The 1996 “Freedom to Farm” Farm Bill
With few agricultural programs to support and high prices expected to continue into the future, the money that was budgeted for commodity programs was converted to production flexibility contract payments (also known as AMTA payments named for the commodity title of the 1996 Farm Bill: the Agricultural Market Transition Act) that were to decline over time. With the AMTA payments, farmers could grow any crop they wanted—with the exception of fruits and vegetables—or no crop at all. The payments were decoupled from production and were to be paid whether prices were high or low.
With freedom from production controls, and with the expectation of a growing export market, US farmers were confident that they could out-compete farmers anywhere in the world in the race for exports. The mantra of many farmers was, “Bring it on.”
The expectation was that times had changed and with farmers purchasing most of their inputs they would be more price responsive than in the past. Thus, it was reasoned, with guaranteed AMTA payments, if prices fell, farmers would idle acreage on their own or switch some acres to a more profitable crop—there was no need for government programs to tell them what to do. The magic of the market would do all the work, and with reduced production, prices would increase back to profitable levels.
While remaining below its 1994 peak, the 1996 corn crop recovered from the 1995 shortfall and prices began to fall. By 1998, with a good—but not record—corn crop, the season-average price fell back below $2.00 from a 1995 season-average price of $3.24. Farmers were losing money.
The expectation was that, in the presence of AMTA payments, farmers would be more price responsive in their acre allocation decisions. They weren’t.
The result was four years of Emergency Payments and huge Loan Deficiency Payments (LDPs). With LDPs, farmers were paid the difference between the loan rate (that is, what used to be the support price) and the posted market price. As a result, large government payments were paid out for every bushel produced and no grain was taken off the market. With all of the year-ending stocks remaining on the open market, prices remained in a four-year trough and the farm-bill-to-end-all-farm-bills was terminated a year early and replaced with the 2002 Farm Bill. The 2002 Farm Bill fixed the level of decoupled payments rather than allowing them to decline over time and added back a program in which payments were made when major-grain prices fell below specified levels.
Source: Daryll E. Ray and Harwood D. Schaffer, Agricultural Policy Analysis Center, University of Tennessee
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