Last week we read two ideas about helping the farm economy. I have labeled these as supply control – where farmers deliberately produce less to raise prices and income; and price control – where commodity prices are simply set by the government.
This week we’ll look at the supply side, where farmers voluntarily plant fewer acres causing prices and income to rise. The first problem is the relationship to prices and income. Cutting back acres by 10% for example would mean prices would have to rise by about 11% to break even. There is no good way to ensure that happens, because it depends on many other factors, such as inventories on hand. It is very possible a 10% supply cutback would lower income, but it is essentially unpredictable. This is why previous attempts to artificially lower production paid farmers to reduce acres to overcome this income loss.
There are other issues. Most suggestions of reducing acres focus on US producers, but commodities like grains are produced around the world, so a cutback here would be a gift to Brazilian farmers, for example.
Planting 10% fewer acres would likely not reduce production by 10%, as farmers would idle their worst acres first. We have experience with this from earlier farm bills with set asides.
The biggest problem however, other than the math, is the moral hazard. While voluntarily reducing acres may be good for the group, cheating is the optimal strategy for the individual. After all, you get the same price as those who reduce planting. I don’t see any sense of commitment to a common cause that could overcome this powerful incentive.
Voluntary acre reduction is one of those theories that doesn’t scale up to a national or international level, but might work in a smaller group like a community or cartel like diamonds. But even then, history has shown us that market forces eventually undermine even the strongest supply reduction efforts.