1. APCA 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. APCA 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. 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”

4. 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

5. 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

6. 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

7. 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?

8. 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

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

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

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

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

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

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

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

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

17. APCA World Corn Exports as a Percent of Production Percent

18. 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?

19. 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…

20. 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?)

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

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

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

24. APCA “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. APCA “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. APCA “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. APCA 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. APCA 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. APCA 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. APCA 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. APCA Current U.S. Policy Can Cause Economic 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. APCA Current U.S. Policy Can Cause Economic 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. 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

34. APCA 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. 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

36. 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

37. 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

38. 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

39. APCA 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. APCA Thank You

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