Low Farm Prices Won’t Go Away

Commentary, Agriculture, Milton Boyd

Continued low grain prices, bad weather and more farm subsidies evoke visions of tractors in the streets and more farm aid concerts on TV. The fact is, grain prices may continue to decline over the next 50 years, just as they have in the past. That will bring tough choices for farmers, policy makers, and taxpayers.

Lower prices are the natural consequence of increases in grain yields brought on by continuous technological progress, as well as improvements in farm management, education, and mechanization that mostly began around World War Two.

The higher yields have resulted in more production and fewer farmers. Inflation-adjusted wheat prices have declined by about 85 percent, from thirteen dollars per bushel in 1947 to two dollars per bushel in 2001, measured in 1990 dollars, according to data from the U.S. Department of Agriculture. For the hardworking farmer, this is a disturbing reminder of the saying, “To become a millionaire, simply start with two million dollars and wait.”

Professor Willard Cochran of University of Minnesota describes the farmer’s difficult price-cost situation as a treadmill. Farms naturally become larger and adopt more technology to increase yields and cut costs so they can remain competitive. But the higher production eventually forces grain prices even lower, mandating even larger farms and better technology to offset the lower prices.

With the technology treadmill going faster than growth in food demand, long-term prices continue downward. Correspondingly, lower prices force higher-cost farmers from the industry. The full-time farm population for Canada and the U.S. has declined to less than three percent of population, compared to around 70 percent in 1930 in many regions. Due to increased productivity in agriculture and lower prices, larger farms and fewer farms are now typical.

Wheat yields increased by 120 percent, going from 18 bushels per acre in 1947 to 40 bushels per acre in 2001, according to the USDA. Corn yields during this time increased even more, going from 29 to 138 bushels per acre, a whopping 375 percent increase.

In his 1996 book, Ultimate Resource 2, the late economist Julian Simon held that agricultural prices are in a permanent decline. Farmers will continue to modernize, increase production and create lower prices. However, occasional periods of drought will generate brief spikes in prices, as in the early 1970’s. Professor Simon expected gains in grain production to exceed world population growth, if scientists are allowed continued incentives to develop new technologies.

Researchers are only beginning to scratch the surface of agricultural technologies like genetically modified foods and biotechnology. Virus-resistant, drought-resistant and nutrient-enhanced crops could significantly increase production in both developed and developing countries, according the 2001 United Nations Human Development Report.

Further, emerging technologies in energy and other areas could free up additional resources for agricultural production, Simon predicted. This contrasts with the 1960’s-70’s gloom and doom view of fixed resources, where the world runs out of food, water, and energy by around 2000, and the population bomb blows up. Clearly, consumers and taxpayers should be thankful for the past productivity and abundant food provided by farmers, as waistlines continue to grow.

But $190 billion in new proposed U.S. grain subsidies over the next ten years aren’t needed. They will only add to the excess grain supply created by the current U.S. subsidies, estimated at $50 billion annually by the 2002 OECD study, Agricultural Policies: Monitoring and Evaluation. They will hurt farmers in developed and developing countries alike through lower prices.

The annual $100 billion in European farm subsidies further depress grain prices, as these alone are greater than the annual economic output of most of the poorer countries in Africa combined. Subsidies would be better spent on promoting better international development programs and democratic reforms in distressed regions of the world to improve income and education, which typically bring lower population growth.

An added benefit of international economic growth would be a reduction in world conflict and potential terrorist acts. To cope with future lower prices, farm policy makers would be wise to give up fighting natural trends of modernization that bring higher grain production, lower prices, and fewer farmers. Instead, they should allow farmers to adapt to these trends, rather than interfering in markets.

While farm subsidies have helped Canadian farmers in the short run, they have hurt them in the end by causing lower prices, and bidding up farmland beyond its productive value, while creating more government debt. Low prices have hurt farmers in less developed countries, as well, and have given them stronger incentives to produce higher paying crops like coca and poppies, used to make harmful drugs.

Farm policy makers should use three approaches to help farmers catch their breath on the treadmill. First, a fair and equitable transition program is needed for farmers who must exit the industry under severe financial stress, and farm insurance would be helpful that covers disasters like severe weather and droughts.

Second, more freedoms and less unnecessary regulation, a policy implemented successfully in New Zealand, would allow farmers who remain in the industry to be more internationally competitive. Thirdly, policy makers should oppose farm subsidies, rather than attempting to outbid the huge treasuries of the European Union and the U.S, in a subsidy war that neither farmers nor taxpayers can win.