Not Just Another Recession
Why the Global Economy May Never Be the Same
This is a strange and painful year to talk about grain. Our televisions bring us pictures of starving African children, but world grain stocks exceed 190 million tons—a record surplus. Federal subsidies for agriculture will total nearly $19.5 billion in 1985, but U.S. farming is in a historic recession. Ironically, the most important customer for U.S. grain exports is the Soviet Union; the United States and its allies now must compete for the privilege of selling to our chief adversary. It is a curious year indeed.
It is time to put to rest many of the myths we have long cherished about agriculture. We had come to believe that America could feed a hungry world, and we debated how much leverage this power would give us. We believed that we not only should, but could, protect farm incomes and rural lifestyles through public policies that manipulated supplies and demand. We believed, moreover, that these differing goals could be achieved at the same time—and, with little effect on our other interests, economic, financial and diplomatic.
What happened is that American agriculture—and that of many of our friends and neighbors—has succeeded all too well. The heartbreaking scenes of famine in the Sahel notwithstanding, the world is learning how to feed itself. And, like the United States, the world has also learned how to protect its farmers by supporting grain prices artificially, stimulating still higher levels of production. As a consequence, we have entered an era of permanent grain surpluses, of a buyer’s market for grain exports, where the United States can no longer set the rules. We now find ourselves in a world awash in grain, with ever-increasing bills for producing, maintaining and storing the unwanted product of our labors.
How did we get here? Why is the world’s new ability to feed itself not an opportunity but a crisis? What does this mean for the United States and its allies? One thing is certain: agricultural policy will never again be only a domestic issue—or only an agricultural issue.
To begin to understand the problem, let us see what has happened to world agriculture over the last decade.
Table I tells much of the story. It gives us a picture of a growing number of exporters, a shrinking set of food-importing nations and, despite repeated efforts to reduce them, a growth of surplus stocks to nearly insupportable levels. What is most interesting about these trends is not the absolute change in numbers but the market shifts they imply: a redistribution of who produces, who buys, who sells and who holds stocks. The United States is essentially competing with its close friends to sell to a smaller number of less-good friends. We are losing, perhaps inevitably, in that competition, and as a result are paying the bills for the world’s grain surplus.
Worldwide production of wheat and feed grains has grown 20 percent since 1974, 100 percent since 1964. Between 1960 and 1980, food production grew slightly faster than population, yielding a net increase in food supplies per person of 0.8 percent per year in the first of the two decades and 0.5 percent in the second. The major source of this growth has been improvements in technology, which have led to a 60-percent increase in average yields. Also important have been policy reforms—principally in the form of price guarantees for producers and improved domestic marketing environments—which have provided new incentives for production.
Some examples are striking. In China, the introduction of market incentives has produced a 15-percent expansion in corn production, a 20-percent expansion in rice production and a 40-percent expansion in wheat production just since 1982. Chinese wheat production grew from 41 million metric tons in 1977 to 85 mmt in 1984—and yields doubled from 1.46 metric tons per hectare to 2.90 tons. By comparison, total U.S. wheat production in 1984 was 70 mmt, at average yields of 2.57 tons/hectare. In 1985 China is expected to produce the largest wheat crop in the world. China’s total production of feed grains, aided by improved yields, increased from 71 mmt in 1977 to 95 mmt in 1984—about 40 percent of U.S. feed grains output.
WORLD WHEAT AND COARSE GRAINS TRADE 1974/75 TO 1984/85
(totals in millions of metric tons)
1974/75 1979/80 1984/85
TOTAL WORLD PRODUCTION 976.8 1164.7 1295.1
United States (as % of total) 20.4% 25.5% 23.4%
Other major exporters1 9.8 7.9 8.7
Western Europe 14.5 12.6 14.6
U.S.S.R. 18.8 14.7 12.3
Eastern Europe 9.3 7.8 8.4
China 10.0 12.5 13.9
Others 17.1 18.9 18.8
TOTAL WORLD CONSUMPTION 987.0 1184.9 1273.9
United States (as % of total) 14.2% 15.4% 14.6%
Western Europe 15.8 13.8 12.5
U.S.S.R. 19.5 18.1 16.4
China 10.5 13.2 14.9
Others 39.9 39.4 41.4
CUMULATIVE SURPLUS STOCKS 115.1 172.0 190.6
United States (as % of total) 23.5% 44.9% 43.9%
Foreign 76.5 55.2 56.0
TOTAL TRADE (in mmt) 127.6 186.8 206.0
United States (as % of total exports) 48.9% 58.2% 49.9%
Other major exporters1 34.4 29.7 30.6
Western Europe 10.0 8.9 13.9
U.S.S.R. 3.9 0.3 0.5
Others 3.4 2.8 5.0
Western Europe (as % of total imports) 25.7 16.4 7.3
U.S.S.R. 4.1 16.3 23.8
Japan 14.5 13.1 13.1
Eastern Europe 8.7 9.4 3.7
China 46.9 5.8 5.0
Others 39.0 47.1
1 Other major exporters are Argentina, Australia, Canada, South Africa, and Thailand.
SOURCE: U.S. Department of Agriculture.
