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Past and Current Policy Past and Current Policy Responses to Agricultural Responses to Agricultural

Price VolatilityPrice Volatility

Daniel De La Torre UgarteDaniel De La Torre UgarteAgricultural Policy Analysis CenterAgricultural Policy Analysis Center

University of TennesseeUniversity of Tennessee

Séminaire EuropéenVolatilité des marchés agricoles

Conséquences et Réponses politiquesLe mardi 21 juin 2011 10h00 - 13h00

Au Parlement Européen (salle PHS 7C50)

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BackgroundBackground

• Price volatility has become a serious problems.

• Volatility in itself is not new to agriculture.

• The new element is that instruments to deal with price volatility have been abandoned.

• Believe that free trade can deal with price volatility.

• What can we learn from U.S. experience?

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The Basis for U.S. Ag. PolicyThe Basis for U.S. Ag. Policy

• Long standing publicly supported research and consequent expansion in productive capacity

• Implementation of policy mechanisms to manage productive capacity and compensate farmers as consumers accrued benefits of productivity gains

• Government programs were implemented to deal with unique supply and demand characteristics of agricultural markets.

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Critical Changes in U.S. Ag PolicyCritical Changes in U.S. Ag Policy

• Since 1985 “policy makers” believed that exports should drive agricultural growth, consequently markets should be allowed to “work”.

• This finally materialized in the 1996 FAIR Act:– Elimination of supply management instruments:

reserves and set aside programs– Elimination of non-recourse loan as support price

mechanism

• Safety Net shifted from government intervention, to market driven solutions: free trade, decouple payments, crop insurance

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U.S. Corn Seasonal Average PriceU.S. Corn Seasonal Average Price

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U.S. Corn Ending Stocks and PriceU.S. Corn Ending Stocks and Price

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Contribution of Decouple Contribution of Decouple Payments to the Safety NetPayments to the Safety Net

• Two type of decouple payments, Direct Payments and Countercyclical Payments

• Direct Payments are fixed, regardless of the price environment. Helpful during low prices, but are they necessary during high prices?

• Countercyclical Payments, vary according to price and are based on “base acreage”. Protect revenue.

• Neither address market imbalanced, nor protect consumers or farmers around the world.

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Crop Insurance: As a Safety Net?Crop Insurance: As a Safety Net?

• If loss of yield, protection is high during high prices; protection is low if prices are low.

• In a high price environment, falling market prices trigger indemnities, therefore crop insurance preserve high prices for farmers.

• In a low price environment , crop insurance indemnities are triggered if prices continue to fall, therefore crop insurance protect from…?

• Moreover, in a low price environment, is when farmers can afford the least crop insurance.

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Trends in Crop Insurance & Commodity Trends in Crop Insurance & Commodity Payments OutlaysPayments Outlays

Bil

lio

n U

S$

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How can Market Regulation How can Market Regulation contribute to a Safety Netcontribute to a Safety Net

• Crop Insurance can protect farmers from losses caused by local events: hail, localized drought or floods, or any other events limited in their ability to impact national/global markets.

• Government sanctioned/sponsored intervention need to manage market wide impacts.

• Safety Net should incorporate not only domestic producers, but also consumers, and also farmers and consumers around the world.

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Managing Extreme Price VariabilityManaging Extreme Price Variability

80%80%

Commodity X

Time

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What Instruments Could be UsedWhat Instruments Could be Used• Inventory Management or Food Reserves:

build reserves when prices are below lower threshold and release them when prices are above upper threshold.

• Expand mandate/use of crops for agro-fuels at low prices, limit their use at high prices.

• Implement short or long-term soil reserves if necessary.

• Aim to make the food reserve system self-financing.

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Benefits of Reducing Extreme Benefits of Reducing Extreme Variability in Ag PricesVariability in Ag Prices

• Protect farmers from very low prices, in exchange of protecting consumers from very high prices.

• Extreme prices increases pressure on natural resources.

• Increase efficient use of resources and promote investments.

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Final RemarksFinal Remarks• Go back to the basics of Agricultural Policy.

• The objective of Market Regulations could focus in managing extreme variability.

• Key challenge is to define an adequate Safety Net. Global vs. Domestic?

• Benefits of Safety Net need to extend beyond farmers and even borders.

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Agricultural Policy Analysis Center The University of Tennessee 310 Morgan Hall 2621 Morgan Circle Knoxville, TN 37996-4519

www.agpolicy.org

Thank You !Thank You !