Cost of production without parity vs. costs of production in a parity system
How these two terms differ is an example of why clarity on parity is so important.
Price support vs income support
Policy that says farmers should receive the cost of production, or a percentage thereof, or cost of production plus a “reasonable profit” is justified because farmers ought to receive “fair prices.” If this policy is implemented as a price support, where actual market prices are supported at this level (a price floor) and the purchasers must pay that price for the commodity, then the cost to the government treasury can be virtually zero. This is a big selling point for policy makers focusing only on “fair prices” for farmers.
Sometimes corporate economists act like there’s no distinction between a price support of $4 per bushel (a price simply chosen for illustration) and an income support that sends government checks to farmers so that the market price plus the payment equals $4 per bushel. With income support payments, the market price can be lower than that which can keep many farmers in business and clearly doesn’t take account of external costs to the environment or society, or doesn’t include any opportunity costs. Corporate America will always opt for income support policy in its many clever forms because this means it can buy cheap commodities to assure large profits. It also projects the illusion that the market price can’t be argued with—after all, it’s the result of supply and demand. It’s also convenient for them to say that farmers need bailing out or they are on welfare. Since the early days of attacks on New Deal Parity policy, this was called “market oriented policy”. This illusion that supply and demand reign supreme was reiterated in WTO policy when a make believe “world price” was used to gage “trade distorting subsidies,” and both price supports and income supports were labeled as such.
Price supports at cost of production
On the other hand, do price supports at the “cost of production” or one of its variants deliver the kind of agriculture that makes family farmers the producers with a sustainable pattern of production? In its favor, such a price support will make the corporate purchasers pay a generally higher price for commodities than today’s system. It would also mean that the price support mechanism would be a revival of the non-recourse loan for storable commodities which allowed a farmer to “seal” the grain in storage at a “loan rate” to be paid back in 9 months with interest. If the local market price did not allow the farmer to pay off the loan with interest, the farmer would forfeit the grain to the government food security reserve (the Ever Normal Granary) and keep the loan. The farmer would never owe the government more than just the grain (unlike with a recourse loan from a bank where the bank could demand payment, even if that meant selling the cows, machinery, or the farm.) This is the same mechanism used to guarantee parity prices. Because most farmers were eligible to seal their grain, the loan rate became the market price floor. No farmer would sell grain for anything less.
So what is the distinction between a cost of production price support and a parity price support?
Cost of production will be calculated by USDA focusing only on the estimated costs per acre of producing a crop most efficiently, i.e. like most farmers today, aiming for the highest yield with whatever technology or economies of scale can achieve the least cost.
This is a link to USDA’s calculation of “cost of production” which is sometimes used by policy makers as a goal of farm policy:
https://www.ers.usda.gov/data-products/commodity-costs-and-returns/
My argument here is not about the technical details of how this was calculated. It may reflect approximate costs and yields experienced by a “typical” farmer of today using modern technology, chemicals, fertilizer, GMO seeds, etc.
Now why are costs of production important to calculating parity prices and how will parity prices differ than cost of production?
Essentially parity prices are prices adjusted for inflation using an index that reflects changes in the costs of production and living expenses. A base period is chosen; the official calculations by the USDA create a prices paid index with the base period is 1910-1914. This prices paid index is referred to as the Parity Index. (see link below)
While “cost of production” factors in yields that will result from new technology or optimum applications of chemicals and fertilizer, an index reflecting changes in costs of production makes no reference to yields. A production system that maximizes yields while ignoring the costs to the environment from chemicals and fertilizer pollution, loss of biological diversity, soil erosion, or social costs to farm families or rural communities will result in a cost of production price level that will not discourage the use of commodities for industrial livestock feed.
If various technologies like new pesticides or GMO seeds can lower the cost of production, then a cost of production price support will decline. If “fair prices” for, let’s say, corn farmers is the main consideration of the price support policy, then this policy might stabilize the current system of crop production and the current system of livestock production in CAFO’s and feedlots. Current corporate dominated livestock production depends on low feed prices (mostly corn and soybean meal, or other feed grains and oilseed meal) that don’t include those external costs. Nor do they include the opportunity costs related to having a sound socially and environmentally sensible production system today, let alone for future generations.
So, what will it take to create or recreate an environmentally sensible production system—an agroecological production system that also incorporates a democratic political and social system?
The Green New Deal offers a chance to reverse the direction of the current agricultural system that relies on cheap monocropped feedstuffs for animals in confinement. Because it is impossible to predict how low today’s commodity prices can go, those prices have no chance of reflecting inflation of farming costs. Thus, aggregate farm income declines and fewer farmers can make a living on the land and those that hang on must rely on more and more technology, giant machinery, and hired labor to farm more crop land. They will also depend on more and more chemicals and GMO solutions to increase yields and counter the inherent agronomic problems of a chemical dependent system. Specializing in a few crops with less regard for conservation will be the likely result.
I think I’ve made the case that there is more at stake in price support policy than “fair prices for farmers.” Price support policy must correct a misallocation of resources that wreaks havoc with the environment, makes most food an object of corporate manufacture, and diminishes life and economic opportunity in rural areas. What will be the difference with parity price supports vs. cost of production price supports?
Most importantly it must be understood that there is a direct connection between the price level of agricultural commodities and the agricultural production system that creates and uses them.
As giant corporations have vertically integrated livestock production where the mountains of feed is bought with a few clicks of a computer keyboard for less than a price that supports family farmers on the land farming agroecologically, should we even characterize this livestock system as part of agriculture? Is it not just the first stage of a manufacturing process—the procurement of raw materials for creating consumer goods? The thousands of items found in the typical mega food mart have almost no resemblance to what we think of as food produced on farms. In this context, are “consumers” really the people who eat modern food products or should we recognize the “consumers” to be the giant food processors and manufacturers? Shouldn’t the system of crop production be recognized as nothing different than pumping oil out of the Gulf of Mexico, scooping coal out of pits through mountain top removal, or clear cutting the nation’s forests?