The situation in Western Europe is equally instructive. If there were ever any doubt that agricultural production responds to price increases, the Common Agricultural Policy of the European Economic Community should forever banish those doubts. The CAP has dramatically increased farm incomes; in Great Britain, for example, participation in the CAP has brought about an estimated 40-percent increase in prices received by British farmers. As a result, the EEC farmers now produce 75 mmt of wheat, as compared with 40 mmt in 1977; EEC wheat yields have increased from 3.66 mt/ha to 5.52 mt/ha this year, substantially above U.S. levels. Although European feed grain production has increased more slowly, from 67 mmt to 74 mmt in the period, yields have grown from 4.1 mt/ha to 5.24 mt/ha, the only region to approach U.S. levels. The United Kingdom has gone from being a net importer of wheat and barley to a major net exporter in little more than four years. Those who have concluded that Europe is not a competitive producer need think again.
There are many comparable if less dramatic cases. India is now effectively self-sufficient, thanks to the technological advances of the so-called Green Revolution, and Pakistan is almost so. Argentine wheat production has nearly doubled, Thailand’s feed grain output nearly tripled, and both Canada and Australia have had major output increases.
In producing countries, with the exception of China, this recent growth in output has brought with it only small increases in grain consumption, focusing new attention on export markets. A country which produces more than it can consume is the proud proprietor of an agricultural export industry. Not only have the numbers of exporters multiplied, but the importance of these exports in both domestic economies and trade accounts has increased.
The importance of agricultural trade for the United States is obvious. Agricultural exports make up one-fifth of overall U.S. foreign exchange earnings, and produce one-fifth of total U.S. farm income. At least one-third of U.S. farmland is harvested to provide grain for exports. Figures for other producing countries are equally striking. Thirty-five percent of EEC wheat is exported—and, if French wheat exports to its EEC neighbors are included, exports claim nearly two-thirds of the French wheat harvest. Canada and Australia continue to export the great bulk of their grain, and neither Argentina, which exports two-thirds of its grain, nor Brazil, for whom soybean exports alone constitute almost 12 percent of its foreign exchange earnings, could meet their foreign exchange obligations without the "green account."
As the number of exporting nations has grown, the grain importing market has become increasingly concentrated. The Soviet Union now consumes 20 percent of all imports, with China consuming 5 percent. Western Europe, which for years was the American farmer’s best overseas customer, has become nearly self-sufficient, and the traditional South Asian markets are no longer growing. Japan, a major U.S. market, has hardly increased imports in several years. Uneasy with dependence on foreign grain, Japan has begun to invest directly in production projects, particularly in Brazil, and has also begun to look to its East Asian neighbors for some of its supplies.
The only other significant markets for the United States are in the Middle East, and in developing countries, which now claim about one-third of all grain imports. Many developing nations, however, are increasingly unable to pay for their needs. Imports by sub-Saharan African states, for example, have barely increased over the decade, despite rising population and declining local production.
Not surprisingly, competition in the grain export market has become increasingly aggressive. Weapons in the competition include a variety of export incentives and subsidies, such as differential export taxes, tax rebates, direct support payments to allow lower export prices, subsidized domestic credits, subsidized export credits and "food aid." Agricultural subsidies and other aggressive trade practices have become a regular feature of international trade: Argentine and Brazilian soybean export incentives, EEC export subsidies ("restitution," in the language of the Community), and various forms of import constraints and preferences. While the Europeans long had a special celebrity for manipulating export credit terms to attract markets, fiscal constraints forced the reduction or elimination of most of these programs in recent years. And the United States, long a minor player in the great export subsidy war, has now become the principal source of subsidized agricultural export credits.
