Oct. 1 (Bloomberg) -- Call it the farm fiscal cliff.
Congress’s failure to pass an agriculture law this year means U.S. farm policy officially reverts to rules dating to 1949 that would raise prices of commodities from cotton to wheat next year at taxpayer expense. Futures traders are betting lawmakers will act to prevent that.
The BGOV Barometer shows that applying the 63-year-old law would force up the price farmers get for wheat by more than half, with government funds propping up the market. Milk and cotton would almost double, and rice would rise 41 percent. Futures contracts in those commodities point to prices next year still well below the level the 1949 law would mandate.
Like the fiscal cliff, the $1.2 trillion in automatic spending cuts designed to force Congress to reach a budget agreement, the threat of a return to Truman-era farm policy is a powerful motivation for lawmakers to compromise on new legislation, said John Schnittker, who was a U.S. Department of Agriculture chief economist and undersecretary during the John F. Kennedy and Lyndon Johnson administrations.
“Farm organizations have hung onto the notion that we need that old law on the books” to make Congress act, said Schnittker, 88 and retired from a career as an agriculture consultant. “The 1949 Act is obsolete and should not be allowed to come into effect.”
The 1949 rules, which also required the government to determine how many acres a farmer could plant, let the U.S. buy up crop surpluses until prices approached parity, a concept based on the purchasing power represented by pre-World War I crop prices.
The parity formulas, which the USDA still publishes monthly, would call for wheat at $13.88 a bushel next year, compared with the $9.025 at the end of last week, and cotton at $1.37 a pound, compared with last week’s 71 cents. Wheat for delivery in December 2013 traded at $8.75 in Chicago Sept. 28, and December 2013 cotton traded at 76 cents in New York.
Corn, buoyed by demand for ethanol, exports and animal feed, wouldn’t need any adjustment to reach parity. Soybeans, now the No. 2 U.S. crop by value, weren’t significant enough in 1949 to warrant a parity price.
Farmers and agribusinesses anticipate that operating under 1949 rules, even for several months, would have little real impact. Spending for U.S. Department of Agriculture programs such as food stamps and crop insurance are set independently of the farm bill, and most of the archaic provisions involving crop acreage and prices wouldn’t go into practice until next year’s harvest.
Officially, farm policy reverts to the 1949 law today, the beginning of the new fiscal year and the day after expiration of the most recent farm law, passed in 2008. Agriculture, and the world it fed, were vastly different on Oct. 1, 1949. The same day, rebels led by Mao Zedong established the People’s Republic of China. The post-war U.S. economy was mired in recession, contracting 3.6 percent, and farm profits were $12.8 billion, down 28 percent from the previous year.
Oversupply was considered the culprit, Schnittker said. Unlike today, when government policy promotes exports and greater production is needed to boost inventories, farm policy in 1949 emphasized managing supplies to boost prices for farmers.
“You ended up with the government owning a lot of crops,” he said. “Policy was done like this for decades.”
This year, U.S. farmers, amid the worst drought in more than five decades, will reap a record $122.2 billion in profits, the USDA said in August. Exports and land values are at records. Global food demand supports planting of more acres and rising supplies.
The lack of a new law is “leaving USDA with far fewer tools to help strengthen American agriculture and grow a rural economy,” Agriculture Secretary Tom Vilsack said in a statement today. The law encourages production and exports, along with lower raw-materials costs for agribusiness giants such as Cargill Inc. and Archer Daniels Midland Co. Its biggest expense, food stamps, feeds one of seven Americans.
The Senate in June passed its version of a five-year law, which would cost $1 trillion over a decade. The House Agriculture Committee approved a bill the following month. Disputes over the cost of food stamps and the shape of farm subsidies kept the bill from a vote in the House before Congress adjourned until after the November elections last month, allowing legislation passed in 2008 to lapse.
Reverting to the 1949 law would halt enrollment in conservation programs and shipments of overseas food aid.
“The reason it’s there is to force Congress to do their due diligence and get a farm bill passed,” said Bing Von Bergen, first vice president of the National Association of Wheat Growers.
Lawmakers will be challenged to pass a new farm bill while dealing with other issues, Vilsack said. Typically, lawmakers pass short-term extensions of the law until spring planting begins and farmer groups demand legislation to help with planting decisions. When the law expired in September 2007, the policy lapsed and a new measure wasn’t passed until June 18, 2008.
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