by Neil E. Harl
Presented by Neil E. Harl at the Charles A. Black Award Banquet, of the Council for Agricultural Science and Technology, Arlington, VA, April 5, 1997. Dr. Harl, Charles F. Curtiss Distinguished Professor in Agriculture and Professor of Economics, Iowa State University and member of the Iowa Bar, received the award for his contributions to science and communicating the importance of science to the public.
As with most sectors of the world economy, agriculture in the last years of the Twentieth Century has been a sector of great change. Closed markets are giving way to free trade, open democratic systems with decentralized decision making are gaining ascendancy over despotic regimes, technology is revolutionizing every facet of production and distribution and competition is assuring that consumers everywhere are elevated to a high pedestal faintly reminiscent of the kings of old. As the Twenty-first Century dawns, the world is poised on the edge of what could be the Era of Accomplishing the Elusive Goals of the Ages–peace, prosperity and victory over hunger.
And yet that road of immense promise, that has so long remained beyond the reach of the human family, is likely to be less of a superhighway and more of a path marked with potholes and dangerous curves. For those who claim any relationship with the production, processing and distribution of food and fiber, it promises to be an exciting time.
Although attempts to divine the future are often wide of the mark and sometimes bizarre in their misjudgments, I would offer three overarching features of the transition to the more prosperous and better-fed world of the Twenty-first Century–(1) more reliance on the market, world-wide, in allocating society’s scarce resources and less on government strictures; (2) a gradual elimination of trade barriers and (3) more emphasis on food safety and the environment.
In several respects, the world agricultural sector leaving the 1990s is not a sector in long term equilibrium. Whenever an organism — political, economic, social or physical — is not in equilibrium, forces are usually set in motion to bring the organism to equilibrium over some time period. That appears likely to be the case with agriculture beyond the 1990s.
Transition away from government support
Until the 1990s, U.S. and world agriculture were heavily influenced by policies of government. In many countries, programs of price and income support had been in place for decades, augmented by barriers to food and fiber imports. In numerous Third World countries, as well as a number of centrally planned economies, food prices were maintained at artificially low levels which assured low cost food but stunted the development of the agricultural sector. U.S. agriculture in the 1980s managed to achieve a particularly heavy reliance economically upon government. In 1987, government payments were responsible for 36 percent of net farm income nationally. The figure was much higher in some states — 72 percent in Iowa and 94 percent in Illinois. The degree of dependence rose in 1988. That level of dependence upon government is not sustainable politically and not prudent economically. The decade of the 1990s was almost certain to see government receding from agriculture with the percentage of net farm income from government sources likely to decline. Indeed, the 1990 farm bill reduced the level of the government safety net for agriculture and the 1996 farm bill launched the country on a course of even less reliance on government with respect to farm policy. Much of that move was budget driven and, indeed, farm policy is likely to be budget driven during the next several decades, if not for a much longer period.
It’s important to keep in mind that government involvement in agriculture has not been unusual. In every country in the Western World, consumers have generally paid two prices for food — (1) the amount paid at the supermarket and (2) the amount paid in taxes to stabilize the agricultural sector. The pendulum of support for agriculture has swung first one way and then the other. In 1973, relatively little was paid in taxes to support agricultural stabilization and relatively more was paid at the supermarket. The result was picketing at the supermarket as consumers reacted to higher food prices. In 1986, the pendulum had swung the other way.
Relatively more was paid in taxes to support agriculture and relatively less was paid at the supermarket. The result was record outlays by government. But even at that, government outlays amounted to only about six percent of the national food bill (at that time) of more than $400 billion.
Transition toward the market. The analog of transitioning away from government is transitioning toward greater reliance on market forces. The winds of deregulation have been blowing for more than a decade. Deregulation has limits, and certainly in the areas of airline safety, food safety, and safety and soundness of financial institutions, deregulation has clear limits. The economic benefits from deregulation have been substantial, however. In general, society is well served with a rational allocation of resources. It is an article of faith that resource allocation based upon the market is more rational than one based upon government regulation. Centrally planned economies have come to recognize and appreciate that fact. Policymakers over the world are coming to place a greater reliance upon market forces.