U.S. agricultural policy has for 50 years focused on supply management and demand development in order to support higher farm prices. Generous financing was provided for storage on farms and by third parties, to allow farmers to hold their crop off the market until they received an attractive price, with the option of selling it to the government if no better alternative presented itself. Such support was supplemented by "deficiency payments," paying the farmer directly for the shortfall in prices below an agreed "target price."
These policies soon built up large American surplus stocks: total U.S. grain stocks reached a high of 115.7 mmt in 1961-62, falling to as low as 27 mmt in 1975-76, before rising again to 136 mmt in 1983-84. The expense of maintaining such surpluses thus became a major new incentive for the development of "food aid" programs aimed at disposing of accumulated grain through concessional sales to needy countries.
The single most important U.S. surplus-disposal effort has been the "Food for Peace" program, known as PL-480, which since 1954 has provided very long term interest-free loans, and a lesser amount of grants, to foreign countries for acquisition of grain from U.S.-owned stocks. A sister program, the so-called GSM credits, provides for partially subsidized, three-year renewable export financing. Despite the high cost to the United States of such concessional arrangements, they are still less expensive than the alternative of storing the surplus.
Such programs also earn the United States substantial political and charitable benefits, although their long-term effect on recipient countries is a matter of serious debate. The expansion of these schemes—which are almost always negotiated at the governmental level—often undermines emerging local agricultural markets and discourages local production. More important, both PL-480 and GSM credits are explicitly political in their orientation, giving priority to shipment of aid to countries considered friendly to the United States, and posing serious obstacles to aid for such nations as Ethiopia. In fact, of the sub-Saharan African countries most vulnerable to the current drought and food crisis, only the Sudan and Zaïre are included on the list of congressionally approved PL-480 beneficiaries.
Still, such programs do accomplish their primary objective of developing markets for the U.S. grain surplus. And the United States is certainly not alone in such practices. As a budget category, food aid falls under the general heading of "surplus disposal" for the EEC as well—as do export development programs. PL-480 loan and grant allocations have grown from $1.1 billion in 1970 to $1.8 billion in 1984-85. GSM credits in 1984-85 total $5 billion, as compared with $1.4 billion in 1982. EEC food aid in 1984 totaled approximately $465 million and is forecast to be larger in 1985.
The U.S. share in world grain trade grew throughout the 1970s, from 40-41 percent in 1970 to more than 58 percent of total world exports by 1979-80. Between 1980 and 1984, however, the U.S. share fell sharply to less than 49 percent of world exports, and is expected to rise only slightly to about 51 percent in 1985. Part of the U.S. loss is explained by the 1980-81 embargo on sales to the Soviet Union, but that business has largely been reclaimed, and is largely responsible for the small recovery expected in 1985. The more significant causes for the loss of U.S. markets are structural: 1984-85 U.S. grain prices are at least 20 percent higher than those of foreign competitors, and there are many more competitors in the market than there were five years ago.
It is frequently argued that U.S. prices only appear higher, because of competitors’ export subsidies and dumping practices. But such assertions are not supported by the evidence. In early March 1985, U.S. hard red winter wheat was selling for $144 a ton, EEC wheat for $120, and Argentine wheat for $114. Canadian and Australian wheat prices, which are generally determined through long-term sales agreements, are less easy to compare, but both countries will match U.S. prices if market conditions permit. EEC prices, without any export subsidy and measured in U.S. dollars, have been significantly below U.S. prices since September 1984. These price disparities were responsible for the startling picture in December 1984 when China sold corn it had bought from the United States, replacing it with Argentine corn whose low price, even after all transaction and logistics costs, netted China a significant saving.
Underlying the high relative prices of U.S. agricultural goods are several important elements, including unfavorable exchange-rate trends, high domestic support levels, and shrinking technological advantages. By their nature, price comparisons imply a given set of exchange rates, and the rise of the dollar on foreign currency markets has severely damaged U.S. grain exports. The level of domestic price supports paid by the U.S. government has also played a major role in keeping U.S. export prices high. The "loan value" determined by Congress (the price at which U.S. farmers can store their grain and receive federal financing) has set a floor under U.S. prices, allowing farmers to take crops off the market as world prices in dollars declined, and creating what is generally called an "umbrella" for U.S. competitors. Legislation adopted in 1981 significantly increased both the "loan value" and target price supports for American farmers. The United States has also begun to lag behind its most aggressive competitors in technology and efficiency—a difference which cannot be attributed solely to lower costs for land and labor in competing countries. Both China and the EEC have higher grain yields than the United States; Brazilian yields in soybeans and corn, where they are grown with modern techniques, also often exceed those in the United States.
