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State farm prospects dreary, Paggi says

Economics has been called the dismal science, and economist Mechel “Mickey” Paggi acknowledged that his economic outlook for California agriculture sounded like he was rearranging the deck chairs on the Titanic.

Paggi, director of the Center for Agriculture Business at California State University, Fresno, painted what he admitted was a “dreary” outlook of the state No. 1, $30 billion per year industry at the 2nd annual Agribusiness Management Conference in Fresno, Calif.

However, Paggi said he was simply trying to be “honest” in helping agriculture face upcoming challenges “straight up.”

“California agriculture has been here for a long time, and it will be here long after I am gone,” said Paggi, but it will never conduct its business as it has in the past.

Globalization, the aging of America, trade policies in the U.S. and elsewhere, continued consolidation at retail and the ever present cost-price squeeze farmers face are a few of the factors behind changing business practices.

Input costs are rising at the same time prices farmers receive for what they produce are at best flat and generally declining, Paggi said.

Farmers are battling this price/cost squeeze by innovating through practices like precision agriculture and Dried-On-The-Vine raisin production. New technology reduces per unit costs, however, it can also eventually increase overall production when everyone follows the innovators out of necessity.

It is the early adapters who benefit the most from new technology before the rank and file follow.

Excess production

To reduce supplies and bolster prices, growers can take excess acreage out of production, as the grape industry has done of late, especially in California's central valley.

However, unless condominiums or houses replace vines, growers plant crops holding more promise than the ones taken out. For wine and raisin vineyards, that could be citrus or almonds. However, eventually the same oversupply situation befalls the new crop, according to Paggi.

Growers continue to fund promotional efforts to increase consumption. Government purchase of surplus fruits and vegetables for school lunch programs also reduce supplies.

Government support programs bolster commodities like cotton, wheat and rice. However, with a $500 million federal deficit, Paggi says federal price supports are in doubt for the future.

Most California crops do not have government support.

Paggi said the future challenges for California agriculture lie outside the supply/demand realm.

Issues like labor costs, environmental regulations, water cost and availability, and a changing market structure where only a few retailers control the majority of the markets for ag products are out of the direct control of farmers and ranchers, but not out of agriculture's influence.

By 2005, the top 10 grocery retailers in America will control 65 percent of the food market. This will impact the total field to retail shelf chain.

Plus for California

Demographics are changing. America is aging. That is a “bright light” for California, which produces the majority of the nation's fruits and vegetables, healthy foods for that aging population.

Aging Americans will no longer stop at McDonald's for Big Mac and fries, but for salads and chicken filets, he said.

California agricultural exports total $7 billion annually and increasing those exports will be one way to survive in the future.

However, unfair tariff barriers continue to penalize American exports.

California stands to gain in opening up free trade through World Trade Organization agreements, but the collapse of the DOHA round of talks recently in Cancun was a sign that it may be 2005 or 2007 before meaningful WTO trade agreements are reached.

Paggi noted that it took eight years to complete the Uruguay Round of talks, and even then some countries, like China, have failed to live up to agreements.

It is not an easy-sledding future for California agriculture, but Paggi is confident the most innovative and imaginative agriculture industry he has seen will meet and overcome a host of difficult challenges.


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