By Jim Hare

DROUGHT HAS PARCHED much of North America. U.S. grain harvests are expected to fall by 31 percent, and large harvest shortfalls are likely in China and Southeast Asia, as well. The surpluses of the past few years could provide the price and supply stabilization consumers need--if they were available.

U.S. farm policy, however, has put the profits of multinational corporations before the needs of both family farms and consumers. An emphasis on commodity exports, a market dominated by multinationals and heavily subsidized by taxpayers, has left food reserves at dangerously low levels, pushed thousands of small farms closer to bankruptcy and raised the spectre of skyrocketing prices for consumers.

In January 1986, carry-over stocks of wheat in the United States amounted to almost two billion bushels. By harvest time in 1988, however, aggressive export subsidy programs, initiated by the 1985 Food Security Act, had cut these stocks in half. Depletion of these reserves could not have come at a worse time. Caught short by the drought, stocks of wheat are now expected to fall to less than 600 million bushels, a 65-day supply, before the 1989 harvest. Many analysts believe a 90-day surplus is the minimum required for an adequate emergency reserve. In addition, a 65-day supply, even if it is sufficient under present circumstances, allows no leeway for other problems with the nation's food supply.

"One year droughts are not all that common," says Mark Ritchie, agricultural policy analyst for the Minnesota Department of Agriculture. "With only 60 days of grain estimated to be on hand before the next harvest, we have put ourselves in the very dangerous position of counting on a bumper crop next year. Without that good crop, real shortages of basic food grains could occur before the 1990 harvest."

The drought has cut harvests of corn and soybeans even more dramatically than those of wheat. The corn crop is expected to be at least 37 percent smaller than last year's, and the soybean crop 23 percent smaller. This will bring the amount on hand before the 1989 harvest to 1.58 billion bushels of corn and 100 million bushels of soybeans. In both cases the projected carryover stocks are significantly lower than many consider necessary for adequate food reserves. And even these estimates could be optimistic, given the extreme temperatures recorded through much of the grain belt during August.

The outlook for world grain stocks is even more grim. The extensive drought damage, combined with the steady growth in population and a levelling off of world grain output, could reduce carryover stocks by a record 152 million metric tons, according to the Worldwatch Institute. This will bring world carry-over stocks to 250 million tons--the equivalent of 54 days of consumption--208 million tons less than was available at the beginning of 1987. According to Lester Brown of Worldwatch, "such a dramatic decline in the world harvest of grain has no precedent." This worldwide reduction in available grain supplies will make it difficult for the United States to make up projected shortfalls through imports, the only alternative to further reductions in reserves.

Droughts Happen --Why Weren't We Ready?
Planning for food security is a fundamental government responsibility. Ancient communities established emergency granaries, with some amassing as much as a three-year supply. These stores were kept, cared for and defended as a matter of national security.

The United States came late to the concept of a national reserve, establishing the "Ever Normal Granary" only after the devastating droughts of the 1930s brought home the reality of famine even in a resource rich country. This granary, which was maintained in government-owned or -controlled warehouses until it was liquidated under President Nixon, served two basic functions: providing for the food security of the nation in case of drought or other disruption; and creating a mechanism for controlling commodity prices in order to stabilize the market and protect consumers from sharp price increases during temporary shortages.

From the beginning, the program was attacked by corporate interests which stood to benefit from price instability, low grain prices and unmanaged commodity surpluses. By the early 1970s, Congress was persuaded to relinquish the "Ever Normal Granary" facilities to commercial warehousers. Under this new arrangement, storage costs for government-owned grain jumped from 4 cents a bushel per year during the early 1950s to over 40 cents a bushel today.

Farmers in the United States struggled under the low price conditions of the late seventies, and millions of bushels were added to government-owned surpluses. Congress responded by lowering commodity prices further and by taking additional land out of production, but the surpluses continued to grow. By the beginning of 1985, the costs of storing surplus stocks had become a major political issue.

Much of the debate over the 1985 Farm Bill revolved around the "problem" of these surpluses. The food and chemical industry lobbyists and the Reagan administration demanded that production continue at full volume and that the surpluses be used to lower the price of grain world-wide in order to increase the volume of U.S. grain exports.