I think we can agree that in order to halt climate change, we must discourage the use of fossil fuels and sequester as much carbon in the soil as fast as possible. Could it make sense to be using fossil fuels to intensify mechanical and chemical methods to produce corn and soybeans, while depleting soil carbon, soil’s ability to absorb rainfall, and ignoring the potential to sequester carbon in the soil? Could it possibly make sense after 5 years of extremely low commodity prices and reports of dire mental health stress of farmers, that the Amazon rainforest is burned, plowed, and drenched in chemicals to grow more corn and soybeans to depress prices even more?
A Green New Deal farm policy must reverse course of the logic and irresponsibility of today’s agriculture system.
It must send the economic signal that we will be using less soil depleting annual commodities that cover most tillable farm land today by making corporate purchasers of these commodities pay more. It must also counter the normal market logic that if prices are higher, production should increase. It must make clear that the problems of the industrial agricultural system cannot be individually addressed by new incentives--whether from government coffers or corporate marketing campaigns--when the underlying economic logic of extraction is not changed. Soil health, putting animals back on the land, using cover crops are all good goals, but they cannot be achieved if the underlying logic still says farmers must produce fencerow-to-fencerow aiming for the highest yield possible to lower their cost of production. At the same time, farmers will steer clear of extensive livestock production that cannot compete with vertically integrated livestock confinements that use cheap commodities for feed.
By making the price of corn and soybeans significantly higher and providing a supply management system that prevents anyone from growing more of these crops to take advantage of the higher prices, livestock production on the land will make sense because it will be cheaper to raise animals on the land without the large capital and energy intensive methods of confinements. The price level of storable commodities must fit the overall production system we envision that matches the goals of countering climate change and promoting social justice that are foundations of the Green New Deal. With higher prices for corn and soybeans, we increase the prices of chicken, pork, and beef so that family farmers can make money raising them humanely on the land.
The supply management system will be key to returning farmland to growing perennial plants like grasses and legumes whose roots go deep and wide, sequestering carbon much like the tall grass prairie did over thousands of years.
With the correct price levels set at higher and higher percentages of parity, we can achieve a Just Transition to a production system that no longer puts livestock in confinement and allows farmers to aim only to meet their quota of the problematic annual crops. There will be land not needed any more for producing corn and soybeans. That land can be planted to perennial grasses and legumes for use as hay, pasture, or wildlife habitat. Hay, pasture, and small grains for feeding livestock on the farm will allow new crop rotations that naturally provide nitrogen for a smaller corn crop and break up weed cycles eliminating the need for herbicides. Likewise, the unending monocropping problems of plant diseases and insect pests, only to be met with more chemical “solutions” today, will be eradicated.
In other words, if we look beyond the important, but limiting, goal of “fair prices for farmers”, and instead ask what level of prices do we need to discourage the use of corn and soybeans to feed confinement livestock, then we can recognize that establishing our price goal comes first, then supply management and incentives for agroecological practices will logically follow in order to achieve our vision.
Some nuts and bolts on Parity Pricing
Let’s revisit using the parity principle of creating a price floor indexed to inflation, but also adopting the base years of 1910-1914. USDA calculates parity prices for most commodities (a quirk of their method actually understates the true parity price). Recent calculations make the parity price of corn over $13 per bushel and soybeans nearly $33 per bushel. https://www.nass.usda.gov/Publications/Todays_Reports/reports/agpr0119.pdf
These compare to today’s prices of about $3.70 and $8.70 respectively, which may make the parity prices seem outrageous. Nevertheless, farmers were still guaranteed parity prices in 1952. Both, a bushel of corn and a bushel of soybeans have lost around 75% of their buying power since 1952. Or you can say that the corporate buyers of corn are paying 75% less than if the prices of corn and soybeans had kept up with inflation.
Rather than thinking farmers should get these parity prices for all the corn and soybeans they produce today, we can adjust the production so that at the stepped up transition levels, a farmer will always be making much more than they are today by raising less corn and soybeans. The confinement corporations will also be paying more for their feed. Their economic adjustment will be to cut production. Some of this decline can then be replaced by family farmers raising livestock on their farms. By the time we reach loan rates at 90% of parity, the general agricultural price level will reach 100% of parity, and we can raise all the livestock on family farms using their ingenuity and a more diverse crop rotations to sequester carbon, while eliminating the need for artificial nitrogen fertilizer and pesticides.
Another fact to look at in judging a cost of production goal is that USDA’s cost of production for corn in the “heartland” is only $3.54 per bushel (see link for Corn: https://www.ers.usda.gov/data-products/commodity-costs-and-returns/) with quite a large yield of 200 bushels an acre average. This is below current prices that most farmers find exceedingly low.
In conclusion, setting a price floor mechanism that achieves “cost of production” will result in locking in the current production system of crops and livestock. Instead, with a Just Transition policy of parity price supports which indexes prices to the “costs” of farming (and household expenses), we can achieve an overall parity price level. We will clearly remove farmers out from under the deadly cost price squeeze; they will not be growing more and more for less and less; and their net returns will be higher from here on out. Most importantly, we can develop a production system where livestock will be humanely raised on family farms and farmers can truly be stewards of the land with agronomically sound crop rotations and responsible use of manure as fertilizer. I have no doubt, that when farmers understand the policy of parity, they will be in the lead for this dramatic change.