APCA US Agriculture: Economic Realities and Policy Prospects Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center North Dakota Farmers Union 84 th Convention Minot, North Dakota November 20, 2010

APCA Challenging Setting for 2012 FB Debate Tight Budget –Spending capped at 2008 FB level Less if order comes down from on high ( reconciliation) More only if find something else to cut (pay as you go) –Craig Jagger, House Ag Com. Econ. Says: 37 programs have no baseline budget after 2012— a $9 billion additional cost to bring back in –Wetland and Grassland Reserve Programs –Most energy programs –SURE “permanent?” disaster program (ends after 2011) –McGovern-Dole International “School-Lunch” program –Lose about $4.5 billion in “timing shifts”

APCA Challenging Setting for 2012 FB Debate Economic Conditions (Shades of 1996) –High prices and high incomes (But it’s different this time!) Farm Bill Preferences –Keep commodity programs as in the 2008 FB –Some want to redirect “Direct Payments” –Heritage Foundation and others want to: Replace subsidies with farmer savings accounts Eliminate funding for Foreign Agriculture Service Merge and reduce funding for four of USDA’s research and outreach agencies –Others say need a “policy for all seasons”

APCA Mammoth Exports Are a Comin’ The largest farm organization and largest commodity groups say so (again) –All that is needed is complete access to growing world markets (all would be great “only if”…) Our import customers would import more and we could better compete with our export competitors Result: US exports will grow at accelerating rates providing a permanent source of farm prosperity Crop price and income programs could be eliminated This is last in of long line of “Only Ifs”

APCA Historical Only Ifs… We have been told for four decades that exports are agriculture’s future –It just has not happened yet-but it will. Trust me. –Actually were told it would happen “only if:” Support/floor prices were lowered (an only if of the 80s) Acreage reduction programs were eliminated (an 90s only if) Exchange rates were different (a periodic only if) Inflation/interest rates were not so high (only ifs in 70s and 80s) –Each time crop producers were promised that: All would be fine in the world that is US agriculture Ag prices and incomes would be stable and “high” Because importers would import more and export competitors would export less –But they apparently did not get the memo

APCA Historical Results Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops 1979=1.0 US Population US Exports US Domestic Demand

APCA Post-70s: Developing-Country Competitors Did Well Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam 15 Crops: Wheat, Corn, Rice, Sorghum, Oats, Rye, Barley, Millet, Soybeans, Peanuts, Cottonseed, Rapeseed, Sunflower, Copra, and Palm Kernel Thousand Metric Tons US Exports Developing Competitors’ Exports

APCA Peeling Back the Onion that is International Trade A couple places I like to look… –How much of the commodity is internationally traded and has that proportion been growing? Not just are countries importing more in total But how does import growth compare to total output (or consumption) growth? –Is world trade really growing relatively or just keeping up –Has the US share of exports been increasing? Exports may be increasing but losing share –That is, how does the US stack up against its competitors?

APCA Hard to find examples of increased output share going to international trade Million Metric Tons World Exports World Production Soybeans is about as good as it gets

APCA US Soybean Exports Are Sure Enough Going Up Million Metric Tons US Exports

APCA But Brazil’s Exports Are Up by More… Million Metric Tons Brazil Exports US Exports

APCA So the US Share of World Exports Has Dropped Precipitously Percent US Soybean Exports as % of World Exports

APCA Let’s Look at Wheat Production and Exports Million Metric Tons World Exports World Production

APCA Wheat: World Exports as a Percent of World Production Percent

APCA US and Canada Wheat Exports Million Metric Tons Canada Exports US Exports

APCA US & Canada Exports as a % of World Wheat Exports Percent Canada US

APCA World Corn Production and Exports Million Metric Tons World Exports World Production

APCA World Corn Exports as a Percent of Production Percent

APCA So, it seems that… Over time: –The proportion of major crop output traded internationally is a mixed bag at best Would it increase with free trade? I doubt it but we will get to that later –The US shares of major-crop world exports have been declining We apparently do not out-compete other exporters of major crops (mostly developing countries) Why would that improve with total free trade?

APCA Would Complete Free Trade Expand the % of Output that is traded internationally? Less than most expect: FOOD IS DIFFERENT –Food is a national security issue—just like military security is to the US. So … Countries want to domestically produce as much of their food as possible Political considerations –Need to feed the population –Need to provide a living for millions in agriculture –Need an orderly exit of workers out of agriculture Suppose there had been total free access to all international markets in 2007 and 2008 –Vietnam, India, Ukraine, and scores of other countries…

APCA Before We Leave Exports… Our President has set a goal of doubling the value of US exports in 5 years Our Sec. of Agr. says don’t expect that from agriculture –Wise warning—In fact, odds are that agricultural export value will drop, not increase, in the next few years –Most of the mammoth increase in the value of exports over the last 3 years came from price not volume (will prices continue to grow?)