The provisions of the farm bill were in marked contrast to proposals offered by family firm advocates. The Farm Policy Reform Act in 1985 and the similar Family Farm Act in 1986 and 1987 would have raised farm prices above the cost of production, and managed overall production to meet projected requirements, including an emergency food reserve. A disaster reserve was also proposed which would have compensated farmers in drought areas with commodities from the reserve-up to 90 percent of their normal yield. As with the "Ever Normal Granary," commodities would be released from reserve stocks when commodity prices rose above pre-set levels.

"Simply put," says Don Vig, vice chair of the Dakota Resource Council, a family farm advocacy organization, "there would be no massive cattle sell-offs, no huge swings in commodity prices and no 44 percent increase in food prices ... if the Family Farm Act had been in effect this past year."

Instead, Congress decided in 1985 to solve the "problem" of surpluses by aggressively subsidizing the sale of U.S. commodities abroad. The "Food Security Act of 1985" has caused 250,000 farmers to lose their livelihood since it was enacted, cost taxpayers over $50 billion in its first three years and liquidated the surpluses. "By rushing headlong into a program to dump our surpluses on the world market, the administration has staked our food security on a prayer for good weather next year," says Dixon Terry, an lowa farmer and co-chair of the League of Rural Voters, a non-partisan voter participation organization that deals with rural issues. "There has never been a policy more inappropriately named."

Cashing In On The Crisis
Not everyone has suffered from the price instability designed into current U.S. farm policy. Grain traders and brokerage houses, for example, are having record seasons as the volumes traded increase and speculators flock to gamble on large price swings. Traders and warehousers who are holding grain bought at 1987 prices will double their money. The few farmers who have grain left from last year and those who harvest good crops this year will also benefit, but farm prices have not yet risen above the average cost of production.

Moreover, food processing companies and retailers appear to be taking advantage of the drought to raise prices on processed food across the board even before higher grain prices take effect. Supermarket prices rose an average of 1.4 percent in July, the Labor Department reported in late August. Included in these statistics were an increase in the price of eggs of 13.8 percent, and an 8.9 percent jump in tomato prices.

Donald Ratajczak, chief economist for the economic forecasting center at Georgia State University, told the Washington Post, "Unquestionably, some people are using the drought as a cover to raise some of their prices." This is a familiar refrain for consumers. Farm prices (the price received by farmers for their crops) declined by as much as 50 percent between 1980 and 1987, but food processors and retailers raised food prices by 36 percent. The price farmers received for the grain in a box of Wheaties, for example, dropped from 3 cents to 2 cents as a result of changes in the loan rates contained in the 1985 farm bill. But the price of that same box in the store rose from $1.04 in 1981 to $1.91 before the drought, and has risen 9 percent since the drought began. The food processing industry has maintained a 15 percent return on equity over the last five years, significantly higher than U.S. industry in general.

By far the largest beneficiaries of the 1985 farm bill have been the transnational corporations which dominate the grain trade. The increased exports made possible by taxpayer subsidies such as the Export Enhancement Program have showered Cargill, Continental Grain and others with cheap grain at public expense. Cargill alone reported a 66 percent jump in profits for 1986. In addition, these same corporations are in the best position, as warehousers, shippers and traders, to profit from short-term fluctuations in commodity prices.

"As the rural economy dries up and blows away, Cargill and the rest are earning record profits," says Dixon Terry. "This alone should be enough to earn them pariah status in rural America."

Paying for Mismanagement
The cost of the mismanagement of the farm economy appears in many sectors. Taxpayers have taken a beating, subsidizing the export of farm commodities through the deficiency payment program, providing additional direct subsidies to grain traders, and providing emergency relief to drought-affected farmers. Consumers are facing price increases of 3 percent to 6 percent, largely resulting from processors trying to maintain their high rate of return of the past few years.

The drought is also exacting an environmental toll. The nation's soil and water resources continue to be undermined by the effort to increase per-acre production: for every bushel harvested, an estimated two bushels of topsoil are lost to erosion. And wind erosion in parts of the midwest is filling ditches and streams with drifts of soil. Wind erosion, the worst since 1955, had damaged over 13 million acres in the Great Plains by May 31 of this year. Additional long-term damage will be suffered if efforts to rebuild our national grain reserves in the next few years are initiated without consideration for the long-term health of the soil and water resources.

