Exports Important, But Can't Solve Current Farm Problem
Although farm exports are critically important, we can't snap our fingers and get them to quickly expand when the American farm economy runs into price and income troubles.
For our farm sector to remain healthy and viable, it must - year after year - export 30% or more of its total production. That was the case in 1996, a good year for the American farm economy. But in 1999, a poor year for farmers, farm exports accounted for only 26% of the total value of farm production.
These numbers underscore two important points: First, we see the importance of exporting 30% or more of our total agricultural production. Second, even a relatively small decline in exports raises havoc with the farm economy.
But if a small decrease in farm exports causes farm income problems, couldn't we solve the problem by a small increase in exports? Before we get carried away with how easy this should be, we need to discuss how global markets operate.
Consumer demands are determined by four variables: The size of the human population, the income distribution of the human population, the tastes and preferences of that human population, and the rules and laws of each nation governing the handling and distribution of finished products. These consumer demands are converted into global demands for farm commodities by traders, processors and speculators.
On the global supply side, the market for a given commodity such as corn is a function of many variables. They include past and present commodity price movements, past research and technological developments, past investment decisions, past monetary and credit policies, national government programs subsidizing the production and export of a given commodity, and last but not least, past growing conditions and the weather.
So what turns up as the global supply of a given commodity at a point in time is largely unpredictable. Let's say global demand for a commodity, as determined by factors we discussed above, increases relative to global supply. Then the world price for that commodity rises, as do prices to U.S. farmers. But when the global demand decreases relative to global supply, the world price falls, as do U.S. prices.
We can see that the export market is not some infinitely expanding space, like the universe, into which some federal agency can simply shoot surplus American farm commodities. It has boundaries, determined by global demand and supply.
Over time, population growth and rising per capita incomes have been the principal sources of expansion in global demand for American-produced farm commodities. But when population growth levels off, as it has in Europe and Japan, and countries of the East Asian Rim experience an economic recession, there is nothing American policymakers can do. They can't cause instant population growth or revive per capita incomes in economies experiencing an economic downturn.
Fantasizing about solving the price and income problems of American farmers through instant export expansion is like fantasizing over winning the Power-ball lottery. The chances of success are about the same.
Willard Cochrane was chief agricultural economist to President John F. Kennedy and is a prolific writer in the area of agricultural policy.
Click below for the previous stories in the series, written by agricultural economists and marketing specialists, offering information on the 2002 Farm Bill.