Minnesota Government Policies: What Can Be Done for Rural Communities Related to Agriculture

A presentation to the Minnesota League of Women Voters
April 6, 2000

Cornelia Butler Flora

The basic reality that agriculture is changing. It is changing because of globalization and post-Fordist industrialization. Globalization is a result of the lowering of international barriers, first in the 1970s and 80s, to the flow of capital and in the 1990s to the flow of goods and services.

As a result, we have international agreements such as the World Trade Organization and NAFTA. The WTO took the place of the General Agreement on Tariffs and Trade (GATT). Farmers are upset about these two international agreements, and there is a real schizophrenia about this issue. On the one hand, we don't like having to import other people's stuff, while on the other hand, we like people importing our stuff. Unfortunately, we can't just say, "You import our stuff, but we won't import your stuff." So, this is the dilemma. Very seldom can you get something (a sale) without offering something in return (a purchase). So we export a huge amount of our agricultural product, just as we import a huge amount of what we eat.

Most people think in terms of the food value chain -- the various steps between producers of the raw materials that make up our food supply and end users who consume it. In the United States, the food processors drive the food chain - not the producers, not the input suppliers, and not the cargo carriers - while researchers report that grocery chains drive the value chain for food in Europe. So, if you are going to look at policies to improve agriculture or ways to do it, you need to look at the processor in the United States. One could argue that meat packers might still be the drivers in the meat value chain.

As we understand that value chain, we understand that farmers making more money will not necessarily keep Main Street in the local community vibrant. All the inputs farmers receive will not necessarily be from the community in which they live. For example, a friend is the member of one cooperative raises hogs for a different cooperative. The feed for those hogs comes from a third coop located several counties away. These contractual arrangements send the product further away and bring the inputs in from a greater distance. They also give farmers more a more secure income as long as they keep contract. So, contract farming is neither good nor bad. But contracts can be good or bad, and a single farmer may not have the resources to be sure the contract is enforced.

One of the policies that is important for keeping farmers on the land is having the state of Minnesota help oversee the contracts. An example of this need is seen in poultry production. While the first contract looks really good to the poultry farmer, the terms of the contract deteriorates over time as it is renewed. The farmer is too weak to contest it by himself or herself.

Another example comes from a number of people in Iowa I have spoken with who contracted with Murphy Family Farms, which is now Smithfield. Basically, these people did not read the contract carefully or didn't understand what it really meant. Their thinking was that because they were dealing with a very big company, they would not go broke, even with low hog prices, because big companies are so integrated. What a typical contract makes it clear that you never own the hogs (which saves you short term capital investment), you just own the processing portion (the more expensive long term capital investment). This is like owning a parking lot where I get paid for every car that parks in my lot. The difference is that only one person owns the cars that park there, and can thus tell you how to run it, how to improve it, and hold you liable for what happens to his car while under your care.

The contract says that the farmer must provide buildings to specifications. These are very expensive buildings and the technologies constantly change. So, you have a fixed investment about one-half million dollars. As one of my friends says, this is a good way to borrow about 1/2 million dollars and to get yourself a minimum wage job. That is an option and it keeps the farmer on the land. If you have more off-farm work, all the better. But, the contract also says that you have to deliver the hogs under certain conditions with certain weight, etc. As the facilities get older and the conditions deteriorate as a result, more hogs will die due to disease. When this happens, the company will say that the farmer is not meeting the terms of the contract and they will terminate the contract. The contracts are sometimes written with the company's guarantee of financing the project, but the producer is still stuck with the debt.

This happened with both the poultry and hog industries. The large companies generally want farmers who have other sources for off-farm income so they pay back the debt. This is why these contracts need to be monitored and O.K.'d by the state.

Participant: I thought the state did look at contracts. Am I wrong? I thought I read about this in some publication. Do they do any review of contracts?