Yet there are good reasons why government intervenes in agriculture in many countries–(1) inelastic demand for most food and fiber products rewards producers with a disproportionate drop in price and in profitability from an increase in supply (of course, the opposite is also true); (2) the vagaries of weather as a major factor affecting production are beyond the control of producers, groups of producers or the government; and (3) no single producer can influence price with output decisions. As a result of these three factors, governments often have gotten involved in agricultural policy. Although government involvement will almost certainly decline from present levels, government will not in our lifetimes completely recede from involvement in agriculture. It is in the interests of neither consumers nor producers for government’s hand to be removed totally from the agricultural sector.
Concerns about the 1996 legislation. The 1996 farm bill represents a significant departure from federal farm legislation since 1933. While the transition away from government programs will likely produce a more rational system of resource allocation, several important implications of the shift deserve mention.
There will be life beyond the federal farm program era. But that life will be different in several respects–
Rather than having 70 to 80 million acres of farm land out of production on a checkerboard-pattern, there could be close to that many acres which would transition to a lower-valued use unless exports are maintained at high levels. However, the more productive land would not be among those acres moving to a lower-valued use. The transition would tend to be concentrated in areas with highly erodible, lower productivity land that has thinner soils and lower rainfall and that is more dependent upon high cost crop irrigation.
This movement of land to a less intensive use would spell economic pain for producers. Beyond that, those geared up to sell inputs to or purchase outputs from a crop-based agriculture also would have to adjust. Indeed, the transition for farmers is expected to be substantially shielded by such efforts as the Conservation Reserve Program which seems likely to continue in some form. Little or no adjustment assistance is expected for those who dry, store or ship grain or oilseeds or who sell seed, fertilizer, chemicals and equipment for a row crop-based agriculture as the area transitions to grazing.
Transitioning toward gradual removal of trade barriers
With trade agreements, like deregulation, the winds of trade liberalization have been blowing for years, but with increasing intensity under GATT, the North American Free Trade Agreement (NAFTA) and the WTO. Consumers everywhere are seeking rising standards of living; producers everywhere are seeking a “level playing field” where decisions are based upon the economics of comparative advantage and not the politics of trade barriers.
In the United States, the removal of import restrictions will have major impacts on all areas of agricultural production. The removal or major modification of deficiency payments and supply control systems to reduce income supports that are production related will have an impact on major crops.
The net effect is that consumers in general will benefit. Some producers will face increased risk exposure with at least short-term reductions in income. Long-term, economic relationships including land values should be re-established and stabilized at new levels.
This dimension of the transition phenomenon for U.S. agriculture will likely require most of the decade of the 1990s and the first decade of the new century. Steps already taken in trade liberalization should produce higher levels of exports in products produced, manufactured or processed in the U.S. over the next decade. The effects will be felt gradually and should affect the exports of meats and meat products, grains, soybeans and durable manufactured goods. The economic impacts will be gradual but unmistakably positive for the U.S. economy.
Similar effects should be felt from the North American Free Trade Agreement (NAFTA) as negotiated reductions in duties on exports to Mexico and Canada are phased in over the next 10 to 15 years. The benefits will come from increased exports of feed grains, oil seeds and high technology manufactured goods. U.S. agriculture has an overwhelming productivity edge in the growing of corn, wheat and soybeans. Mexico has relatively little water, inadequate amounts of arable land, technology that lags the United States and weaknesses in transportation and processing of agricultural products. The overall loss of agricultural sector jobs to Mexico and Canada appears to be modest. The negative impacts in the U.S. on agricultural employment are expected to be felt in the border states as some livestock production and processing may relocate to Mexico to take advantage of lower wage rates in Mexico.
The process of demolishing trade barriers is likely to be much slower than the proponents of removal would like. At the same time, the process is likely to be much more rapid than opponents of change would approve. Not until consumers in countries with substantial barriers to imports of agricultural products insist on living better are politicians likely to be fully responsive to arguments to reduce the level of trade barriers.