The area in which the United States is unquestionably more efficient is in its system of domestic logistics—transport, communications, storage management, organization, paperwork—which moves the crop from the farm to the shipping port. Differentials in these costs, in the highly competitive world market, have an enormous impact. For example, to move a bushel of French wheat from a Paris Basin farm to the port of Ghent or Rotterdam costs about 90¢. To move a bushel of U.S. wheat from Minnesota to New Orleans—nearly twice the distance—costs about 34¢. The U.S. Department of Agriculture several years ago estimated that it cost Brazilian farmers about eight times what it would cost their U.S. counterparts to move a bushel of soybeans from farm gate to port.
The superior U.S. logistics system cannot forever be expected to protect declining U.S. agricultural efficiency from having its impact on U.S. export sales. Awareness of the importance of infrastructure development and logistical management is rising among competitors. Anyone in doubt need only observe the Chinese organization of their exports—or the priority being accorded to their infrastructure renewal. The French have deregulated rail rates to improve export logistics. Massive grain infrastructure investments are underway in the United Kingdom, and the Brazilians are discussing a grain export rail line.
Two other major factors in competition for grain sales are location and international freight costs. China’s substantial advantage in shipping freight to Japan can overcome, to a significant degree, a competitor’s initial price advantage. The United States needed to offer substantial credit concessions to overcome France’s freight advantage in shipping wheat to the countries of North Africa. The proliferation of exporters with such advantages challenges the oft-repeated assumption that the United States would be the least-cost supplier in nearly all markets if competitors did not pursue unfair trade practices.
The net effect of the market shifts described thus far has been a redistribution of stocks. As production has grown and U.S. export opportunities have shrunk, the United States has become the repository of the world’s grain surplus. In 1974, the United States held less than 25 percent of total stocks; in 1984, it held 45 percent. The United States is now storing and financing about 46 million tons of coarse grains and 38 million tons of wheat—about 35 percent of its total annual grain production. The second-largest stockholder is the European Economic Community, which, by the end of this crop year, will hold almost 8 million tons of feed grain and 14 million tons of wheat—more than double its 1981-82 levels, and nearly 18 percent of its yearly production. Total world stocks are expected to reach 105 million tons of wheat and 86 million tons of feed grains by the end of the 1985 crop year.
The cost of this accumulation and its associated subsidy programs is staggering. U.S. agricultural subsidies, which averaged about $3 billion a year in the 1970s, averaged $19 billion a year over the last three years. EEC subsidies—export subsidies, deficiency payments, public stocks—totaled $16 billion in 1984, or 79 percent of the European Community’s entire budget.
The kind of market shifts implied in these figures are not likely to be reversed. Indeed, aside from small distortions due to bad weather or other temporary problems, future grain markets are likely to be characterized by continued increases in world supply, with relatively minor growth in demand.
In the past, the key to America’s prominence was its almost unique status as a surplus producer in a world of countries with major grain deficits. As we have seen, changes in technology and policy have begun to correct that imbalance and, over time, fewer and fewer countries will depend on the United States to feed their people and livestock.
Advances in agricultural technology will continue to increase grain yields. The Green Revolution grew from the identification of new wheat and rice varieties capable of absorbing and responding to fertilizer increases to improve yields dramatically. Adoption of such varieties in the uniform, controlled ecological environments of large irrigation projects, such as in India’s Punjab province, ultimately allowed India to end years of famine and to cut its massive import bills. Further research is underway to develop comparable varieties of grains for the more ecologically varied rain-fed and semi-arid regions, although commercial results in those areas are perhaps ten or more years away.
Developments in biogenetic engineering, the newest area of plant research, are expected to further accelerate the growth of crop yields, leading to new refinements in fertilizer and herbicide use, and to improvement of protein content and other crop qualities. In perhaps 20-30 years, bioengineering may allow the development of crop varieties that are more resistant to poor weather and soil conditions, helping to expand production in what are now marginal regions such as the African Sahel.
Technological improvements are now largely built into the cycle of production expansion. Investment in new technologies and yield-improvement practices is especially stimulated by public policies which ensure high, stable prices for farm output. But even without—or in spite of—government intervention, the expansion of productivity seems destined to continue or even accelerate, as the European Economic Community learned this past year.
