Does the recent extreme turbulence in world agriculture point to a new era of instability for the sector? Or is it just an aberration within a long-term trend?
There is no clear-cut answer, says David Schweikhardt, professor in Michigan State University’s Department of Agricultural, Food, and Resource Economics, who was guest editor for the recent issue of CHOICES, the magazine of the Agricultural and Applied Economics Association.
But, he says, the issues involved “are likely to remain on the food policy agenda, in both national and international forums, for the foreseeable future.”
In one of the articles in the issue, Keith Coble, professor, and Barry Barnett, associate professor, both in the Mississippi State University Department of Agricultural Economics, advocate for caution in concluding that the linking of agriculture and energy through the bioenergy markets and the impact of the worldwide economic crisis represent a new era of instability.
“History is replete with ‘new eras’ in American agriculture — most of which were amazingly short-lived,” they note.
“Regardless of what has changed, much remains unchanged. Agricultural production is still quite concentrated, with less than 6 percent of U.S. farms producing 75 percent of the value of production … And farming is still a risky business.”
The larger question, Coble and Barnett say, is whether agriculture’s risk management tools are adequate for unstable, volatile markets.
For large-scale family farms, 88 percent of net worth is tied to farm assets and approximately 68 percent of farm net worth is in real estate.
“Thus, from a portfolio perspective, variability in land values may be farm more significant than variability in annual net income caused by random output prices, yields, and input costs,” Coble and Barnett note.
Farmers utilize a variety of methods to manage risk exposure, they point out: diversification of crops and/or locations; off-farm employment and/or investments; irrigation; forward pricing, etc. And government programs can provide income enhancement and risk management for some producers, but not others.
Of “today’s hodgepodge of government commodity programs and subsidized insurance programs,” Coble and Barnett note, “It is hard to imagine that anyone working from a clean slate would conceive of such a mix of overlapping and sometimes conflicting programs.”
Greater risk reduction per federal dollar spent “could be obtained from simpler, non-redundant programs.”
There are, they point out, “no standing federal programs that protect crop producers against rapidly escalating input costs…and neither the private sector nor the public sector provide protection against fluctuations in land values.”
A primary advantage of federally provided or subsidized risk management programs is that they provide longer run protection than is available from markets, but they “can distort market price signals and lead to misallocation of resources. The benefits of federal commodity programs are also bid into land values. Since land is a primary store of wealth for many farm households, the potential for changes in federal policies is likely one of the most important risks currently facing many U.S. farm households.
“In this period of record budget deficits, any effort to reduce federal outlays for agricultural commodity programs or corn/soybean-based bioenergy programs is likely to cause tremendous capital losses for many farm households.
“Further, as the economy recovers from the current recession, the Federal Reserve is likely to raise interest rates to forestall inflationary pressures. This will also create downward pressure on land values.”
The full text of this and the other articles on this topic may be accessed at www.choicesmagazine.org.