Summer, 1997

From the Editor

New World View

A decade ago the great Midwestern breadbasket of the U.S. was a sad place. American farm exports had declined by 40 percent from the start of the 1980s. Land values had fallen as well with farmers in Iowa suffering declines in excess of 60 percent, leading thousands into bankruptcy. The grain belt had been buffeted when the euphoria of the 1970s, during which Russian grain deals and cheap interest rates had combined to inspire farmers to bid up land prices and buy the latest farm equipment, was superseded by double digit interest rates, a Russian grain embargo and a recession.

Today, however, the tables have turned again. Prosperity envelops the heartland. Partly this is due to low interest rates and generalized growth throughout the economy. The Midwest, though, is getting an extra boost by a legal change. Officially known as the 1996 Federal Agricultural Improvement and Reform Act (FAIR), the law is better known as the “Freedom to Farm” bill.

This law replaces a complicated set of regulations that limited the ability of farmers to plant what they wanted, when they wanted. In the past, the government gave various subsidies and guaranteed minimum prices in exchange for restricting the freedom of farmers to plant. Now farmers are free to plant “fence post to fence post,” and most are doing so. This new law is liberating what we call “program crops” – things such as wheat, feed corn, soybeans, etc. Produce farmers have always been free to plant what they chose and also have carried the market risk of their decisions.

For the big grain crops, the new freedom also carries with it the responsibility to shoulder the burden of declining prices. Although subsidies continue, they no longer are tied to volume or planting restrictions. So far, prices have been generally strong, and the true test of the new law will be when prices fall – only then will we see if Congress has the stomach to tolerate mass bankruptcies by American farmers.

And the bankruptcies will come. American farmers are prodigious producers with the highest agricultural productivity in the world. Yet, as with farmers around the world, U.S. farmers tend to perceive themselves as producers with the expectation that marketing is someone else’s business. Every year most farmers want to plant more land, use more productive techniques and, in general, increase production – regardless of market demand. Sometimes the only real stop on production is when the banks refuse to extend more credit.

Fortunately, there are many others in the food industry who are very marketing-oriented and, without a doubt, help the farmers by moving their crops, either in bulk or as part of various food products.

Of course, here in America, we have a situation right now that serves as a break on U.S. exports. The situation? Prosperity! You see, although this attitude is changing gradually, many U.S. companies are reluctant exporters. Sure they look to export when the domestic market is slow, but as long as domestic demand is brisk, they tend to neglect export. In a sense, Americans are spoiled – the large domestic market encourages an insularity that manifests itself in many ways.

Companies are beginning to recognize that one can’t abuse markets and expect them to be there when you want them to be there. Obviously, American business has to cultivate export markets in good times and bad.

Equally, farmers have to change. Just as they have become more sophisticated in their horticultural practices, they need to be more sophisticated about reducing their market risk. Partly this is financial: grains and feed are traded via numerous financial instruments, and farmers have to utilize these instruments to hedge against market fluctuations. Partly it is contractual; many produce growers, for example, are now selling a great deal of their crops via contract at a fixed price, particularly into the foodservice market. But, in the end, the greatest protection for growers is likely to come from having a diverse group of markets. If Europe is depressed, perhaps the Pacific Rim is doing well. If U.S. demand is slack, perhaps the Mideast can use a little extra.

Maximizing financial returns for all U.S. growers and manufacturers means viewing the world as the market. Sometimes one size or variety is highly prized in Europe but virtually unsalable in Asia, or vice versa. The Florida grapefruit industry depends on the fact that the French love the red fruit and the Japanese the white.

Ever since the New Deal, American farmers have been restricted in the freedom to run their business as they see fit. Now, that freedom has been returned to them. Americans love their freedom, but it will take a world of markets for U.S. farmers to find prosperity along with their freedom.  EXP