Like the United States, the EEC has been seeking to reduce its farm budget without provoking an excessive political or social backlash. For the first time in the Community’s history, the nominal prices guaranteed to European wheat producers were actually reduced in 1984 in an effort to discourage production—but technology overcame policy. The effects of the price reduction were outweighed by an unexpected 30-percent increase in yields, producing record output levels and a net increase in most farm incomes. Unless European farmers come to believe that these productivity increases are a short-run phenomenon—and that their governments will persevere with price reductions, even to the extent of reducing incomes of key political groups—planting will continue to expand.
The EEC dilemma is compounded by another important paradox common to grain production sectors in many industrial countries. Many EEC farmers—particularly the smaller, more traditional producers, the French and German equivalents of "family farms"—are marginally efficient and deeply in debt. As lower prices begin to force them out of business, their land is not generally taken out of production; it is merely transferred to more efficient users, with a net increase in productivity and output. The newer farms are large enough to take advantage of economies of scale and expensive new technologies, and as a result are efficient enough to operate profitably, and compete internationally, at much lower price levels than their predecessors. Such structural change is already evident in southwest England, in the Paris Basin, in Landes in southwest France. Thus it is incorrect to assume that reduced price supports, in themselves, will lead to dramatic production cuts. On the contrary, after a brief period of adjustment, they may lead to just the opposite result.
In contrast to the relentless growth of production, the demand side of the world grain market is likely to be characterized by only modest increases in overall imports, unless income increases far more quickly than agricultural production in several of the larger developing countries.
World population growth will, of course, remain a key variable in determining aggregate demand, although, as mentioned earlier, production growth has outpaced population growth over the last 20 years. Technological breakthroughs on the horizon could accelerate this trend, especially if the "delivery system" for this technology—agricultural services, infrastructure, credit, fair-pricing policies—is improved at an equal pace in developing countries.
The relationship between population growth and increases in effective demand is complex. Population growth does not necessarily bring with it an increase in either food-production capabilities or the means to finance food purchases from outside suppliers. From the standpoint of world agricultural markets, the practical effects of population growth on demand are limited. Indeed, in the poorest countries, the growth of population may actually reduce effective food demand by straining local resources and draining the foreign exchange necessary for food imports, thus setting the stage for tragedy.
Income growth, on the other hand, will play a more direct role in shaping future demand. Here the distinction between food grains (primarily wheat) and feed grains (corn, rye, barley and oats) becomes essential. As a basic staple, wheat is especially important in low-income diets. But demand for wheat is quickly saturated; as income increases, consumption moves toward higher-cost, higher-protein meat products—which are produced with feed grains. Wheat consumption is thus likely to increase only as fast as population, while feed grain demand is closely linked to income. (However, if feed grain prices rise sufficiently, wheat regains interest as a feed grain substitute.)
The industrialization of poultry production has accelerated this movement from bread to higher-protein meat products by introducing a low-cost major protein source that can be produced almost anywhere. The extraordinary worldwide expansion of the poultry industry has been the engine behind the growth of feed grain trade—especially corn, proteins and processed protein substitutes. Forecasts of feed grain demand become forecasts of poultry and beef consumption as income increases, and feed grain imports are thus determined by the extent to which domestically produced output will satisfy that demand.
In assessing future demand trends, it seems clear that the Soviet Union will remain the single most important market for U.S. grain exports. Soviet production levels are expected to continue to deteriorate, and long-term improvement is unlikely without major agricultural policy reforms, including production incentives such as those that have proved effective in some East European nations. But even with such reforms, Soviet agriculture will remain hindered by technological backwardness and poor soil and climate conditions, and is not likely to keep pace with domestic demand.
Nearly all Soviet grain imports are negotiated through long-term purchase agreements, under which the U.S.S.R. tends to be a very price-conscious and professional customer. Aware of their nation’s status as the largest single buyer in a surplus market, Soviet buying agents are sensitive to their impact on the market and distribute their purchases among several sellers. Their return to the U.S. market, despite high U.S. price levels, has been interpreted as an effort to keep commercial ties open, but also may reflect a recognition that a stable, long-term relationship with the world’s largest exporter is essential in view of the U.S.S.R.’s enormous requirements. Sales to the Soviets now represent 15 percent of all U.S. grain exports, while purchases from the United States represent about one-third of Soviet grain imports. Other principal sources of Soviet crop imports are Argentina, France, Canada and Australia.
The European Economic Community, as shown above, can no longer be seen as a major market for U.S. grain production. Imports into the Community have been essentially limited by CAP protective barriers to proteins (soybeans, corn gluten and other products), feed compounds and certain varieties of corn. The international farming and trading community has proved itself enormously creative in working around the rigidities of EEC regulation to find markets for new products, and potentially profitable niches in this business will probably continue to be found. However, Europe is not likely to become a major import growth area.