I don't know what the state of Minnesota does. I know this is definitely not the case in the South. I do know about the case of poultry. Again, I don't know what happens with the contract growing in Minnesota but it would definitely be something to research. Generally, contract growing for crops goes like this. Let's say that I am a vegetable canner and I will contract with 100 growers to deliver a specific vegetable from specific seed on a specific day with a specific quality. I look very carefully at the product. Then I decide to take out the bottom 50% and just contract with the top 50 producers, who may in fact take over the land of the some of the 50 that I dropped. The next time around, I will again pick only the top fifty percent to contact with. The fewer the growers, the better for the canner. It is easier to contract with a few rather than a lot of people. As a result, I have a competitive system and will just keep contracting with the champions. The producers compete to sell their products, but with increasing concentration in food processing, the processors don't compete with each other to buy what the growers produce. That is the type of competition that law firms use. You hire a lot of people, work them to 60 to 80 billable hours a week, try them out, and then you let a lot of them go. The practice of growing contests it difficult for rural communities, as these decisions are outside of the rural communities' control and are not made in regard to the well-being of the place -- only the well-being of the firm. That is what the market is expected to do, but it is hard on people and the environment.

What does this mean to rural communities? Obviously, it means we are not going to have agriculturally-based retail and wholesale businesses based in town because the contractor will supply the input and will take away the products for processing elsewhere. So, we will have a few communities around the state with value-added agricultural industries (although these are likely to be in urban areas and are not the cure to community economic ills that many claim they are. There will be the majority of Minnesota communities where this will not happen.

There has to be a lot concern about rural development so there can be off-farm jobs, which helps keep people on the land -- and connected with community.

A student I am working with just finished an interesting study of Marshall County, Minnesota. Her sample of owner operators found that 75% of those households had off-farm income, either from the husband or wife working off the farm. So, concern about rural communities as a whole is very, very important.

Prior to the 1996 Farm Act, there were a series of farm bills that built on the federal response to the Great Depression of the 1930s. In the 1930s, most farmers grew some wheat and some corn. Most farmers milked cows. In the South, most farmers raised cotton. In particular, many small farmers grew or could grow some tobacco. Thus commodity price supports, given in exchange for executing conservation practices and limit supply by taking acres out of production of those commodities, were put into place. Those price supports provided a base price below which domestic prices could not fall. And, to help farmers' cash flow, the federal government also provided a loan on the bushels harvested. That loan rate in essence became the ceiling price for the market. Those loans, made on grains or cotton prior to sale were non-recourse loans, which means if the price never gets to the loan rate, the farmer can just walk away from the unsold crop, keep the loan price and let the government deal with the crop. If the crop was sold below the loan rate, the farmer received a deficiency payment to make up the difference between the loan rate and the market price. It was not a bad notion but it was not holistic enough. So, people planted what they knew they would get a government price for, which they could predict. The only thing unpredictable would be the amount of set aside acres they had to have in place in order to qualify for the loans. They didn't pay as much attention to the market price as they did to what would be the loan price. The loan price was always determined very late and the conditions were always determined very late, creating a great deal of anxiety for farmers.

It only made sense to put the least productive land in the conservation program, as your payment depended on bushels (production). And you had to keep planting the program commodity crop, or you would lose your base acres from which you would take the set-aside and qualify for the deficiency payments. So, you had these perverse incentives to keep planting the same thing and growing as much as possible of it, no matter what world markets did or what happened to ecosystem health -- or your neighbor's farm. World markets looked terrible in the 70s, looked pretty good in the 80s, and looked great up until about 1997.

The idea of the 1996 Farm Act was to help farmers change and diversify from growing a lot of the same old crops and diversify their production systems to meet more diverse market demands. At that time we realized that we were supporting low valued, high volume commodities that required huge subsidies in terms of dams, locks, straightened rivers, railroad support, etc. to move. The federal government subsidized grain traders to send products overseas. We were also subsidizing the shippers to ship overseas. And we lent money on very "soft" terms (below market interest rates and forgivable loans) if they would buy our grain rather than someone else's grain. This was a very expensive proposition when we were only growing bottom-of-the-line products. Although Americans grow the finest corn, it is still #2 dent corn and it is transformed into many other things.