Impact on low income countries. The last frontier for increasing food demand is the Third World. While only about 20 cents of each additional dollar of income in the U.S. goes for food, the figure in Third World countries is nearly four times as great. The key is per capita income. An accelerated pace of economic development, with higher per capita incomes, is the long-term answer. It is in the interests of low cost producers of food to the world to be supportive of efforts to boost economic development in the struggling economies of the world.
We wish we had a costless, painless solution to the queuing problem headed by countries such as Korea, Taiwan, Indonesia and others. Central Africa may well follow but it may take several decades for economic development to lift those countries out of the category of being perpetually embattled and endangered economically. A critical element is a commitment by stable local governments to take the necessary steps to begin the long climb out of poverty.
While we are talking about economic development, we must mention the People’s Republic of China. If that country, which is well-launched on its economic revolution, can proceed through its political revolution without getting off track economically and without walling itself off from the rest of the world, it will forever alter the trade landscape in food and food products. There is awesome potential as incomes in that country rise and as diets are upgraded.
Emerging production and trading blocs. Although eventually regional trade patterns may come to play a lesser role than at present, the world seems to be transitioning toward four major production and trading blocs —
Consequences of trade liberalization. Over the next several years, food consumption patterns are likely to change worldwide–
In general, in a world of no trade barriers, countries are expected to export those goods that utilize intensively the resources with which the country is relatively well endowed. Thus, countries with large populations relative to the supply of arable land can be expected to produce labor-intensive products and to import products requiring arable land such as feed grains. Likewise, countries with a heavy endowment of arable land and a favorable climate for crop production are expected to produce for export those products requiring arable land. Thus, meats, feed grains and other processed food products requiring feed and food grains should be produced by countries such as the United States, Ukraine, Canada, Brazil and Argentina.
What will this mean for wages, land values and the level of prosperity in agriculture? A compelling case has been made that so long as capital, technology and goods can move freely across international boundaries, wages and land rents should be the same in every country. Note that this theorem does not require the free movement of people, only the free movement of capital, technology and goods.
The consequences of completely free trade should be — (1) a gradual increase in grain prices, (2) higher farm incomes in the short-run in the countries with a favorable land endowment and (3) higher land values in the long-run in those countries as farmers bid the higher prices and incomes into land values. At the same time, it could mean lower farm incomes and lower land values in countries with less productive land that have protected their agricultural sectors with barriers to imports.
Wage levels would gradually move toward a common level except to the extent a country develops technologies and manages to retain the benefits of those technologies for a time.
Transition toward greater concern about the environment
Environmental degradation from intensive agricultural production is becoming increasingly obvious not only in the United States but in every area of the world where intensive agricultural production is carried on. Ironically, the transition away from governmental involvement in agriculture is expected to exacerbate the problem of stream and groundwater pollution as less of the best land is idled each year, although less intensive use of chemicals and commercial fertilizers may result from economic pressures. The outcome could be more pounds of nitrogen fertilizer, pesticides and herbicides applied per square mile in the best land areas, even though less may be applied per acre because less of the better land would be idled under government farm programs.
The problem is heavily one of “externalities.” Effects are felt beyond the producing unit and the market does not take those effects into account. Accordingly, consumers of products responsible for the pollution are paying an artificially low price for the product (in terms of total social costs incurred) and users of the environment (such as downstream water users) are suffering artificially inflated costs.
To a considerable extent, the solution is likely to involve strategies to assure that producers take into account the full amount of costs incurred as a result of production, including costs inflicted on others because of environmental degradation. This can be done through environmental regulations (the principal approach since the mid part of this century), taxes on inputs responsible for the pollution, thus reducing their use, economic incentives or some combination. The outcome will be higher prices for some products, at least for those products produced in areas where pollution is a problem.
Concerns about food safety and fears about genetic manipulation are also part of the environmental dimension of the transitional decade. It is important to remind ourselves that, in the Twenty-first Century as in the Twentieth, the consumer will be king. Competition assures that outcome and political power confirms that the power of governments will be used to intervene whenever interests of the consumer are jeopardized.
