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Too much optimism about exports?

Furthermore, this overly optimistic view of our export potential is a big reason why the federal government is not considering U.S. agricultural policy that could correct agriculture’s problems, says Daryll Ray, who holds the Blasingame Chair of Excellence in agricultural economics at UT.

The problem with exports “is that we are only looking at the demand side assuming that we would get the export markets,” Ray said. “We didn’t look at the possibilities for increasing supply in other parts of the world, including areas we are actually looking to for increased demand.

“We have to recognize that most countries don’t want to import food. If you were in a country where your food is a serious concern and you knew that you would be subject to the whims of another country, I don’t think reducing the price by any amount is going to make you want to shut down your production agriculture.”

Evidence is mounting that Ray is right, considering that today there are ample supplies of most commodities in the world and that several countries are continuing to expand their production capacity.

“We need to be realistic and understand that we will always be an exporter,” he said. “But it’s a residual market, not an everlasting dump that we can use to convince farmers that everything is going to be wonderful.”

Unfortunately, it’s not in everyone’s best interests to agree with Ray. “It is to agribusinesses’ benefit for farm policy to continue going the way it’s going. They have that much more to process, that many more inputs to sell.”

In addition, “Agribusiness, no question about it, has had a tremendous impact on the direction of farm policy over the last few years and are highly motivated to continue the way things are right now.”

Some U.S. commodity groups do recognize this, according to Ray, “but there are lots of others that have bought into the idea that planting flexibility is good, and therefore we don’t want to do anything that would mess with that.

“Many of them have also bought into the idea that exports are the ultimate growth potential for agriculture. There is not a totally objective analysis that is going on with these groups. They think that it is,” Ray said.

One idea that that is hard to ignore is that farmers always produce too much. “That’s just the way it is.” Ray suggests two time-proven solutions, a farmer-owned reserve and some type of land diversion program.

“The big reason we need to have a farmer-owned reserve (FOR) is to preserve the markets that we already have. If you look back at 1983 and 1988, when we had a tremendous drop in corn yield, we had 4 billion bushels of stock in our farmer-owned reserve that we could use for our exports and satisfy our domestic demand. Today, we think we have a lot of stock, but we really don’t.”

A farmer-owned reserve would also, “sop up a lot of this grain very quickly at very reasonable prices. If we just announced an FOR this month, the price of corn would jump.”

A FOR in place in the 1970s did not survive the 1996 farm bill. Farmers were mixed about its benefits, noted Ray. “Some farmers liked it when we had an FOR because they got their storage paid for, but a lot of other farmers said that the FOR is keeping the price from going real high which is when they make all their money.

“But those high prices also cause foreign agricultures around the world to sit up and take notice and start investing in their agriculture like they never have before. Also, you may be the one with the low yields and don’t have anything to sell anyway.

“Another complaint about the FOR was that it got too large, and I think we would need to put a cap on how large we allow it to get. We need to manage it properly.”

On land diversion, Ray points out that the United States is already well-schooled in making projections on domestic demand and what exports might do in the year ahead, then looking at what changes need to be made in inventories.

“It’s not something that we can’t do or haven’t done. And will we make mistakes? Absolutely. But doing nothing and spending $32 billion in a given fiscal year for farm assistance is not a solution either.”

Farmers also worry that a return to a land diversion or acreage reduction programs would mean the loss of planting flexibility.

“We don’t have to have a land diversion program tied to the history of a particular crop if we don’t want to. The idea is that you would set-aside a certain percentage of your total crop base, rather than 10 percent of your corn, 5 percent of your wheat or 1 percent of your cotton.

“The government moved away from that because they wanted more control. But, we can manage it to be more flexible or we can manage it to be very rigid.”

Given the current supply/demand situation, Ray would opt for “some measure of total cropland base for the major crops and have farmers reduce land by a percentage of that total. Let them produce what they want on the remainder. Everything is in excess, so it really doesn’t matter.”

In the future, there may situations where there are excesses in one or two crops and some crops have shortages. At that time, farm policy may take a closer look at the tradeoff between farmer flexibility and allowing the markets to work more reasonably. “But that’s not something that we have to address right now.”

Unfortunately, the political climate of the times is such that neither land diversion nor an FOR is being seriously considered, noted Ray, who recently testified before the House Agricultural Committee. “But if we have two or three more years like the ones we’ve had the last three years, and we’re going to have to realize that the production side is the problem and we’re going to have to do something about it.

“Right now, we need to get people thinking that in the near future, we’re producing too much and we have to do something.”

Economists have discussed a global effort to control supply, noted Ray. “The problem is that the United States is typically the country that holds the reserves and would have to share that, along with acreage reduction, with the rest of the world.”

In addition, China and Brazil may be hard pressed to agree to such a policy. Both countries have agriculture development policies in place which places emphasis on expanding acreage not fixed acreage.

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