts of their land out of production. Cotton acreage this year declined by 11% nationwide, but in the Far West--dominated by California--the drop was 18%.

In all, loan sign-ups have resulted in 400,000 acres in California being idled or placed into a limited number of alternative crops.

The acreage cutback will help reduce the current global oversupply of cotton and, if the program runs its five-year course, will buy the domestic cotton-textile industry time to improve its competitiveness, said Thomas W. Smith, president of Cal-Cot, the big Bakersfield-based cotton marketing cooperative.

Cotton gins are consolidating, marketing is assuming an increasingly international orientation. Textile mills are also consolidating, modernizing and experimenting with robotics and are beginning to market “made in USA” labels on domestically produced garments, Smith told the symposium.

“The farm bill has changed the rules of the ballgame,” he said. If the level of subsidies does begin to decline as scheduled in 1987-88, and if the dollar continues to drop in value, he added, U.S. cotton will become more price competitive and will begin to force out lower-quality foreign production.

“This is not a quick process,” Smith acknowledged, “but equilibrium will be re-established. . . . It’s going to be an interesting game.”

Global oversupply continues to depress grain prices generally. “The world is awash in grain,” said Walter P. Falcon, director of Stanford University’s Food Research Institute. “The only hope is for the unexpected.” The “unexpected” could range from such natural phenomena as flood and drought to even relatively small production cutbacks in such currently huge grain and cotton producers as China, he said.

But it may be the expected--such as continued rapid increases in crop yield per acre--that will prove telling in terms of determining agriculture’s future. Farms will continue their long-term trend of expanding in size, becoming less labor intensive and utilizing potent new seeds, said Michael J. Phillips, senior analyst with the congressional Office of Technology Assessment.

For example, he said, new seeds will increase current yields of 481 bales of cotton per acre to 554 bales by the year 2000; rice yields will rise from 105 bushels an acre today to 124 bushels; wheat will increase from the present 36 bushels to 45 bushels an acre.

Production Increases

Similar increases in production are expected to occur among animal crops--such as doubling the amount of milk that a cow can produce--all of which will create “monumental headaches for policy-makers,” Phillips said. “We have the potential for some serious surplus problems to emerge.”

In short, he said, biotechnology coupled with information technology represent the third major era in U.S. agriculture in this century, succeeding the mechanical era that followed World War I and the chemical era that followed World War II. “Management will be the new name of the game,” he predicted. And management needs will guide farm size:

- Small farms (those reporting annual sales of less than $100,000) constituted 93% of all farms in 1969 and accounted for 48% of sales. Today, they compose 86% of the total number of farms and generate 27% of total sales; by 2000--less than 14 years away--small farms will constitute 80% of the nation’s farms but will account for just 4% of sales.

- Large farms (those reporting annual sales exceeding $250,000) constituted only 2% of all farms in 1969 and generated 35% of total sales; today, they make up 6% of the total but account for 53% of total sales. By 2000, 14% of the nation’s farms will produce 86% of total sales.

When it comes to larger farms, California is the national leader, according to Agriculture Department figures. Of the more than 9,000 farms reporting sales of more than $1 million a year, California counts 2,398 of them--more than a quarter (and by far the majority of them are family corporations). Florida is a distant second with 643, followed by Texas with 618.

The survivors will be adding land at currently depressed values--an average of 50% below what farmland fetched a few years ago. “And they will do just fine,” said John R. Norton III, former deputy agricultural secretary and head of Phoenix-based JR Norton Co., one of the nation’s largest agricultural enterprises.

Meanwhile, attrition will continue to whittle away at the number of farms, which stood at about 6.8 million 50 years ago and totals about 2.3 million now. “Probably fewer than half a million farms would be ideal,” Norton told the symposium.

A free-market advocate who resigned his government post earlier this year, Norton said studies indicate that the most effective farming units range in size from 800 acres to 2,000, while the national average in 1984 was 437 acres. In Iowa, he said, the average farm has 300 acres, and 90% of them do less than $50,000 a year in sales--the limit for government “deficiency” payments, made when market prices fall below “target” prices.

‘Chronic Overproduction’

“Our taxes would be better spent in relocating and retraining these people,” he asserted. “It would be better to let the markets operate freely and make direct income payments” to the displaced farmers rather than perpetuate a system that contributes to what he called “chronic overproduction” and penalizes efficient growers of whatever size.

“It’s best not to interfere,” Norton said.

The phenomenon of fewer but larger farms merely echoes the earlier transition from “mom and pop” grocery stores to supermarkets, he said, adding: “The fresh produce industry could not operate today without that change.”

The symposium was sponsored by the University of California Agricultural Issues Center, based at UC Davis. It was the first such activity by the center, which was created and funded by the state Legislature in 1985 as an agribusiness “think tank.”