All the major exporters are looking to the developing countries as a major outlet for their surpluses—particularly the growing populations and economies of East Asia. Those expectations, however, must be tempered by a realistic appreciation of the growing agricultural potential of the East Asian region. Reasonable production policies and improved farming practices should turn many of these countries into net exporters—particularly of corn—in the reasonably near term. Relatively few developing countries are now using the higher-yielding corn varieties, hence their adoption could rapidly expand output. Increased production will, however, be offset to some degree by increases in local consumption, spurred by income growth, and improvements in local infrastructure and logistical management.
Within East Asia, China could, with improved internal logistics, absorb its entire corn and soy production even as output continues to grow, and may therefore choose not to export, except for political or foreign-exchange reasons. Korean consumption will continue to exceed production, bringing it closer to Japanese importance as an importer. Indonesia, on the other hand, could approach self-sufficiency in some products, and the Philippines could become a major corn exporter. Thailand can also be expected to increase its feed grain export sales.
Thus, it is possible to imagine that within five to ten years the entire East Asian market will be served primarily by exports from Asian producers—with Thailand, China and the Philippines filling the import needs of Japan, Korea, Taiwan, Singapore and others hovering close to self-sufficiency. Such market arrangements would not only reflect freight and cost advantages but also local political realities. However, Japan’s continuing efforts to diversify its sources of production suggest not only further exploitation of the Chinese export market, but also that of Brazil and other countries.
In South Asia, India and Pakistan could be—and are from time to time—significant exporters, thanks to Green Revolution technologies. Although there is enormous potential to expand the Indian internal market, income, marketing and political constraints make that unlikely. Bangladesh will remain a major, and dependent, importer.
In Latin America, reasonable internal policies could lead to dramatic expansions in production of some grains, especially corn, in Brazil and Argentina. Brazil and Argentina will also continue to seek to expand their low-cost soy exports, and Argentina its low-cost wheat.
North African grain consumption is growing steadily, but while policy reform and agricultural development can expand production significantly, this region will also probably remain a significant importer for some time.
Sub-Saharan Africa, where famine persists despite surpluses elsewhere, is the most painful case, illustrating the continuing importance of political and logistical questions in determining food availability. The entire shortfall in Sahelian grain this year has been estimated at three to four million tons, while the world holds grain surplus stocks of nearly 190 million tons. The African famine, while an enormous human tragedy, is by no means an international agricultural production crisis. With a world almost as afloat in subsidized grain export credits and food aid as in grain, it should not even have become a financial issue. Financing the whole shortfall would cost perhaps $500 million, barely a footnote to U.S. export credits and food aid totaling $7 billion, and to comparable European programs now approaching $1 billion yearly.
As a long-term problem, the famine must also be seen as a local planning, policy and management failure of enormous proportions. Local policies discouraged production. Essential agricultural services were ineffective or unavailable. Local marketing arrangements had been repressed or undermined by inefficient bureaucracies. Policymakers did not respond quickly enough when localized food deficits became evident, and were unable to organize the movement and release of food supplies efficiently or plan for likely future needs. As the scale of both human migration and emergency crop distribution requirements grew, the long neglect and mismanagement of basic infrastructure and public services brought them to collapse.
An end to the current drought may reduce the scale of suffering in Ethiopia and other affected areas, but it will not solve the long-term crisis, which will require far-reaching institutional reform, infrastructure development and the development of human capital. Many sub-Saharan countries are therefore likely to remain dependent on imports of foreign grain for many years to come, although continued poverty and low foreign-exchange reserves will ensure that for most affected nations those imports will have to come in the form of humanitarian aid rather than market purchases.
The combination of growing international competition and weakening demand has dealt a body blow to the American farm sector, which is now experiencing one of its worst recessions in memory. Since one of every five American jobs is linked to farming, that recession has become a national problem of major proportions.
The numbers tell the story. Farm income averaged $23 billion in 1983 and 1984. Farmers’ debt service during those years averaged $21 billion. Federal farm subsidies averaged $19 billion in the same period, with most of these funds directly or indirectly supporting farm income. At some points, farm income would have been negative in the absence of federal subsidies. Farm bankruptcies more than doubled from 1983 to 1984, and are now occurring at an even faster rate.