APCA US Corn, Soybeans, and Wheat – Value and Volume of Exports Volume of Exports Value of Exports Volume of Exports Billion Dollars

APCA US Corn, Soybeans, and Wheat – Value of Exports and Farm-Gate Prices $ Per Metric Tons Value of Exports $/MT Billion Dollars

APCA Lost Our Policy Bearings We have forgotten why we have commodity programs –Don’t know the problem –Let alone the objective Many say: Agriculture has the power to “milk” the government, so it does! Thus, the consensus among many is: –Do away with them; they are a waste –Move the money to some other ag use

APCA Why Commodity Policy? Agriculture does not behave like our Econ 101 teachers said it would –Inherent variability – weather and pests are not problem in non-farm/non-food industries –The total food/agricultural market lacks quick response to even sharp declines in prices

APCA It’s Lack of Price Responsiveness, Stu… Lower prices cause markets to automatically correct, right? Right! –Consumers buy more –Producers produce less –Prices recover—problem solved! But in agriculture, lower prices do not cause the same degree of reaction –Little self-correction on the demand side People do not consume significantly more food –Little self-correction on the supply side Farmers do not produce significantly less output –With little correction prices do not recover

APCA Once Upon a Time… There were farm policies that provided –Floor Prices –Supply management tools –Price stabilization and reserves Over the years and especially since 1996 –All three were eliminated –Replaced with payment programs: Coupled to price and production (Deficiency Payments) and Decoupled (Direct Payments) Partially government-funded insurance schemes The 2008 FB added another revenue based insurance scheme (ACRE)

APCA Current U.S. Policy Can Cause Economic Crises (can and has) When supply outruns demand: –U.S. Commodity prices plummet –U.S. grain farmers become wards of the state –U.S. livestock producers, other grain users and farm input suppliers are subsidized –Low grain prices are triggered internationally –Many countries, especially developing countries, are unable to neutralize impacts of low prices –U.S. accused of dumping

APCA Current U.S. Policy Can Cause Economic Crises (can and has, cont.) When demand outstrips supply: –Short-Run Crop prices explode Livestock/dairy producers go bankrupt Food prices increase at alarming rates Countries hoard rather than export Additional millions become undernourished/starve in developing countries –Long-Run High prices bring big resources into ag production worldwide Prices crash again

APCA You say that supply catches up with demand (and it doesn’t usually take long). Then you say that supply growth tends to exceed demand growth. But, but, but… What about all that talk… About the coming population explosion and Double-digit growth in per capita incomes in Asia, India...

APCA It’s Easy to Underestimate Supply Growth Let’ begin with the US: –Investment in yield enhancing technology (300 bu./ac on best land in a few years?— national average a decade or two later??) –Gradual conversion to cellulosic feedstocks for ethanol production –Conversion of Conservation Reserve Program Acreage and hay/pasture land to crop production

APCA It’s Easy to Underestimate Supply Growth International supply growth—yield –Development and adoption of drought/saline/disease resistant crops –Globalization of agribusiness: Near universal access to the new technologies world-wide Narrowing of technology and yield differentials between the developed and developing world

APCA It’s Easy to Under Estimate Supply Growth International supply growth—acreage –Long-run land potentially available for major crops Savannah land in Brazil (250 mil. ac. -- USDA says 350) Savannah land in Venezuela, Guyana, and Peru (200 mil. ac.) Land in former Soviet Union (100 mil. ac.) Arid land in China’s west (100 mil. ac. GMO wheat) Savannah land in Sub-Saharan Africa (300 mil. ac percent of 3.1 bil. ac. of Savannah land) Supply growth has always caught and then surpassed demand growth (and it does not take long)

APCA The Need for Food Reserves Supply-Driven Disruptions –Crop-related weather - sporadic –Natural disaster - occasional –Political instability – chronic Demand-Driven Disruptions –Unanticipated surge in demand –Usually only three or so per century Can occur in conjunction with supply disruptions Result –Severe price bubble

APCA Our Recent Experience (2008) Demand surge (ethanol) –Coupled with wheat shortfall in Australia and Eastern Europe and other cereal shortfalls –Prices of storable agricultural commodities tripled Moderately increased food prices in global North Added 250 million to the 800 million already facing chronic hunger –Results Food riots in over 25 countries Protection of national food supplies via tariffs, taxes and embargoes

APCA This Wasn’t Supposed to Happen Commercials argued they would provide reserves –Government “interference” not needed Not to worry –Freer trade ensures availability from one country or another Neither assertion true –Commercials have no incentive to hold stocks –Supply disruptions can affect more than one supplier (country) in a given year Countries view food as a national security issue

APCA Policy for All Seasons Assume the unexpected will happen –Random policy and weather events do occur—Plan for them Establishment of Grain/Oilseed/Food Reserves –Moderate impacts of random policy and weather events by providing stable supply until production recovers –Operated/overseen by a multinational commission –Stores strategically purchased reserves

APCA Policy for All Seasons Keep productive capacity well ahead of demand –Public investment in yield enhancing technologies and practices Provide means to hold arable land in rotating fallow during periods of overproduction –This land could then quickly be returned to production in the case of a crisis

APCA Other Issues GIPSA –Appears to be a case of packers wanting to instill fear to avoid addressing “unfair practices” GMOs –Need public (not Monsanto) rules for converting patented GMOs to generics Livestock/meat/environmental issues –Consumers rule, consumers rule, cons…

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APCA WTO … Does not account for the unique nature of food and agriculture –Does not understand the difference between DVD players and staple foods Needs to be reformulated or be replaced with an organization that recognizes the need for –Food Reserves to address the inevitable shocks to the availability and price of food –Promoting increases in worldwide productive capacity, especially each country’s domestic production –Addressing Agriculture’s inability to gauge the use of productive capacity to match demand by creating methods to overcome –Agriculture’s inability to self-correct