Can Exports Solve the Farm Problem?

Many farmers and policy-makers, including new USDA Secretary Ann Venneman, have touted increased exports as the solution to the current farm crisis. This faith in exports provided much of the basis for the last farm bill six years ago, and is being repeated again as Washington considers a new farm bill. But is the promise of increased exports a solid basis for policy or a long-shot gamble?

The answer rests with the nature of the global demand for the basic commodities -- wheat, feed grains, soybeans and meal, as well as poultry and animal products. If the demand for those commodities is strong relative to their supply, the prices of those commodities will be rising and the domestic farm scene will be a happy one. If the global demand is weak relative to the supplies of those commodities their prices will be falling. And if the elasticity of the global demand for those commodities is low, which it is, their prices will fall dramatically.

In 1998, the global demand for these commodities contracted modestly, causing the world prices for those commodities to fall sharply; the average farm price of soybeans in the US, for example, was $7.35 per bushel in 1996, had fallen to $4.75 per bushel in 1999. As a consequence, the total value of US farm exports, which stood at $59.9 billion in 1996, had fallen to $49.1 billion in 1999.

The physical volume of farm exports declined very little over the period 1996-1999. It was the market contraction in global demand for the basic commodities that drove down world prices of those commodities, caused the value of US farm exports to decline significantly and brought on a domestic farm price-income crisis. If somehow we had pushed a greater volume of basic commodities onto that contracted inelastic global demand, the prices of those commodities would have fallen even further.

The export market is not some infinitely expanding space, like the universe, into which some federal agency can simply shoot surplus American farm commodities. The global market for farm food commodities is a closed system. Over time, population growth and rising per capita incomes have been the principal sources of the expansion in the global demand for such American produced 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 that American policy makers can do to instantaneously increase demand for America's farm commodities.

It does not make sense to pursue a strategy of pushing exports when the global demand is weak. To sell more of our farm commodities in that situation requires us to price them below the going market price, and thereby pull sales away from our competitors. This would, of course, invite retaliation in which those competitors (like Brazil and Argentina) came back at us by cutting their prices still further. This is not the way to profit from the export market -- it is the formula for an expensive price war.

For the US, this is a terrible solution. The world prices for products like soybeans and corn are already below the costs of production for most US producers. To expand your sales by selling more at a still lower price is no way to get well financially and to stay in business. This practice can only transfer the costs to the US taxpayer, as we are continually forced to provide emergency payments to farmers because of extremely low prices.

The global demand for American farm products cannot be manipulated at the beck and call of American policy makers. Foreign importers are not going to increase their purchase of American food products because US policymakers want them to do so. Imports of American farm products will increase again only as those importing countries pull out of their economic slump and consumer incomes begin to rise.

Fantasizing about solving the price and income problems of American farmers through instantaneous global demand expansion is like fantasizing over winning the Power-ball Lottery. The chances of success are about the same. Farmers generally, and family farmers in particular, would be better served by forgetting about fixing the broken export market for farm commodities, and concentrating their energies on enacting legislation designed to strengthen rural communities, reduce the pollution of America's farmland and rivers, and increase competition among suppliers of non-farm produced inputs on the production side, and among handlers and processors on the marketing side.

Dr. Willard Cochrane, professor emeritus at the University of Minnesota, is one of the nation's leading agriculture economists, serving as President Kennedy's Chief Agricultural Economist, chief economist at the Department of Agriculture during the Kennedy/Johnson administrations, and as an agricultural economist for the United Nations and the US Department of Agriculture. He has written several highly influential books and articles on US farm policy. This was written for the Institute for Agriculture and Trade Policy (www.iatp.org).

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