Compounding the changes which have occurred in international markets is the growing debt burden of the farm sector. Agriculture in the United States, as in most of the world, is characterized by large capital assets—land and equipment—and a very meager cash flow. The financial return on farming assets is often not very attractive relative to other sectors, but the government has used subsidies in an attempt to make income flows reasonably stable, and the farmer’s rural way of life has often been viewed as a compensating benefit.
In the mid-1970s, stirred by the apparently permanent export boom and a seller’s market in farmland, some banks began to make major loans based on farming assets rather than cash flow. Farm debt rose from $50 billion in 1970 to $132 billion in 1979 to $216 billion in 1983. Farmers who either bought land or borrowed for major capital investments based on high nominal land values found themselves with large debt service bills just as interest rates began their climb and the export market for U.S. grain began to slump. Land values that rose from an average $374 per acre in 1970 to $1717 per acre in 1981 have fallen by nearly one-third nationwide, and will be further depressed by the accelerating farm recession. New planting credit is being denied to many small producers—possibly as many as 13 percent of all producers.
U.S. policymakers are under enormous pressure to find some way to rescue the farmer from the deepening crisis, either through debt relief, price improvements or a combination of both. The motivations for such efforts are not just political, but stem from a deeply felt desire to protect America’s rural traditions, and to help hard-working individuals who are faced with grave economic distress. For more than 50 years, in response to similar concerns, farm prices have been subsidized; storage, equipment and exports have been financed on subsidized terms; credit has been subsidized; and lending resources have been expanded. And Congress’ most recent actions to subsidize, liberalize and guarantee credit, to protect beleaguered small farmers so they may further expand our grain stocks, is entirely consistent with the history of American farm support policies.
However attractive they may seem, such traditional approaches to our farming problems have lost their economic justification. Even though the recipients of such support work hard for their livelihood, the decision to sustain their income and way of life in the face of overwhelming market forces can no longer be viewed as an economic investment—it has become a social welfare program of enormous proportions.
There are almost no policy scenarios—for any of the major exporters—that allow one to escape certain inevitable conclusions. World grain production will continue to grow, export competition will increase, price levels will continue to fall. Thus, surpluses in those countries that continue to apply traditional policies to try and protect domestic producers from world prices will continue to grow as well, along with the cost of such policies. The producers will in the end benefit very little—unless policymakers consciously attempt to stop the cycle, define their objectives more clearly and find new means to achieve them.
It is fashionable these days in some agricultural circles to talk of the four-to five-year farm cycle. The boom days, we are told, will come back in a year or two if we can just hang on. One gets the impression that many in the U.S. farm sector are waiting to re-live 1974-81, when world grain trade grew by 60 percent and U.S. exports increased by 80 percent, with prices keeping pace, helped by the weakness of the U.S. dollar.
But the lesson of that era is not that prices rise, that agriculture is "green power." The lesson is more subtle and universal: when prices rise, production eventually rises, almost everywhere and probably too much. The system is dynamic, if a little clumsy and given briefly to over-reaction. As soon as everyone sees the winning trick, the game has probably changed. Competition is relentless.
Thus, any unilateral action to try to manipulate the global market is almost certain to be self-defeating. This includes all the usual strategies of unilateral production controls or price cuts. Production controls do have the advantage of controlling domestic surplus stocks. But efforts to use production controls to force prices up will have only a negligible impact because of the scale of surplus stocks overhanging the market. Moreover, any perceived price movement or shortfall in product that might affect the market will quickly induce expansion by other producers or even encourage new players to enter the market, absorbing any price effect that was achieved.
The most common production control technique, especially as productivity improves, is to reduce planted acres, usually through acreage control programs. However, the history of acreage control programs suggests that they have only marginal effect on long-term output, as farmers put their lowest-value land under control and production continues unabated. Ironically, the most effective means of production control may be the withholding of planting credits by bankers attempting to control their exposure on heavily indebted farms.
Allowing domestic price levels to fall on a short-term basis is also likely to do little to solve the production problem. As marginal producers are forced out of business, as demonstrated earlier, average yields are likely to improve. Lower prices will reduce output only if they are maintained long enough to change farmers’ long-term intentions and if price declines exceed productivity increases. Thus, domestic prices would have to decline severely to affect production.
