Late 1990s prices slowed production little but fueled ethanol
During the last four years that the 1996 Farm Bill was in effect, the price of corn remained below the loan rate, dragging all other row crops with it. Even though US soybean exports increased from their low of 805 million bushels in 1998 to 1,064 million bushels in 2001 as China increased its imports by 240 million bushels over the same period, that was not enough to raise the prices of crops competing for the same acreage and stanch the level of government payments required to keep the US agricultural sector afloat.
The argument made in the passage of the 1996 Farm Bill was not whether or not farmers are price responsive in their allocation of acres, but the idea that they would be more price-responsive now that they purchased more of their inputs than they did in the 1930s or even 1950s. Farmers have always been price responsive in their allocation of acres among the various crop options including pasture and hay.
Over time farmers historically have also shown a willingness to reduce the number of acres needed to produce the eight major crops (corn, soybeans, wheat, cotton, rice, grain sorghum, barley, and oats): just very slowly and not timely enough to quickly return prices to the level needed to keep from driving farmers out of production. And even when farmers have been forced off the farm, the land has remained in production.
The same was true when prices began to plummet in the years following the adoption of the 1996 Farm Bill. The price of corn in 1995 was $3.24 per bushels then $2.71, $2.43, $1.94, $1.82, $1.85, and $1.97 from 1996 to 2001, respectively. Between the 1997 crop year and the 2001 crop year, harvested acres for the eight major crops declined by 17.2 million acres (7.5 percent). Barley and oat acres declined by 33 percent each. Wheat acres fell by more than 24 percent. Cotton and rice acres increased. Corn acres fell by 3.9 million acres while soybean acres increased by the same amount.
Despite these changes, crop prices remained at a level that required massive government payments into the 2001 crop year.
While farmers were not price responsive enough on the supply side to return crop production to profitability, they were price responsive on the demand enhancement side. With corn prices below the loan rate, farmers were told that further processing to increase the non-food use of their corn and soybeans was the answer to their price woes. And so farmers and their check-off boards searched for suitable products that could use a lot of what they were producing.