Category Archives: over-production

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.

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”

Remarkable Graphs of Corn & Soybean Profitability

CORN

Blue blocks: Profitable time periods. Note that I’ve altered the graph by adding red and blue blocks to show profitable years vs. profit-loss years. Source: Ag Cycles: A Crop Marketing Perspective By Chad Hart/Iowa State.

The remarkable graph above, showing corn profitability since 1972, says it all.

The article in which the graph is embedded, by Iowa Ag economist Chad Hart, begins like this… “Over the past seven years, corn and soybean producers in the United States have enjoyed their best run of returns in history.”

Hmmmm. Let me think. What happened about seven years ago?

After that he explains that profitability is cyclical in a competitive industry such as commodity farming, and that “economic theory indicates the long-run profitability of a competitive industry is zero.”

Hart says, “When we examine the average return to a bushel of Iowa corn over the entire time period from 1972 to 2012, it is a positive 5 cents per bushel. However, if you looked at 1972 to 2011, the average return was negative.” !!!

He then warns of a near-term downward cycle of lower commodity and farmland prices.

It’s already happened. Corn prices have fallen. This year’s producers who are renting land that is priced according to yesterday’s profits, may see a tough bottom line.

Unfortunately, from there on out in this paper, Hart goes off on economist tangents about interest rates and input costs during recessions that aren’t as relevant as what I see as the biggest story when one talks about an over-produced commodity crop, which is policy. Furthermore, policy is what has driven down exports and feed demand for corn in recent years.

If we were dealing with a commodity that feeds the world’s growing populations, like Jim Rogers always tells investors, the price of corn would go up because of natural, growing demand. Instead, we’ve had overproduction of corn for decades on end, and it feeds agribusiness, not the world’s growing populations. The Energy Independence and Security Act of 2007 created a new and rapid demand for this input-heavy crop, rewarding the producer, the machinery maker, the fertilizer, seed, and chemical companies. Policies have supported corn growing both on the demand side, and through direct payment programs and crop insurance.

If we really wanted food and energy security, we’d promote fuel efficient vehicles instead of Chevy Tahoes and F350s that burn E85, and we’d preserve our soil, waterways, biodiversity, and aquifers so that future generations have healthy land on which to grow food.

Corn and soybean production in America today is mostly all about policy.

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SOYBEANS
Also interesting is the same information on soybean profitability as viewed on the following graph:

Source: Ag Cycles: A Crop Marketing Perspective By Chad Hart/Iowa State.

We can generalize that soybeans have, on average, had more profitable years than corn. They have enjoyed a boost in price, too, as a consequence of ethanol’s recent, large demand for corn. Plus, around 15 percent of our nation’s soybean crop is going to produce biodiesel these days.

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SOURCE: Ag Cycles: A Crop Marketing Perspective