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Agricultural Economic and Agricultural Economic and Policy Uncertainty:Policy Uncertainty:

The U.S. CaseThe U.S. Case

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

Agricultural Forum Sponsored by the Mexican SenateMexico City, Mexico

August 2, 2011

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Lost Our Policy BearingsLost Our Policy Bearings• We in the U.S. have forgotten why we

have commodity programs– Don’t know the problem– Let alone the objective

• Many say: U.S. 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 use

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Why Commodity Policy?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

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The Root of the Ag Problem: Lack The Root of the Ag Problem: Lack of Price Responsiveness of Price Responsiveness

• 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

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Once Upon a Time in the U.S.Once Upon a Time in the U.S.

• 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)

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Current U.S. Policy Can, Current U.S. Policy Can, and Doesand Does, , Cause Economic CrisesCause Economic Crises

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

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Current U.S. Policy Can, Current U.S. Policy Can, and Doesand Does, , Cause Economic CrisesCause Economic Crises

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

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Export Growth Will Make US Ag Export Growth Will Make US Ag Prosperous??Prosperous??

• The largest U.S. farm organization and commodity groups say so (again)

– All that is needed is complete access to growing world markets (all would be great “only if”…)

• Import customers would import more and we could better compete with our export competitors

• Result for the US: Exports will grow at accelerating rates providing a permanent source of farm prosperity

• U.S. crop price and income programs could be eliminated

• But historical experience is not encouraging

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Historical ResultsHistorical 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

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Post-70s: Developing-Country Post-70s: Developing-Country Competitors Did WellCompetitors 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

Th

ou

san

d M

etri

c T

on

s

US Exports

Developing Competitors’ Exports

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Before We Leave Exports…Before We Leave Exports…

• Our President has set a goal of doubling the value of U.S. 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 U.S. value of exports over the last 3 years came from price not volume (will prices continue to grow?)

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US Corn, Soybeans, and Wheat – US Corn, Soybeans, and Wheat – Value and Volume of ExportsValue and Volume of Exports

Vo

lum

e o

f E

xpo

rts

Value of Exports

Volume of Exports

Billio

n D

ollars

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What about all that talk…About the coming population explosion

and Double-digit growth in per capita

incomes in Asia, India...

Does that suggest large increases inexports for a country like the US?

It’s not that simple…

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First of all…First of all…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

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But Also… It’s Easy to But Also… It’s Easy to Underestimate Supply GrowthUnderestimate 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??)

– Conversion of Conservation Reserve Program Acreage and hay/pasture land to crop production

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It’s Easy to UnderestimateIt’s Easy to UnderestimateSupply GrowthSupply 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

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It’s Easy to Under EstimateIt’s Easy to Under EstimateSupply GrowthSupply 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. -- 10 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)

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The Need for Food ReservesThe 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

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Policy for All SeasonsPolicy 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

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Policy for All SeasonsPolicy 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

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Agricultural Policy Analysis Center The University of Tennessee 310 Morgan Hall 2621 Morgan Circle Knoxville, TN 37996-4519

www.agpolicy.org

Thank YouThank You

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