of price support programs. The key differences in farm production, prices, and income follow:

5

In the absence of transitional Government programs, in the first years after price support programs are discontinued, an even greater decline in prices and income might be expected. On the other hand, an adjustment period of 3 to 5 years is not long enough to fully reflect all adjustments which would occur as a result of the sharply lower prices and greatly reduced net income.

Perhaps even more important, however, farm income in recent years has received substantial support from marketing orders, Public Law 480 exports, and agricultural conservation payments. If these programs, as well as price support and acreage diversion programs, had been discontinued, farm prices would have dropped even further and farmers' net incomes would have been less than $6 billion.

Comparability with earlier estimates.-These estimates are in line with the conclusions reached in earlier studies at Iowa State University, Cornell University, Pennsylvania State University, and Oklahoma State University. In 1959, at the request of the chairman of the Senate Committee on Agriculture and Forestry, the technical staff of the U.S. Department of Agriculture and a committee from the land-grant colleges projected farm prices and income for the period 1960-65 in the absence of price supports. This study was published as Senate Document 77, 88th Congress, 2d session.

The analysts projected a decline in farm prices from 1955-57 levels, of 17 percent by 1965 if price supports were discontinued. They projected a decline in realized net farm income from $11.5 billion to about $7 billion in 1965.

Soon after this pioneering study was published in January 1960, economists at Iowa State University completed studies of the economic effect of eliminating specific price support and acreage control programs. They reached conclusions similar to those indicated by the projections in Senate Document 77.

Professor Brandow at Pennsylvania State University, using somewhat different analytical methods, in late 1960 also reached the conclusion that, if price supports and production controls were removed, by 1965 realized net farm income would fall to about $7.2 billion."

Adapted from estimates prepared by the Economic Research Service and the Agricultural Stabilization and Conservation Service, USDA.

Shepherd, Geoffrey, and others, "Production, Price, and Income Estimates and Projections for the Feed-Livestock Economy Under Specified Control and Market-Clearance Conditions," Ames Center for Agricultural and Economic Adjustment, Iowa State University, August 1960 (Special Rept. 27). See also Robinson, K. L., "Possible Effects of Eliminating Direct Price Support and Acreage Control Programs," in Farm Economics, Ithaca, N. Y., State College of Agriculture, Cornell University, October 1960 (Na. 218), pp. 5813-5820.

"Economic Policies for Agriculture in the 1960's-Implications of Four Selected Alternatives," Joint Economic Committee print, December 1960.

In 1963, a group of economists at Oklahoma State University_and at the Center for Agricultural and Economic Development at Iowa State University made a comprehensive analysis of alternative feed grains and wheat programs. They concluded that if price supports and acreage diversion programs for feed grains and wheat were discontinued and there was a 3-year period of adjustment to market prices, even though surplus stocks increased somewhat, net farm income would drop $5 to $6 billion. This study assumed the cotton, rice, peanut, dairy, and tobacco price support programs were continued. Had these programs also been discontinued, the projected decline in net farm income would have been even greater-more than $6 billion, or more than 50 percent.

8

As recently as January 1964, Tyner and Tweeten, economists at Oklahoma State University, published a study of excess capacity in U.S. agriculture. They conclude that at the prices prevailing in the last 5 years, except for the acreage and commodity diversion programs, American agriculture would have attempted to market about 7 percent more products than could be moved through market channels at the prevailing price levels.

Their study, which analyzes the problem in a different way, concludes that, in the absence of acreage and commodity diversions by the Government, farm prices would have to fall more than 20 percent to permit farm output to clear the market.

Because of the high level of farm expenses per $100 of cash receipts from farm marketings, a drop of more than 20 percent in farm prices would be expected to reduce net farm income by more than 50 percent. These university economists found the excess capacity of American agriculture had remained relatively stable for the past several years. There was no indication of a gradual reduction in agriculture's excess capacity even though 3 to 4 percent of the farmers were quitting farming each year and commercial exports of farm products were increasing over the period. However, there is general agreement that unusually favorable weather has contributed to increasing crop yields in recent years. Part of the excess capacity of American agriculture would be eliminated if less favorable weather (as in 1964) were experienced for a few years.

