Some of the Major Changes in U.S. Agriculture and the Forces Influencing the Agricultural Economy in the Past Half Century

By: Luther Tweeten, Emeritus Chaired Professor, Department of Agricultural, Environmental, and Development Economics, Ohio State University

The era of falling real price of food is over.

Two “megatrends” are underway, one on the food supply side and another on the food demand side.

  • First look at food supply. I measure excess production capacity in U.S. agriculture as the surplus of production over market utilization at politically acceptable prices–calculated by adding up production removed by government acreage diversion, net stock accumulation, and the portion of exports due to government subsidies. U.S. excess production capacity totaled 6 percent in 1962 and averaged near that proportion throughout the 1960s (Tweeten 1989). In sharp contrast, excess production capacity in U.S. agriculture today is near zero. As argued later, the rest of the world also has little excess production capacity. World agricultural resources will be challenged indeed to provide food, fiber, and bioenergy in future years without major price increases!
  • The 2012 drought is transitory, but, if the preponderance of today’s climatologists are correct in their judgments, global warming is secularly underway with attendant unusual weather events such as storms and drought.
  • Of greater concern is the falling percentage rate of increase in agricultural yield and productivity. Yields of cereals such as corn, wheat, and rice that supply two thirds of our calories increased at a trend rate of 3.2%/yr. in 1962 but by only a 1.2%/yr.trend rate in 2012 (See Tweeten and Thompson, 2009)! Overall world crop and livestock productivity per hectare for crops and per animal unit for livestock increased at a trend rate of 2%/yr. in 1962 and 1%/yr. in 2012!
  • Arezki et al. (2012) claim in an IMF publication that there are 1 billion acres of world land that are not now but potentially could be cropland, most of it in Africa (496 million acres) and South America (304 million acres). But those acres will not go into gainful crops without substantial investment in roads, irrigation, fertilizers, drainage, property rights, law and order, etc. Those investments will not be forthcoming in the absence of higher crop prices. Meanwhile, about as much cropland will be lost to urban development, soil degradation, depleted water tables for irrigation, biofuel crops, etc. as is likely to be added each year.
  • Now look at the demand side. Given the above supply trend, another megatrend of great importance is declining global birth and population growth rates in the past half century—a trend expected to continue and relieving some pressures on the faltering global supply of food.
  • Food demand grows mainly from population and income growth. World population growth increased at the trend rate of 1.9%/yr. in 1962 and by only 1.1%/yr. in 2012. Total food demand growth, a trend rate of 2.1%/yr. in 1962, gradually fell to a trend rate of 1.3%/yr. in 2012.
  • In short, unless there is an unexpected increase in global cropland, future food demand is likely to grow faster than food supply—a considerable turnaround from 1962 when food supply growth sharply outstripped demand growth. Real prices of farm food ingredients projected to rise on average by1%/yr. in future decades contrast considerably with real farm prices decreasing 1%/yr. on average in the 1960s.In conclusion, the above is no counsel of Malthusian despair—American consumers will hardly notice the trend reversal, but living standards will be retarded especially in poor countries.

Another major change is in the national economic environment in the past half century.

  • U.S. farmers operated in a supportive national economy in 1962. Unemployment was only 5.5% in 1962, a considerable contrast with 8.2% in 2012. The nation’s inflation rate was 1.1% in 1962 and 2.0% in 2012.
  • In 1962 federal debt was $303 billion ($248 billion of that owed to the public rather than to government agencies). Federal debt was $16.35 trillion by 2012, $11.58 trillion of it owed to the public. Federal debt as a proportion of GDP was 53% (44% for publically held debt only) in 1962, proportions that had increased to 105% and 74% respectively in 2012.
  • The federal government deficit of $7.1 billion in 1962 had ballooned to $1.3 trillion in 2012. The former constituted a 2.3% annual growth rate, well below the 7.5 % growth in national income (GDP). Hence federal debt was a declining share of national income so that servicing that debt constituted less and less burden over time. In 2012, federal debt grew at a rate of 8.0%, well above the 2%/yr. rate of GDP growth. Thus, current fiscal policy is unsustainable—if debt continues to be accumulated at the current rate, interest on the federal debt will in time consume the entire national income. The economic dead end is much sooner if account is taken of contingent liabilities to future recipients of Social Security, Medicaid, and Medicare.
  • Congress and President seem hell-bent on a fiscal course whose end game is best illustrated today by the “Greek tragedy” playing out in Europe. The proximate cause of the present political course is “Washington” but the root cause is Americans who demand a high level of government services they are unwilling to pay for. “Borrow and spend” policies rule.
  • I have often said that the greatest economic problem facing U.S. farmers is risk and uncertainty. Continuation along the nation’s current fiscal path adds to the risks. As national debt rises to multiples of national income, interest rates rise to attract and hold government bond buyers, giving rise to a cost-price squeeze on indebted farmers and other debtors. A country with critically burdensome debt is likely to print money (quantitative easing) to finance government. Consequent inflation brings real wealth losses to current holders of financial securities and raises interest rates as investors withhold investment for fear of falling bond values. High interest rates compensate for inflation.
  • The federal government eventually will be forced by circumstances to cut spending (including on farm commodity supports?), raise interest rates, end the biofuel mandate, and otherwise enact policies that will adversely impact American agriculture.
  • The farming industry has shown some restraint in bidding for farmland and otherwise responding to the prosperity of recent years. (Livestock and poultry producers are a notable exception to the prosperity.) Farmer’s debt-asset ratio was 14 percent in 1962 and 11 percent on 2011 (latest available data). The return on equity in farming was 5.74 percent in 1962 and 6.75 percent in 2011. Whether the strong current financial situation for farmers can be maintained depends heavily on two conditions. One is for Washington to bring runaway, unsustainable fiscal policy under control without massive collateral damage to the economy. A second condition is that investors in farmland (in majority, farmers) show restraint in bidding for land.  While the longer term outlook for the farming economy is bright, current low interest rates and high commodity prices are transitory. As farmers bid (and most farmland buyers are farm operators) high current land earnings into land values, they collectively risk creating  a bubble very likely to burst with attendant trauma to farm and  nonfarm investors in farmland.
  • Farmers currently receive 80-90 percent (large farms much less) of their household income from off-farm sources. High unemployment attending nationwide fiscal austerity constitutes another future burden and uncertainty facing farmers.
  • A bright spot in this otherwise bleak fiscal outlook is the stimulus to farm exports induced by a falling value of the dollar in international exchange. Unable to borrow easily in international financial markets, a cheaper dollar will expand American exports to pay for imports. As an industry of strong comparative advantage, U.S. agriculture will benefit through expanding exports.

In conclusion, American agriculture has undergone massive changes in the past half century and on the whole has remained internationally competitive and prosperous. Long-term supply-demand trends favor agriculture. Possible roadblocks include dangers of excessive prices of U.S.farmland and an irresponsible fiscal policy currently headed toward a worldwide financial debacle. American agriculture has much to gain if the current fiscal trajectory is corrected. Properly timing the turnaround in current policy is critical if harsh adjustment pain is to be avoided.

References

Arezki, Rabah, Klaus Deininger, and Harris Selod. ”Global Land Rush.” In Finance and Development, March 2012, p.46.

Council of Economic Advisors. Economic Report of the President. Washington, DC: U.S. Government Printing Office, 2012.

Tweeten, Luther and Stanley Thompson. “Long-term Global Agricultural Supply-demand Balance, and Real Farm and Food Prices.” Farm Policy Journal. 6,1 (February 2009): 1-15.

U.S. Department of Agriculture. Agricultural Outlook. Washington, DC: Economic Research Service, 2012.

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