A decline in U.S. export prices—if only through lower exchange rates—would somewhat assist the U.S. agricultural sector by spurring U.S. grain export sales and reducing U.S. subsidy bills. It would, however, be a fantasy to presume that permitting U.S. prices to fall would, in itself, automatically allow the United States to recover, or even increase, its export market share—or to retain any short-term market growth that did occur. Competitors would inevitably respond: several could sell below U.S. prices, others would increase or introduce subsidies or other export incentives. Lower prices, moreover, will not re-open markets in nations that have little hard currency to spend for imports, or that have recently arrived at self-sufficiency and are determined to protect their internal markets. Lower prices would increase the European Economic Community’s cost of competing with the United States or excluding U.S. imports, but they have the similar option of reducing prices. And lower prices would be only one factor in political marketing arrangements—as the United States, which has long been a high-price seller, has frequently proved.
An effort to organize international production along the lines of the once-successful oil-producers’ cartel would be self-defeating as well. It is impossible to organize any cartel without major constraints against entry into the business, a means of enforcing discipline and some common interests among the producers. World grain producers are far too numerous and diverse to allow development of such an organization. Nearly every country either is already in the grain business or, with emerging technologies, soon will be.
What is remarkable in looking at today’s agricultural situation is the degree to which the interests of the wealthy surplus producers diverge from those of the new, developing-country exporters. Notable as well is the degree to which interests other than economic ones are involved in this relationship. The agricultural policies of wealthier producers—the United States, the EEC, Canada and Australia—are really driven more by the need to protect a major domestic economic, social and political interest than by the need for foreign exchange produced by these exports, no matter how significant those trade earnings may be. The new producers often must export these crops to survive, or they see agricultural expansion as their only feasible vehicle for development or link to a world economy.
The United States has serious national interests in the political and social stability of many poor producing nations, and also has major economic concerns other than agricultural trade—banking and other economic interests, as well as exports of other products, and imports of raw materials. A strategy based on coercing poorer countries to restrain their own production to protect American social interests will not only provoke hostility and conflict, but will almost certainly backfire. A reduction in Brazilian or Argentine grain exports, for example, would reduce the foreign exchange those nations so badly need to repay their debts to American banks. Similarly, China’s exports to Japan are a critical part of a new political as well as economic relationship with Japan—a relationship with important implications for the whole of Asia.
Rural traditions and values are important non-economic issues in most countries, just as they are in the United States. There is, moreover, a widely held, perhaps fundamental, conviction that access to food is too critical to a society’s survival to be left entirely to market forces. Agriculture is a strategic good, and there is no country that is willing to be entirely dependent on another for its sustenance. As a long-term surplus producer, we often forget this essential reality—and the fact that our own very efficient market, and those of most wealthier producers, operate in a very fortunate and protected context. It was, of course, this reality that ultimately made our expectations of "green power" so illusory.
The questions with which we are then left are quite different from the questions we are accustomed to facing in our agricultural policy making: to what degree must the larger exporters accommodate the new, poorer producers? How are we to adjust our own policies and resolve our domestic agricultural conflicts? What price are we willing to pay for these social values? What are the common interests among the more prosperous exporters? Does that commonality suggest any direction for resolution of our problems or alternatives to our conflicts?
We have clearly underestimated the extent to which our principal competitors—particularly the European Community, which is emerging as our most powerful competitor—share our problems. We have let our battles over agricultural trade often obscure our mutuality of interests. The cost of the EEC’s agricultural subsidy is at least as insupportable as our own. The constant debates over its cost can continue to dominate the EEC agenda only at great expense to other critical problems. The attachment to a nostalgic agrarian idealism is perhaps even stronger on the eastern side of the Atlantic; the demise of a deeply loved culture and society is at least as wrenching. What does a society do when faced with unacceptable and critical social, political and economic changes, and not only finds it difficult to continue to pay the price for protecting itself from those changes but discovers that, despite the enormous price being paid, those changes are coming anyway?
Multilateral discussions are underway, through the Organization for Economic Cooperation and Development and the General Agreement on Tariffs and Trade, to begin acknowledging the domestic implications of, and constraints on, international agricultural trade policies. If we are genuinely to seek resolution of these issues, however, we must at the same time acknowledge the international constraints on our domestic agricultural policy making and the international implications of the policies we have pursued for so long. There will obviously be major domestic, social, political and economic consequences to such a change in policy direction. And we will have to determine how great a share of our limited national resources we are willing to invest in protecting our rural values.
The point of this discussion is not to insist on any specific strategy, but rather to force a clear look at the underlying dilemmas of today’s agriculture. These problems and choices are universal. Agriculture in the United States, in the EEC, and in most of the world has long been treated as a domestic political issue. But the fundamental changes which have taken place in world agriculture must now be matched with equally fundamental changes in world agricultural policy.