The declining political influence of agriculture assures that environmental matters will be a major feature of future farm legislation into the next century in this country and, increasingly, worldwide.
The rate of progress toward completely free and open trade will be determined by political considerations. Trade barriers will be reduced as consumers in a country communicate to their governments that they want to eat better and live better. Until that happens, trade barriers in food products will continue.
Undoubtedly, the most dramatic transformation in modern time with respect to the agricultural sector is occurring now in the former Eastern Bloc countries. The 23 countries which are transitioning toward a market economy are proceeding through two revolutions–(1) an economic revolution in terms of how resources are allocated, incomes are distributed and economic decisions are made; and (2) a political revolution in how governments are organized and how political decisions are made. The fact that both revolutions are occurring simultaneously assures that economic and political life will both be characterized by a measure of untidiness – if not chaos.
Reasons for the transformation
The primary economic reason for the enormous effort to transform the economies of that region is economic growth. Under central planning, the economies were not growing, per capita personal incomes were not increasing and chronic and persistent shortages of some products plagued the countries.
Although economic growth can be defined in several ways, one acceptable and useful definition is that economic growth has occurred whenever there is an increase in average per capita incomes in real terms (adjusted for inflation). Knowledgeable observers in the countries involved were acutely aware that economic growth had been running at consistently higher levels in the market-oriented economies of the West.
In general, it is believed that as the economies are restructured, the institutional framework needed to support a market economy is put in place, and an entrepreneurial, risk-taking class emerges, economic growth will take place.
Sources of economic growth
It is generally believed that economic growth can and does occur as a result of four conditions–
Realistically, improved economic efficiency is the condition most likely to produce better levels of economic growth. In that regard, improvement is occurring slowly in most of the countries. Available data indicate that all but a few of the countries had achieved positive economic growth by the end of 1996. Data from the European Bank for Reconstruction and Development, provide one assessment of the progress made to date as shown in Table 1.
Table 1. Economic Growth (%) in East Europe, the Baltics and CIS
Source: Transition Report, 1995, European Bank for Reconstruction and Development.
Within a decade, it is anticipated that the region will be growing robustly and will be a strong player on the world economic scene. In the meantime, technical and educational assistance is essential to provide the needed vision for their decision makers and insights in how to solve the myriad of problems being encountered in the transition.
Quite clearly, the countries going through both an economic and a political revolution face the greatest challenge ever encountered by a country in peacetime.
In conclusion, it seems appropriate to ask, “what does the human family expect of its agricultural sector?” I believe the human family expects that movement toward four distinct outcomes will characterize the coming decades–
Within less than a decade, the world should experience the greatest period of economic growth in the history of the planet. All four of the major production and trading blocs should be enjoying robust growth and rising per capita incomes. That should assure increasing demand worldwide for foodstuffs and a period of greater prosperity for agriculture. However, as noted earlier, those gains will, in the long-run, be reflected in increased land values rather than in better returns to labor and capital other than land.
The dimensions of the transition for world agriculture beyond the 1990s assure a more rational allocation of the world’s resources. However, the transition will be economically painful for some and will certainly lead to challenges as producers, processors and consumers adjust to a world of greater price volatility. In the U.S., whether consumers will be tolerant of price increases in times of reduced supplies remains to be seen. Certainly producers will be able to count on less in the way of a safety net during periods of low prices.
U.S. agriculture has been a genuine success story. As the winds of deregulation pick up momentum, it is important for the Congress and Parliaments around the world to monitor the consequences for signs that the sector is being propelled in directions that are unacceptable. Certainly consumers will raise their voices if food supplies are inadequate or food costs are perceived as being too high.
See U.S.-Mexico Trade: Pulling Together or Pulling Apart? Office of Technology Assessment, U.S. Congress, ITE-545, U.S. Gov’t. Printing Office, October, 1992.
See Leamer, Theory of International Comparative Advantage, Ch. 1, MIT Press, 1984.
Your donation to CAST helps support the CAST mission of communicating science to meet the challenge of producing enough food, fiber and fuel for a growing population. Every gift, no matter the size, is appreciated.