APCA Agricultural Economic and Policy Uncertainty: The U.S. Case Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Agricultural Forum Sponsored by the Mexican Senate Mexico City, Mexico August 2, 2011

APCA Lost 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

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 The Root of the Ag Problem: Lack 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

APCA 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)

APCA Current U.S. Policy Can, and Does, Cause 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

APCA Current U.S. Policy Can, and Does, Cause 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

APCA Export Growth Will Make US Ag 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

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 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?)

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

APCA 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 in exports for a country like the US? It’s not that simple…

APCA 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

APCA But Also… 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??) –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 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

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 Thank You

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