	Introduction

When farm commodity prices fall and costs of production rise, farmers can get caught in a "farm price-cost squeeze." The potential for such a financial bind dates to the first half of the 20 th century when farmers began purchasing more of their farm inputs such as fertilizers, improved seeds, and feed concentrates. Since the 1930s, U.S. agriculture has been supported through the ups and downs of the market by federal farm policy, most recently set under the 2008 farm bill. In 2009, some farmers found themselves in difficult financial circumstances, following high farm prices and relatively prosperous times in 2007 and 2008. Livestock, dairy, and poultry producers faced particularly low or negative returns based in part on input prices, primarily for feedstuffs, that did not fall as fast as output prices. In order to survive, many farmers have been drawing on equity built up in recent years. Meanwhile, producers of crops, both federally supported ones such as grain, oilseeds, and cotton and non-program crops such as fruits and vegetables, continue to deal with volatile costs of energy and fertilizer, which are affecting their returns. In some instances, Members of Congress and policymakers in the U.S. Department of Agriculture (USDA) are being asked by farm groups to consider additional support to farmers. Cyclical Agricultural Markets

The cyclical nature of agricultural markets plays a large role in the farm price-cost squeeze. When prices rise and remain elevated, following poor weather or strong demand, for instance, periods of profitability typically ensue, eventually encouraging producers to add more acreage, increase inputs such as fertilizer, or buy additional cows to produce more milk. Once additional supplies enter the marketplace, prices tend to retreat. Similar economic reasoning applies once the cycle turns down. In this case, as profitability declines or goes negative, farmers no longer have the economic incentive to produce as much, so they cut back on the volume or quality of inputs or, if financial conditions are bad enough, go out of business altogether. As economists, commodity marketers, and farmers alike have generally found, prices eventually turn higher, profitability returns, and the cycle repeats. The most basic way to measure the farm price-cost squeeze is to directly compare prices received by farmers with prices they pay for inputs. Across agriculture in 2009, the price-cost squeeze was most evident in the livestock sector, particularly dairy. The collective decision by farmers translates into a sector-wide supply response which, because of substantial lags in the production cycle for both crops and livestock, plays a large part in prices that farmers receive in future months. U.S. agriculture is also governed in part by federal polices that affect the markets and farmers' production decisions. Finally, farmers often depend on off-farm income to help insulate their household from financial difficulties their farms may encounter. As policymakers developed farm programs to support the farm sector, technological gains over time have resulted in farm production in excess of market demand, leading to a farm price-cost squeeze and a decline in farm numbers. Most public support for agricultural subsidies stems from the public's desire to help "family farmers." Historically, public support for farm programs has benefited from the country's agrarian roots and generally favorable perception of farmers as being hard workers, honest, and subject to market forces and weather that are beyond their control. Should federal policy address the long-term trend of large farms producing an increasing share of U.S. agricultural production? Some critics have questioned whether current farm policy is reinforcing or accelerating trends in U.S. farm structure, intensifying the farm price-cost squeeze that some farmers are experiencing.
When farm commodity prices fall and costs of production rise, farmers can get caught in a "farm price-cost squeeze." The potential for such a financial bind dates to the first half of the 20th century when farmers began purchasing more of their farm inputs such as fertilizers, improved seeds, and feed concentrates. Since the 1930s, U.S. agriculture has been supported through the ups and downs of the market by federal farm policy, most recently set under the 2008 farm bill.
In 2009, some farmers found themselves in difficult financial circumstances, following high farm prices and relatively prosperous times in 2007 and 2008. Some livestock, dairy, and poultry producers faced particularly low or negative returns in 2009 based in part on input prices, primarily for feedstuffs, that did not fall as fast as output prices. In order to survive, many farmers have been drawing on equity built up in recent years. Meanwhile, producers of crops, both federally supported ones such as grain and cotton and non-program crops such as fruits and vegetables, continue to deal with volatile costs of energy and fertilizer, which are affecting their returns. In some instances, Members of Congress and policymakers in the U.S. Department of Agriculture (USDA) are being asked by farm groups to consider additional support.
The cyclical nature of agricultural markets plays a large role in the farm price-cost squeeze. When prices rise and remain elevated, following poor weather or strong demand, for instance, periods of profitability typically ensue, eventually encouraging producers to add more acreage or increase inputs such as fertilizer. Once additional supplies enter the marketplace, prices tend to retreat. Similar economic reasoning applies once the cycle turns down. In this case, as profitability declines or goes negative, farmers no longer have the economic incentive to produce as much, so they cut back on the volume or quality of inputs or, if financial conditions are bad enough, go out of business all together. As economists, commodity marketers, and farmers alike have generally found, prices eventually turn higher, profitability returns, and the cycle repeats.
The most basic way to measure the farm price-cost squeeze is to directly compare prices received by farmers with prices they pay for inputs in the form of price ratios. These ratios provide a relatively current indication of economic conditions, and concerned policymakers can monitor them on a monthly basis as USDA releases the data. Across agriculture in 2009, the price-cost squeeze was most evident in the livestock sector, particularly dairy.
When farm prices fail to keep pace with the cost of inputs, the collective decision by farmers to reduce output translates into a sector-wide supply response which, because of substantial lags in the production cycles for both crops and livestock, plays a large part in prices that farmers receive in future months. U.S. agriculture is also governed in part by federal polices that affect the markets and farmers' production decisions. Finally, farmers often depend on off-farm income to help insulate their household from financial difficulties.
Most public support for agricultural subsidies stems from the public's desire to help "family farmers." Historically, public support for farm programs has benefited from the country's agrarian roots and generally favorable perception of farmers. As Congress developed farm programs to support the farm sector, technological gains over time have generally led to farm production in excess of market demand, creating a farm price-cost squeeze on a periodic basis. To survive, farms often seek lower per-unit costs by expanding the size of their operation. As large farms produce an increasing share of U.S. agricultural production, some critics have questioned whether current farm policy is reinforcing or accelerating this process.