Our reputation as a reliable supplier of grain has also been damaged by the failure to ensure adequate reserves. With the United States unable to meet its export commitments, buyers around the world will be scrambling to locate alternative sources for the commodities they need. The projected shortfalls in the U.S. harvest have already prompted Brazil to announce plans to expand cereal production by 14 percent.

A heavy price in human misery will be exacted in poorer countries as the price of imported commodities rises and emergency assistance is cut back. The U.S. Department of Agriculture (USDA) has privately warned the Agency for International Development (AID) not to expect any surplus grain to be available for famine assistance next year. Higher grain prices will also reduce the amount of grain that private relief agencies can purchase at current funding levels.

Ironically, the higher grain prices may help stifle U.S. attempts to discourage food self-sufficiency in developing nations. The higher cost of imported grain will make it possible for local farmers to sell local grains without competition from heavily subsidized U.S. commodities.

Perhaps the most disturbing aspect of the drought is the inability of U.S. policy to cope with it. Droughts are natural occurrences, and this drought, while severe, should not cause the sort of crisis we are now facing. The failure of the malapropian "Food Security Act of 1985" to maintain emergency stocks large enough to keep supply in balance with demand is at the root of the current predicament. As Don Vig puts it, "The real blame for any increase in food prices belongs on the 1985 farm bill. Only the drought is a natural disaster."

With projected carryover stocks next year well below the 90-day supply considered necessary to provide for the nation's food security, our only short term options are to reduce usage or continue to use emergency stocks.

Picking Up the Pieces of A Failed Policy
Usage reductions will most likely come by cutting exports, both in food assistance and subsidized sales. To help recipients of U.S. grain address the expected reductions, agricultural experts are calling for an international meeting of food donors, both government and private, to find ways to meet the food needs of famine struck countries and to cover the financial shortfalls poor nations will face due to higher grain prices. "Drought and flooding damage has occurred over much of the globe this year," Mark Ritchie notes. "The need for food assistance will be greater than ever. International cooperation in arranging the necessary aid is absolutely essential this year when total world harvests will be insufficient."

Another danger is that the expected loss of export markets could set the stage for another round of subsidy wars if the United States determines to "buy its way back into the market" when harvests return to normal.

Over the longer term, consumers and farmers alike need the protection offered by adequate grain reserves. The emergency reserves could be isolated from the market, and stored on farms at government expense to provide the least expensive, most secure hedge against successive crop failures. The reserve stocks would also serve as a price cap, protecting consumers from shortage-induced food price increases. The farm disaster reserve, proposed in the Family Farm Act, would also help prevent massive farm failures. This disaster reserve is particularly important for diversified livestock operators who produce their own feed, and who have been forced to sell off breeding stock as hay and crops disappear.

The rebuilding of adequate reserves will require production increases over the next few years. The protection of soil and water resources, however, is also a food security issue, and should not be further sacrificed in a rush for "fencerow to fencerow" production.

Finally, it is important to note that while the threat of food shortages has pushed prices up to near record levels--$2.80 per bushel of corn, $8.48 for soybeans, and $3.75 for wheat (as of August 15th), these prices are still very close to or slightly below the average cost of production. If these prices had been set by Congress in 1985, most of the 200,000 farms that went under since then could have been saved. The income produced would have provided a shot in the arm to the manufacturing economy, also, as farmers and rural people invested in their farms and businesses and improved their standard of living. Consumer prices would have risen slightly, again depending on the extent to which processors determined to maintain their high profit margins, but the reserves created would have given consumers a two to three year buffer for future crop failures.

The current drought is a reminder to the nation of the inevitability of natural cycles and the necessity to adopt food and agriculture policies which recognize the responsibility of the government to assure adequate supplies of food at fair prices, encourage and enable farmers to conserve and rebuild the nation's soil and water resources and which put those interests above those of the trading and processing corporations. In the absence of a new direction, the current price and supply instability is just a taste of what the future holds.

Jim Hare is Communications Director of the League of Rural Voters.