The thought was, "We know farmers are innovative and smart. Let's let them experiment and let's guarantee them an income that is not related to what they produce." The income was very good in the first two years of Freedom of Farm. Farmers who had previously participated in the commodity programs received a payment decoupled from what they produced and what they did to their land and water. Many farmers paid off their debt at that time and improved their debt to asset ratio, which was a very smart thing to do. But they did not innovate into new crops grown in new ways. The reason they did not innovate is an important piece in regard to what the state can do to help farmers. Farmers didn't innovate because nothing else changed. There were no institutions to help them market alternative crops. There was no information available to help them look at alternative ways of growing and marketing alternative crops. We made no institutional changes and expected farmers to change on their own.

What we had in place were the elevators that took corn, soybeans or wheat, while the very innovative ones might take sunflowers. There was no market for new products and no commodity associations which profited from more of a new crop being grown through check offs. They were no researchers receiving money from the non-existent commodity associations, and thus no one to lobby for extending the loan deficiency payments for new crops -- but there were there for the old crops, plus one, soybeans, introduced after the 1930s.

Participant: I need to argue with you a bit. We grew corn and soybeans because corn and soybeans had more value than any other crop. Some years ago, sunflowers became the "rage" but sunflowers could not compete with soybeans as far as what you could grow on an acre of ground. You could grow violets rather than corn, but you don't get as much out of an acre, so that is why they are growing corn and soybeans because you get more per acre than you do with the alternative crops.

Exactly and this is because it is the way it has always been. You are rewarded by the deficiency payments by how many bushels you grow. The market didn't make corn and soybeans profitable, the U.S. government did.

Participant: Yes, it's all set. These products are worth more than anything else one would grow.

But is it worth more only because the government is paying you for growing this particular crop? Sometimes it is truly worth more and sometime it is not. We need more research to determine what are other things we can grow and market. The tricky thing here is not looking for the "miracle" crop. Sunflowers are more risky. Farmers in Minnesota adopted soybeans in the 1960s relatively quickly, as the crop was supported by extension and research and marketing mechanisms.

Participant: I come from that area and in the long hall you are right, but at the time this was a big innovation. This was a big step to take.

We need to do more studies to learn what was put into place to allow farmers to include soybeans in rotation. Extension really pushed it. You had processors ready to be there to buy. You had a whole industry of input and a whole institutional structure there to help with this change. My point is that farmers are doing what is smart. But what is smart financially has to do with the institutional structure that surrounds us.

The price of soybeans now is really low but this year farmers have loan deficiency payments for each bushel of soybeans. What are they going to plant next year? Soybeans. This is the only smart thing to do because this is the way the programs are set up. It would be too risky to try something else because the whole institutional structure in the state and the private sector make it more profitable to grow corn and soybeans. But, that institutional structure is not based on worldwide prices.

The point I'm trying to make is that the government programs makes farmers grow corn and soybeans. But we might need to look at world prices to see if it's worth our while as tax payers to do so. My question is, "Why are we planting more soybeans acres than ever in this country when soybeans are at world market lows?" There are a lot of people growing a lot of soybeans. We also see that increasing as a result of new technologies, such as Round-up ready soybeans and Round-up ready corn, where you can grow and manage more per acre. In terms of rural communities, supporting people to grow soybeans may mean encouraging one person to grow many, many acres of soybeans. But that person may be someone who has nothing to do with that community.

Paying for Producing What Society Needs

What is it that farmers produce? Farmers do a lot more than produce food and fiber. Farmers are indeed stewards of the land. We understand more and more that the quality of our water depends on what happens to the land, yet we reward farmers for fence row-to-fence row cropping because the biggest reward is the crop deficiency payment, which is based on per bushel of beans or corn.

So, we need to get the state of Minnesota to pay farmers for producing for the public good.

Participant: Who determines that?

Clean water?

Participant: No, the public good. O.K., clean water. They understand corn.

Yes, they understand corn, but why do we give farmers all of this funding? Is it because we want all of this corn and soybeans? Is it because we know what to do with it? No. Why do we subsidize corn and soybeans when we don't get good prices? Who defines that public good means that corn and soybeans farmers are worth more than wheat farmers? It's the powerful politicians. Why do they do it? Because the Corn and Soybean Associations are much stronger than the Wheat Growers.