Income decline on large farms.-It has often been assumed that the major effect of the removal of price supports would be the squeezing out of the smaller and less efficient farmers. The large decline in farms with sales of about $1,000, even though price supports were in effect, has already been noted. Analyses of the Economic Research Service indicate the large farms with over $40,000 sales per farm would face even greater financial difficulties than smaller ones if price supports were discontinued.

This is because of the high ratio of cash expenses to cash receipts. Large farms with more purchased supplies and hired labor per $100 sales have a higher breakeven point than smaller farms. Had price supports been absent the past 3 years, expenses probably would have

Tweeten, Luther G., Earl O. Heady, and Leo V. Mayer, "Farm Program Alternatives: Farm Incomes and Public Costs Under Alternative Commodity Programs for Feed Grains and Wheat," Ames, Center for Agricultural and Economic Development, Iowa State University, May 1963 (CAED Rept. 18).

Tyner, Fred H., and Tweeten, Luther G., "Excess Capacity in U.S. Agriculture," Agricultural Economics Research, January 1964 (vol. XVI, No. 1), pp. 23-31.

exceeded cash receipts for the group of farms having sales of over $40,000.

On specialized cash grain and cotton farms having sales of over $40,000 in the past 3 years, with price supports in effect, net cash receipts averaged more than $10,000. Had price supports been discontinued, and prices fallen to world levels, analysts' estimates indicate production expenses would have exceeded cash receipts by more than $10,000 per farm.

The approximately 1,400,000 farms with sales of $5,000 to $39,000 had net incomes averaging about $5,700 in the past 3 years. Without price support programs, a substantial number of these farms would have experienced losses, and the average net income for the group would have been reduced 40 to 50 percent.

Income decline on cattle ranches.-Cattlemen who produce feeder cattle at times have opposed the feed grain program on the grounds that the resultant effect on feed grain prices would weaken the demand for feeder cattle. However, they often failed to consider the long-run view that if nothing is done to curb excess feed grain production the inevitable eventual result is an oversupply of meat animals and poultry which lowers all meat animal and poultry prices, including the prices for grain-fattened cattle. Lower prices for grain-fattened cattle are soon reflected in lower feeder cattle prices.

Analysts estimate that in the absence of price supports in 1961-63, the gross incomes of cattle ranches in the Western States would have been about 20 percent lower than they actually were, largely because of lower cattle prices. Production expenses on cattle ranches are not as high a percentage of cash receipts as on crop farms. However, it is estimated that, in the absence of price support programs, net incomes on cattle ranches in 1961-63 in the Northern Plains, in the intermountain areas and in the Southwest, would have dropped 30 to 45 percent.

Farm program benefits and costs for major commodities.-Farm program costs have been higher in recent years than anticipated, primarily because of the unexpectedly high crop yields. Had crop yields been lower, the reduction in Commodity Credit Corporation stocks would have been greater, more of the cost of diversion payments might have been recovered, and acquisitions of loan collateral might have been considerably smaller.

Estimates were made of the value of production plus Government payments under existing programs for 1964 and 1965 for feed grains, wheat, cotton, and rice, and of the value of production in the absence of price support and acreage diversion programs. Similar estimates were made, assuming both price support and Public Law 480 programs were discontinued. They indicate that the decline in returns to producers in the absence of price supports would vary from 21 percent for cotton producers to 38 percent for feed grain producers. În the absence of both price supports and Public Law 480 programs, the drop in returns to producers would be even greater.

The estimated decrease in farm returns, in the absence of price supports and in the absence of both price supports and Public Law 480 programs is shown below:

1 Feed grain producers returns are adversely affected by increased quantities of wheat available for animal feed.

It also is of interest to note that estimated Commodity Credit Corporation expenditures for the 1964-65 commodity programs are equal to 25 percent of the value of feed grains produced; 19 percent of the value of the wheat produced; and 26 and 27 percent, respectively, of the value of cotton and rice produced.

