AgDM newsletter article, August 2002
by Otto Doering, professor; and Michael Boehlje, professor, Purdue University; and Neil Meyer, University of Idaho.
hat sounds sensible
(export more) when heard separately in each country becomes nonsense when
aggregated around the world. No one can have more net exports unless someone
else has more net imports.
- Thurow, Lester. 1999. Building Wealth: The New Rules for Individuals, Companies and Nations in a Knowledge-Based Economy. Harper Collins, New York, p. 71.
We have a strong relationship between exports and farm prosperity in the United States. From the early 1900s to the early 1920s, increasing prices and export volumes made farming unusually prosperous and boosted land values. During World War II and its aftermath, another boom in prices and exports was experienced. A third boom occurred in the 1970s, which peaked in 1981. All the prosperous periods were the result of political decisions or crop failures.
If we calculated the full cost of exports, including government support to farmers, transportation subsidies, damage to the environment, etc., sometimes we ended up exporting commodities below our full internal costs of production.
High commodity prices encourage all farmers to produce more. The high prices in 1995-97 certainly helped bring about our current oversupply of commodities. We know that increasing U.S. commodity prices through high loan rates in the 1970s increased the prices for farmers beyond our borders. We changed our policies in 1985 to avoid this by moving to lower loan rates and depending more on deficiency payments for our farmers, basing this on a target price set well above the loan rate.
What we see historically is long periods of moderate or low prices punctuated with shortages and high prices and export demand. Despite policies to boost grain exports, volume has been mostly flat since the 1980s. High prices from export booms have been rare (only during the teens, in the 1940s, and during the 1970s).
Why do we see what we see today?
The critical non-agricultural drivers were:
Future trends that are important to us
Where does this leave us?
In terms of our current situation of world oversupply, demand is not likely to grow quickly enough to take care of the problem.
High prices stimulate oversupply because once demand shortages are met, the investment and production continue as long as variable costs are covered. If price is to be the mechanism to reduce supply, it then takes a long period of low prices to reduce world supply. Meanwhile, income support policies keep land in production.
Supply adjustment can come from reduced acreage or from reduced yields. Reduced yields will occur with reduced inputs (land, fertilizer, technology) or bad weather. Farmers donít take land out of production as long as they can cover variable costs.
A variety of factors involved in determining export growth are listed in Table 1. An assessment of these factors does not indicate export growth as a foregone conclusion even with more open trading rules.
The strongest potential growth avenue for grains may be processing, where most of the demand growth has occurred over the past 20 years. This goes beyond taxpayer subsidized ethanol production and price protected fructose production to such things as biochemicals and plastics. However, this usually requires price stability at moderate levels for the raw materials.
The long-run experience in creating agricultural prosperity through export growth is not very good. Technology moves across borders easily and rapidly. Price spikes encourage excess investment, which results in excess production. It can take many years for invested production capital to depreciate and reduce overall supply.
Prosperity from agriculture and food product production will come to those adding value to basic commodities supplying consumer desires and finding new uses for commodities. The largest returns will likely be to those meeting consumer demands by adding value and capturing market niches. Production agriculture needs to look at things such as how healthy foods reduce heart disease, cancer, and other diseases. Capturing some of the medical and health dollars could save the nation money while improving the financial health of agricultural producers. Producers must find ways to capture added value rather than produce more commodities.