The state acts upon what is defined as the public good, which is determined by pressure groups. The market does what is profitable. The market will always do what is profitable and they say that they are acting the way they do because it is profitable. It is the role of the state in a capitalist society to make it profitable to do what is right. Who defines what is right? This is what civil society, organized pressure groups, do. Increasingly, the public is defining water quality as what is right. We are also understanding that farmers are the guardians of our soil and water, but under the current situation, it is not profitable for farmers to do what contributes to the public good. Hopefully we are also understanding that there is no reason to think that farmers should be any more altruistic than anybody else.

What is it that farmers really do for society? Drinkable water is going to be the issue of the future. We have seen that happen in New York State already where the state is paying farmers to do whole farm planning. This is not easy for farmers to do because all of the institutions are set up to make it profitable to do what they have always done.

What state options would encourage farmers to look at alternatives? Some options could be:

We hesitate to do that now, but enforcement is a critical issue. In Iowa we let the public good go, and we have very bad water quality as a result. Thus Iowans have had to spend a lot of money cleaning up our water. If we only enforce the negative sanctions without positively encouraging people to make changes, it won't work. Farmers really do not like regulations. Part of this is because we have all of these stupid best-management practices that someone in Washington, D.C. thinks up. Because the Natural Resource Conservation Services department has done no research on what the real impacts of specific best management practices (BMPs) are in specific environmental contexts, farmers say, "Putting in this mandated practice makes no sense". But we have NRCS so poorly staffed that farmers are not given the latitude to determine what makes sense on their own land, so they will go for an outcome standard rather than a design standard.

What is really happening to the water? There are ways we can monitor the water but this means making institutional changes. This is where a whole community can work together. You can get inputs from a distance, but services are purchased locally. When you pay for services, you get new and exciting custom service groups to come in.

Participant: Can you expand on that? Are you saying that the community might be able to provide services, but farmers would still need to get inputs from somewhere else?

Yes, but the services provided by the community would include things like installing, caring for, and repairing buffer, rather than the traditional inputs of seed, feed and agrochemicals. One reason why farmers don't put in riparian buffers is because you have to plant them at the same time you are planting corn. So, you create new custom service enterprises that are based on skill. We then have a whole new area of services such farm management and integrated pest management (IPM) that require skilled people in rural areas running their own businesses.

Farmers can afford these new custom services (as they are increasingly paying for custom spraying, custom harvesting and custom planting) if they are paid for the ecosystem services these custom services produce. That is what we as tax payers should be paying for, rather than corn and soybeans. Farmers don't want to take welfare, and the current institutions -- both market and governmental -- demand that you must grow corn and soybeans. We need to let the farmer work on these other issues. In the support of multi-faceted rural development, it is very important that we look at these things within the context of community. Farmers need to get together with people in the community.

We have developed a research tool that the North Central Regional Center for Rural Development, which covers the 12 North Central region states, used with some folks in Illinois. We looked at the question that if something changes on the farm to make resource flows, what has to change off the farm to make this work? If it was more labor, how was that labor supplied? If it would take a different kind of processing, where would that come from? This gives community people the opportunity to change in tandem with what farmers are doing. Instead of hiring farm laborers, they are hiring custom service people who have their own businesses. It's much easier to get good help from an independent business owner than it is just hiring folks. Anyone who has tried to hire folks in the last year or so knows what I'm talking about. You buy the service, not the person's time, when you go to an independent business owner.

The state of Minnesota should support more local food systems and give alternatives for people to produce and buy food locally. One example is HACCP, which is the Hazard Analysis Critical Control Point, which is the new way we are now doing meat inspections for meat safety. This will be implement into a number of other food crops value chains in regard to the food safety regime. The state of Minnesota can help get the record systems up and running for small processors to help make them competitive.

While some small processors view HACCP as being regulatory and extremely costly, it can also be a way to be extremely flexible and to have a cutting edge in the market. Again, this is an area where it is important to have state support to help small processors, who will then provide alternatives for people who feel they can only contract with large packers in order to have a way to slaughter their animals. These small processors need serious help in getting funds.

IBP can hire one person or a team of people who can make all of their plants presumably HACCP ready, although we are now seeing that they keep lousy records and HACCP requires good trace-back records. But, there are ways we can make things happen to keep small meat processors in place.