Also, by taking into account the value of the crop plus Government payments under the current program, versus estimated value of production in the absence of the program, and differences in CCC expenditures, it is possible to estimate the increase in producer returns per $100 of net expenditures on each commodity program.

This analysis indicates producers' crop values and payments are increased about $186 for each $100 net expenditure on the current feed grain program.

Similar estimates for the voluntary wheat certificate program, for the 1964 and 1965 crop years, indicate wheat producers' returns are increased about $225 for each $100 of net CCC expenditure on the

program.

Under the current cotton program, with price equalization payments being made to domestic users of cotton as well as to exporters, cotton producers' returns are increased $100 for each $100 of net CCC expenditure.

Also, in the case of rice producers, incomes appear to be increased about $100 for each $100 of net CCC expenditure on the program.

The dairy price support program is something of a special case. Most of the products acquired under the price support program are exported under Public Law 480 programs. If these programs were continued (as assumed in this analysis, but which might not occur), Government expenditures would be reduced very little by the elimination of dairy price supports which increase producers' incomes about $200 million annually.

Although the tobacco programs have been highly successful they have experienced increasing difficulties in recent years. However, it is known that the tobacco program costs are very low and in the absence of price supports tobacco prices would be much lower than at present. While specific estimates are unavailable, tobacco growers' incomes are probably increased several hundred dollars for each $100 of net Government expenditures on tobacco price supports.

Land values in absence of price supports.-Farm real estate values increased an estimated $19 billion in the past 3 years, or about $6 billion a year. Farmland values are now near an alltime high in relation to net income from farming.

If price supports were discontinued and net farm income declined to the $6 billion level, residual earnings available as a return on farm real estate investment would be about $1 billion. If such residual earnings were capitalized at 4 percent, they would support a value of farm real estate only a fifth of the actual value of $151 billion that existed in January 1964.

Outstanding real estate debt was $16.8 billion on January 1, 1964, on which the annual interest charge amounted to about $900 million. This debt is owed by less than half of the farmers. About $2 billion of this debt is owed under installment land contracts in which the buyer's equity averages less than 30 percent. Such equities would be wiped out by the reduction in real estate values implied by the lower level of farm income. A large number of defaults and foreclosures likely would occur.

Some have urged farmers to consider recent increases in farmland values as a part of their return from farming. In the absence of price supports in the past 3 years, in addition to annual losses of farm income of some $6 billion, farmers also probably would have experienced decreases in farm real estate values of several billion dollars a year.

IMPLICATIONS FOR FUTURE FARM POLICY

The three most common criticisms of farm price supports are (1) that they are excessively costly to taxpayers, (2) they cause agriculture to be inefficient, and (3) they interfere with the freedom of farmers. However, an overall view would note that in recent years consumers have obtained a larger volume of high quality foods at less cost in terms of their ability to pay than in any earlier period in history. It is generally accepted that consumers in no other country are as well served at as low cost by their farmers. Furthermore, if the Government cost of the price support programs were added to the consumer's food bill it would be increased less than 5 percent. An overall view also recognizes, as was noted in the opening sections of this report, that technical changes in American agriculture have been proceeding more rapidly in the past 10 years, with price support programs in effect, than in any earlier period in history. Overall efficiency in resource use in American agriculture is continually achieving new highs.

And, finally, there has been a sharp trend in recent years toward greater flexibility in price support programs which give individual producers increased opportunities to select alternatives best suited to them.

The wheat and feed grains programs are entirely voluntary. Although individual farmers may experience some disadvantages as an indirect result of these programs, the disadvantages appear to be fewer than under previous programs. While the major benefits of these programs are realized by those who participate in them, noncompliers, too, realize net benefits. For example, market prices for most noncompliers are higher than they otherwise would be and other producers, such as poultrymen, dairymen, and cattlemen, are benefited by the increased stability in feed grain prices. Reduced supplies of feed grains and wheat for livestock feeding also strengthens the prices of meat animals including range cattle over a 2- or 3-year period.