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US Agriculture in a Global Setting

US Agriculture in a Global Setting. Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center. 2010 National Farmers Union Convention Rapid City, South Dakota March 15, 2010. What We’re Going To Do. Ag implications of greatly expanding world food demands and freer markets

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US Agriculture in a Global Setting

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  1. US Agriculture in a Global Setting Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center 2010 National Farmers Union Convention Rapid City, South Dakota March 15, 2010

  2. What We’re Going To Do • Ag implications of greatly expanding world food demands and freer markets • Separating export hype from reality • The basic free trade issue: Food is different • Two views of commodity policy • Grain reserves and policy for all seasons • WTO implications • Concentration Issues

  3. 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”

  4. 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

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

  6. Post-70s: Developing-Country Competitors Did Well US Exports Thousand Metric Tons Developing Competitors’ Exports 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

  7. 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?

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

  9. US Soybean Exports Are Sure Enough Going Up US Exports Million Metric Tons

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

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

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

  13. Wheat: World Exports as a Percent of World Production Percent

  14. US and Canada Wheat Exports US Exports Million Metric Tons Canada Exports

  15. US & Canada Exports as a % of World Wheat Exports US Percent Canada

  16. World Corn Production and Exports World Production Million Metric Tons World Exports

  17. World Corn Exports as a Percent of Production Percent

  18. 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?

  19. 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…

  20. 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?)

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

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

  23. Two Views of Commodity Policy • “Show Me the Money” • “Houston, We’ve Got a Problem”

  24. “Show Me the Money” • The view is that commodity programs exist because: • Farmers have inordinate political power • Farmers “milk” the government • Corresponding Conclusion • Farm programs are a waste • They address no real problem • Taxpayer gift

  25. “Show Me the Money” • So… • Get rid of them • Conservative think tanks • Editorial writers and syndicated columnists • Those for which “free market” is not a concept but a religion plus much of the general public • Redistribute or “earn” payments • Environmental/Wildlife Groups • States with large vegetable/fruit/etc production • Organic, small farms, land preservation, tourism • Multi-functionality (all the above)

  26. “Houston, We Have A Problem” • Chronic price and income problems • Why? • Market correction does not occur in timely manner • Economist call this “Market Failure” • Sometimes market failure is in remission …but it always comes back (at least so far)

  27. Characteristics of Agriculture • Agriculture is different from other economic sectors.On the demand side: • Even with a major drop in food prices: • People don’t eat more meals a day • They may change mix of foods and purchase more services with the food • Aggregate intake remains relatively stable

  28. Characteristics of Agriculture • Agriculture is different from other economic sectors.On the supply side: • With low crop prices— • Farmers continue to plant all their acres • Farmers don’t and “can’t afford to” reduce their application of fertilizer and other major yield-determining inputs • Who farms land may change • Essential resource—land—remains in production in short- to medium-run

  29. Chronic Problems Persist • Except for short periods, production tends to outstrip demand • This is a good thing • The excess capacity problem is not over—now it will be a worldwide problem • Increased acreage • Increased yields • When prices decline, self-correction does not work in a reasonable length of time • Quantities demanded and supplied change little

  30. We have dropped the “Managing Plenty” Part • In the past farm policies for grains included • Floor Prices • Supply management tools • Price stabilization and reserves • Over the years, especially since 1985 & 1996 • All three were eliminated • Replaced with payment programs: • Coupled to price and production (Deficiency Payments) and Decoupled (Direct Payments) • Partially funded insurance schemes • In 2008 added another revenue based insurance scheme (ACRE)

  31. Current U.S. Policy Can CauseEconomic Crisis 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

  32. Current U.S. Policy Can CauseEconomic Crisis When demand outstrips supply: • Short-Run • Prices explode • Livestock 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

  33. 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

  34. Our Recent Experience • 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

  35. 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

  36. 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

  37. 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

  38. 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

  39. Finally, Concentration • Pressure DOJ to enforce existing laws • Pressure DOJ to step-up patent-related investigations in the seed industry • Pressure DOJ to address livestock issues • Pressure DOJ to reconsider past rulings • Cargill and Continental merger • Dean food and other dairy mergers • JBS and others

  40. Thank You

  41. Weekly Policy Column To receive an electronic version of our weekly ag policy column send an email to: dray@utk.edu requesting to be added to APAC’s Policy Pennings listserv

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