We need to provide experiments for alternatives, but let's not just experiment on the farm. This research must also be linked to pass-the-farm-gate stuff.

Let's look at the farmer who decides to grow flax. Many people are saying that flax is going to be a good product to grow.

Participant: But people aren't paying enough for it.

You're right, they aren't paying enough for it, so this person cannot just grow flax. This is an innovative farmer but the community must be innovative with him, so you will need somebody who is a specialty processor of flax oil or a specialty processor of linen. You must have these kinds of industries going on at the same time so this farmer can see a reason to start growing flax in terms of making a profit. Farmers can grow lots of things. They cannot sell them because the value chains are not there. It is appropriate for the state of Minnesota to help create the value chains, which is not always value added enterprises but linking the producer with existing end-users.

Participant: We would love to have alternative crops if we didn't have to harvest it in the fall. It would have been for weed control and that would have been good, but they didn't pay enough for it.

We have to figure out how we can put market institutions in place so that this can be profitable. Although farmers are very good at growing things, they are not very good at selling things. It is the institutions that are in place that can help make this different. My argument for rural communities is that that must be in the context of rural community. Obviously, it must be linked, so you will need coalitions that take you to and from a variety of markets. This is a place where public dollars could help us identify these kinds of alternatives. In these cases, public dollars can take risks so that entrepreneurs can then enter an arena to complete the value chain.

What are public dollars currently doing? They are heavily supporting market development that tends to be very unimaginative, like industrial parks. The disadvantage rural communities hav is that they are distant and dispersed. They really don't know what is "hot" and who is buying what is "hot". This is a service that could come from the public sector to help us at least begin looking into alternatives.

Institution building should be aimed at the market, because the market is so efficient at distributing goods and services. But, innovative institutions will only happen in urban areas unless we give rural areas a "jump start" because of their dispersion and distance. We just don't have those kinds of contacts. One contact is not enough. People are tired of someone coming in with a "miracle" crop idea and then losing their shirts, but rural folks have tended to believe that person because there are not a lot of alternative sources. So, the question is: How do we get those alternative sources of information to the farmer? I believe this would be an appropriate role for extensionists tied to the land grant universities.

Often, the public sector "jump starts" something that later becomes private sector. If extension now decided to do artificial insemination, there would be local protests from the artificial inseminators. But, extension started to do this for free to clarify that there was going to be a market.

Another example is when extensionists handed out highbred seed to radically change how farmers grew corn. Extension also handed out soybean seed to help introduce the crop. The current source of both those seeds is now firmly in the private sector. In other words, the public sector took the risk that allowed market enterprises to emerge.

We giving farmers loan deficiency payments to make farming less risky. Why do farmers put their crops into commodity crops?. Now we have more specialization and crops that were ultimately meant to be income supports for the bulk of rural residents embedded in rural communities. The situation has changed. Little of the billions of dollars Congress has appropriated in the last few years to make up for low commodity prices has remained in rural communities.

The state of Minnesota needs to promote farm community entrepreneurial partnerships. Let's not just make the farmer the only innovators. If you can't make money from your innovations, it won't work. My notion is that the problem is not just that this is the way the markets are. It is the way institutions are that in turn make markets function the way they do. What we must do for rural America is understand that we've had policies in place for 60 years that encouraged people to do these program crops. From experience, they learned this was not profitable. So, we must invest real money in allowing alternatives to be put in place. That means paying farmers to produce the things we really value and that is determined through a political process. The nice thing is that water quality is something most people acknowledge as being very important. When we see towns that are dealing with these issues, we see that they are making a difference. We must not blame farmers but acknowledge that we are all allies in this.

Looking at communities is an excellent way to bring about these needed changes. The community gives us a better handle as to what is going to happen in rural areas.

All institutional structures taught farmers not to be involved in their communities, as their real future rested in Washington, D.C. If pork producers wanted to increase pork prices, their commodity associations encouraged the federal government to buy more pork for the school lunch program in order to bring up pork prices. It worked. We need programs on the state level that show that involvement at the local level can also work in creating alternative institutions that strengthen local communities, rather than make them irrelevant to what happens on the land. And that such involvement helps farmers, not just agriculture as a sector.