Now fretting about grain prospects

by Morton Sosland
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Little reason exists for questioning the benefits of this year’s lower crop prices for food manufacturers. Yet, any celebrants of reduced ingredient costs needs reminding that what has been good for both consumers and food manufacturers has meant drastically lower incomes for the farmers who grow the nation’s grain. Absolutely essential is recognizing how the price decline affects various aspects of the rural economy and the likely effects the financial conditions will have on plantings. The potential trade-off of lower current prices for smaller future crops poses a worry for food makers looking beyond several quarters.

Preliminary crop price forecasts point to levels in 2015-16 that will average below the 1998-2002 period, which was the last time crop prices declined after relatively strong returns. In the period 2008-13, farmers enjoyed unusually favorable returns, creating conditions during which cash reserves were built. Those reserves often are cited as providing enough financial strength to encourage farmers to resist making decisions that will affect future plantings. After all, the basic driver of the price surge ending in 2014 was the government mandate creating unusually heavy demand for corn to make ethanol as well as a few years of unfavorable growing conditions in parts of America as well as in foreign competitors. Bolstered by reserves, farmers conceivably could look for a repeat of some of these positive forces rather than their likely disappearance.

A recent analysis by the Department of Agricultural Economics at the University of Illinois notes that grain farmers most likely will have an operating cash shortfall this year. In reaction, producers may reduce spending to reduce cash outflows for 2016 crops, slash their cash rent payments on acreage and/or decrease purchased inputs. Buying fewer inputs already is reflected in sharply reduced sales by tractor and farm machinery suppliers as well as increasing worries from suppliers of seeds and chemicals.

Just what is at stake here is strikingly illustrated by U.S. Department of Agriculture studies aimed at measuring agricultural productivity. Hardly anything is more dramatic here than recent data on agricultural production growth between 1948 and 2011. In that period, agricultural output more than doubled, while the aggregate of inputs into farming rose just 4%. The small input gain is accounted for by reductions of 78% in labor use and of 26% in acreage offset by gains of 140% in use of goods like energy, chemicals and seed/feed and of 65% in capital goods made up of machinery, equipment, real estate and inventories. After 1980, total agricultural input use fell by 15%, but output continued growing on account of technical advances like increasing yields.

No one may argue with how impressive it is that food production easily kept pace with a more than doubling in U.S. population in the period from 1948 through 2011 in face of a decrease in farmland. Agriculture’s showing is reflected in a 1.49% annual rise in output, while total input use declined at an annual 0.07%. This netted annual productivity growth of 1.42%. Even with that apparent stability in inputs, relative prices encouraged farmers to substitute chemicals, purchased services, energy and machinery for labor.

Hardly anything is more important to maintaining crops like wheat and corn than making sure that increases in agricultural productivity do not slow. After noting the upward trend of agricultural productivity for half a century or more, the U.S.D.A. finds “no statistical evidence of a productivity slowdown” at any time. Investments in both private and public research are often cited as drivers of agricultural progress. Recent trends neglect this, as government spending is slashed. Private research spending has gained, but not enough to offset. Based on reduced research outlays and the long lag between research findings and productivity growth, the U.S.D.A. indicates that the healthy annual productivity gain of 1.42% will fall to 0.86% by 2050. As far in the future as that is, it should be of immediate concern to the food business.

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