Category Archives: commodities

Farmers Should be Protected During the Long Periods of Low Prices

This post is by Daryll E. Ray and Harwood D. Schaffer of the Agricultural Policy Analysis Center, University of Tennessee, in Knoxville. They write Policy Pennings, and I use their excellent analysis on this site from time to time.

Today’s writing by Harwood and Schaffer tells us that long periods of low prices which don’t cover crop inputs historically can last a very long time and thus they need greater policy support. (My impression is that the latest farm bill supports farmers better during periods of low prices – readers in the know are encouraged to weigh in to help enlighten us.) Beyond that issue we should perhaps be asking ourselves instead why our policy covers these monoculture crops so heavily in the first place, when the end result is always overproduction.—Kay M.


Commodity policy choice: Treat the symptoms or address the cause of low crop prices

When it comes to developing policy prescriptions to deal with the dynamic of long periods of low prices interrupted by much shorter periods of high prices, two approaches are possible: one approach provides symptomatic relief and the other treats the cause of low crop prices. One must choose one approach or the other.

If policy analysts develop and policymakers adopt public policies that treat the proximate cause of low prices—the presence of a supply that exceeds demand—there is no need for symptomatic relief. On the other hand, providing symptomatic relief (to short term price disturbances when prices are high and little relief when prices are low) ultimately becomes very expensive and risks losing public support for agricultural programs when farmers need them the most.

For many years, agricultural economists understood that agriculture was different from many other sectors of the economy in that an oversupply of grain and oilseeds and the ensuing low prices did not bring about a timely self-correction in agricultural markets. Low crop prices did not cure low crop prices within a reasonable time frame.

In other sectors of the economy, low prices cause suppliers to reduce their production of the item in excess supply and consumers to increase their purchases. The result is that supply and demand come back into balance at a profitable price level quite quickly. This timely self-correction does not occur in agricultural commodity markets.

Because they understood the dynamics of the market, policy analysts worked to develop policies that would isolate a portion of the supply from the marketplace, bringing about a balance between supply and demand and the return of prices that kept producers in business. To keep from accumulating ever-larger isolated stocks, policies were also developed to reduce production to allow demand to catch up with production.

Understandably, farmers were often frustrated with these policies. And from the perspective of an individual farm operation this made sense. If they had been allowed to produce more they could have earned more, they reasoned. And that is true for an individual farm. But when all farms seek to increase production, the result is an oversupply that drives prices downward for everyone, and the size of the decline in prices is greater than the increase in production.

In recent years, policy makers and many agricultural economists have simply chosen to ignore these dynamics and instead argue against policies that manage supply. In place of traditional supply management policies, they have advocated for policies that use crop insurance to protect farmers against variations in prices—symptomatic relief.

The problem is that these policies only work well when prices are at or above the cost of production. If prices remain low for an extended period of time, farmers end up paying premiums for policies that do not even cover the cost of production.

We understand that farmers do not want to hear this kind of analysis; they would rather hear about booming export demand, a growing ethanol demand, and a new “price floor.” When we are invited to speak to farm groups, producers come up afterwards and emphatically say, “I don’t like what you are telling me!” and then they continue, “But I needed to hear that.” When prices were high, many economists were telling farmers that there was a new price floor undergirded by increased input costs.

During this period, we continued to tell farmers about the low prices that would come when the yearly increases in ethanol demand began to stagnate and supply continued to increase. We cautioned farmers to put some of the increased profits in the bank instead of buying lots of new machinery and driving up the price of land. Today, some of those who talked only about high prices and a new plateau are saying to farmers, “I hope you put some money away during the good times.” Good advice, but a couple years late.

The trend in recent decades is toward policies that tend to provide producers with little income support when prices are low for an extended period of time. As a result, the associated costs of maintaining a vibrant agriculture can actually be more costly to U.S. taxpayers through emergency programs/payments. Failing that the results could be devastating to a large swath of farmers. For farmers in less developed countries, lower prices have severe consequences. When prices are low in countries where agriculture is a large portion of the economy, the impact on the economy is severe.

The challenge of policy analysis is not to design public policies that make the good times even better; rather it is to have policies in place to help protect farmers during the long periods of low prices. Over the last century, the periods of low prices have been much longer than the boom times.


Photo: FlickrCC by Rae Allen, c.1958.

FAO: Global Food Price Index is Down Again.

A very reassuring new Food Outlook Report has just been released by the FAO.

If we were to go back over the past five years and review all of the sensationalist headlines proclaiming that food production in the world is headed downwards and far-more-than-that drama predicting assured gloom and doom, we would see that many fear-mongers got it very wrong.

The world on average has surpluses of food right now. Weather was quite good all around for the globe’s wheat crop so that 2014 will set a new high record. Strong prices pushed a rebound in corn production to make up for the recent large policy-induced demand for corn coming from the U.S. The Midwestern United States didn’t experience a multi-year drought as many predicted in 2012. And climate change is not as of yet affecting our global food supply in a significantly negative way.

The graphs below show us the remarkably positive state of the world for food and agricultural production.

Global food prices have fallen significantly over the past three years.

The decline in September marks the longest period of continuous falls in the value of the FAO’s Food Price Index since the late 1990s.

Only the meat commodity is up in the past two years. Sugar, dairy, cereals, and vegetable oils are all down. Today’s high meat prices are a result of the high feed prices from a couple year’s back, so that comes as no surprise.

STOCKS-TO-USE-RATIOS FROM THE REPORT
Wheat: Based on latest forecasts for stocks and utilization, the world wheat stock-to-use ratio increases from 25.2 percent in 2013/14 to 26.9 percent in 2014/15, while the ratio of major wheat exporters’ closing stocks to their total disappearance rises from 14.1 percent to 15.6 percent, reflecting this season’s ample supply situation.

Coarse Grain: The anticipated increase in world inventories will result in the stock-to-use-ratio reaching 20.2 percent, a value not seen since 2001/02, and well above the historical low of 13.8 percent registered in 2012/13.

Rice: Based on the current estimates, the drop in world carryover stocks would reduce the world rice stock-to-use ratio from 36.2 percent in 2014 to 34.8 percent in 2015.

Cereals: The overall positive outlook, if realized, will result in the cereal stocks-to-use ratio increasing to 25.2 percent in 2014/15 from 23.5 percent in 2013/14, and the highest since 2001/02.


Sources:

http://www.fao.org/news/story/en/item/253838/icode/

http://www.fao.org/3/a-i4136e.pdf

Financial Times Features Global Grain Surplus Story Plus Video

The Financial Times and commodities writer Gregory Meyer are known for their quality articles. They’ve covered the U.S. and global surplus of grain story in an article including a video (below).

Story here: Commodities: Cereal excess By Gregory Meyer. “Global grain supplies are soaring, which will cause an eventual slowing of food price inflation”