U.S. Farm Bills Fuel Food Price Inflation

The Food, Conservation, and Energy Act of 2008 expired at the end of the U.S. 2012 fiscal year, and covered all agricultural commodities produced in the U.S. during the full crop year of 2012. Congress on New Years Eve approved a nine month extension of the 2008 act, and it is now set to expire at the end of the 2013 fiscal year and cover the full crop year of 2013. American farmers currently have no clue if and when Congress will pass a new 5-year farm bill and what the Federal Government's latest agricultural policies will be.

Food price stability is supposed to be one of the Federal Government's main goals when proposing and enacting their primary agricultural and food policy tool, the farm bill. However, all farm bills enacted by the U.S. government throughout history have always resulted in Americans overpaying for food. The current uncertainties surrounding the farm bill will likely lead to greater food price volatility than ever, throughout the full year of 2013.

If the 2008 farm bill wasn't extended on New Years Eve, the law would have automatically reverted to the last permanent farm bill, which was enacted in 1949 - the year in which the New York Yankees, with the help of Yogi Berra and Joe DiMaggio, defeated the Brooklyn Dodgers in the World Series. The Brooklyn Dodgers have since moved to Los Angeles and were sold last year for a record $2.15 billion, and Brooklyn is now the home of the Nets - an NBA team that was founded as the New Jersey Americans 18 years after the passage of the last permanent  U.S. farm bill.

The U.S. Agricultural Act of 1949 included price support programs covering agricultural commodities, which allow farmers to receive a minimum amount of dollars for their agricultural commodities produced. Its goal is to provide farmers who produce agricultural commodities with a "parity" level of income based on their level of income vs. the rest of the U.S. economy during the years 1910 through 1914, which they considered to be the "golden age of agriculture".

During this so called "golden age of agriculture", the agriculture industry employed 20% of our nation's workforce. Beginning in 1940, a revolution took place in the U.S. agriculture industry that suddenly made American farmers substantially more productive. Inventions of new machines, irrigation methods, and improved pesticides, allowed American farmers to work dramatically less hours, while being able to produce a much larger amount of food. All together, growth in U.S. agriculture productivity increased 5-fold from 0.4% annually from 1910 through 1939, to 2% annually from 1940 through 1996. As a result, only 2% of our nation's workforce works in the agriculture industry today.

The 1949 farm bill included a "parity ratio", which is defined as: the level of prices for articles and services that farmers buy, wages paid to hired labor, interest on farm in-debtedness secured by farm real estate, and taxes on farm real estate, divided by the the general level of such prices, wages, rates, and taxes during the period of January 1910 to December 1914. It also created "adjusted base prices" for agricultural commodities based on the most recent 10-year average prices received for the commodity, deflated by the corresponding 10-year average of the index of prices received for all commodities. The bill then calculated a "parity price" by taking "adjusted base prices" for agricultural commodities and multiplying them by the "parity ratio".

Even though the parity price hasn't been used for many decades, the USDA is still required to spend millions of dollars monthly on calculating and reporting the latest parity prices for each agricultural commodity. The 1949 farm bill mandates that the Federal Government support a minimum sales price for agricultural commodities by directly buying from farmers milk and butterfat products at 75% of its parity price, wheat at 75% of its parity price, cotton at 65% of its parity price, and corn at 50% of its parity price.

The milk parity price as of October 2012 was $52.70 per cwt and the Federal Government under the 1949 farm bill is required to support a minimum milk price of $39.525 per cwt vs. the current milk January futures price of $18.10 per cwt. The wheat parity price as of October 2012 was $18.60 per bushel and the Federal Government under the 1949 farm bill is required to support a minimum wheat price of $13.95 per bushel vs. the current wheat January futures price of $7.83 per bushel. The cotton parity price as of October 2012 was $2.11 per lb and the Federal Government under the 1949 farm bill is required to support a minimum cotton price of $1.37 per lb vs. the current cotton January futures price of $0.77 per lb. The corn parity price as of October 2012 was $12.10 per bushel and the Federal Government under the 1949 farm bill is required to support a minimum corn price of $6.05 per bushel vs. the current corn January futures price of $7.23 per bushel.

The U.S. Agricultural Act of 1949 supports minimum agricultural commodity sales prices for farmers that are above current market prices by 118% for milk and 78% for wheat and cotton. Only corn's current market price is above the 1949 farm bill minimum sales price, with corn currently selling for 19.5% more than what the government is required to pay for it in the 1949 farm bill.

If Congress didn't extend the 2008 farm bill on New Years Eve, milk prices in retail stores would have roughly doubled in recent weeks, with U.S. consumers today likely paying approximately $8 per gallon of milk. Around mid-year when farmers begin harvesting wheat and cotton, consumers would have experienced an explosion in prices of goods containing wheat and cotton. If a new farm bill doesn't get enacted this year, consumers will once again be facing these same threats in late 2013.

Even since the first Agricultural Adjustment Act was enacted in 1933, Americans have been forced by the U.S. government to overpay for food. The Agricultural Adjustment Act of 1933 restricted agricultural production by paying farmers subsidies not to plant part of their land and to kill off excess livestock.

During the Great Depression, the free market was trying to make lives for Americans easier by allowing them to benefit from low food prices. However, the U.S. government ignored the root causes of the Great Depression and decided that farmers were producing too many commodities like hogs and cotton. Late in the Spring of 1933, the Federal Government began carrying out "emergency livestock reductions" and 1 million farmers were paid to destroy 10.4 million acres of cotton. The Federal Government bought 6 million little pigs and other livestock from farmers. All of these little pigs and other livestock were simply killed, many of them shot and buried in deep pits.

More recent farm bills have rapidly expanded the size of the U.S. government by introducing new federal programs, expanding subsidies, and providing more food stamps and foreign food aid. Most farmers support free market principles and prefer honest pay and honest work. Farmers become fearful any time that a new farm bill is up for consideration, because 60% of the subsidies go to just 10% of farms and if a farmer's competitors unfairly qualify for more government subsidies, it could force them out of business. Generally speaking, U.S. farm bills have disproportionally favored large agribusiness at the expense of small struggling farmers.

The farm bill is just another way to make Americans more dependent on the Federal Government. If farmers weren't unfairly given subsidies, competing farmers wouldn't need their own subsidies to stay in business. If the government didn't keep food prices high by continuously increasing the size of the food stamp program, the number of Americans who need food stamps will fall dramatically.

The passage of U.S. farm bills make food prices unstable and help fuel huge food price inflation. The fact that most parity prices for agricultural commodities are well above current market prices, shows that Americans today are still blessed with very cheap food. As the Federal Reserve continues to expand its balance sheet and the U.S. moves closer to trillions of dollars of debt monetization, food prices have the potential to double overnight without any substantial reduction in demand.