THE UC/AIC QUARTERLY

THE NEWSLETTER OF THE UC AGRICULTURAL ISSUES CENTER
VOLUME 12. NO. 4. 1998

Director’s Message
“Commodity Policy for the New Decade”
by Daniel A. Sumner

Most economists and many others now accept the long-term goal of more open agricultural markets and much-reduced government control of commodity supplies and prices. As we look to the new millennium, the compelling logic of open markets and economic freedom, and the obvious failure of the opposite (as in North Korea, for example), have overwhelmed most of the remaining disagreements about this long-term goal.

Here, however, I focus not on policy goals for agriculture in the new millennium, but rather on commodity policy for the new decade. In this intermediate time frame, political events and intellectual mistakes can divert the long-term agenda. In fact, this has already occurred as roller-coaster commodity prices, El Niño, and the Asian financial meltdown have created a volatile backdrop for domestic farm policy adjustments, implementation of major trade deals, and formation of the World Trade Organization (WTO).

For some countries, the 1994 WTO Agreement on Agriculture remains a major stimulus for domestic reform. For example, in South Korea the symbolic opening of the rice market and the more substantial opening of other agricultural markets caused a broad re-thinking of the role of government in agriculture. This promises substantial, if gradual, reformation of Korean agricultural policy.

In the United States, the situation is different. Here, gradual and intermittent movement toward more reliance on markets began about 15 years ago, well before the WTO Agreement. Furthermore, we have reformed internal subsidy policy much more than border policy, and our subsidy changes were clearly not a response to the WTO. The United States has complied precisely with its WTO obligations; we were asked to do relatively little by the WTO Agreement and have done exactly that.

The subsidy changes enacted as a part of appropriations legislation in October of 1998, however, showed how U.S. policy reform can be diverted. This pre-election response of Congress and the Administration included altered crop insurance provisions, marketing loan payments, extra “contract” payments, and new dairy subsidies.

Note that this Federal legislative action left out most California crops. Even though 1998 was a horrible year for most California farm industries, the federal subsidy programs -as usual- were directed to the traditionally subsidized crops that are more important elsewhere.

Obviously, the Federal Agricultural Improvement and Reform Act of 1996 did not end U.S. farm programs! Our domestic policy agenda for the new decade will probably include a new farm bill in 2002, and possibly additional policy changes before that. The events of of 1998 showed again how quickly agricultural markets and policies can change. As we look to the next round of farm program reforms, we need to recognize that policies are not fixed and policy uncertainty is part of agriculture. Further, we must recognize that the path of policy reform is neither straight nor straightforward.

Noted Economist Provides AIC with a Glimpse of the Future

Professor D. Gale Johnson of the University of Chicago has given AIC Board members and guests a provocative glimpse of potential world agricultural trends during the next several decades. President-elect of the American Economics Association, Professor Johnson is considered by many to be the world’s leading agricultural economist.

The basis for the dinner-discussion at UC Davis in November was his new paper suggesting that, despite growing incomes and continuing increase of world population, output growth for basic agricultural commodities will exceed demand growth. This excess of production over demand, Professor Johnson noted, would cause the price of food in general to gradually decline. The paper is titled “The Growth of Demand Will Limit Output Growth for Food Over the Next Quarter Century.”

The downside is pressure that declining prices would place on agricultural producers, especially those producing bulk foods. Under this scenario, for example, prices for basic grains would continue to fall gradually in inflation-adjusted terms.

A key point made by Professor Johnson is that the world seems poised to take advantage of a number of technological advances and continued increases in crop and livestock yields. These expected improvements in production over the next quarter century are a result of investments made in agricultural research, technology and extension over the previous quarter of a century (1970-1995).

Johnson’s argument does not suggest that world food problems have been solved once and for all. It does imply that if we continue to invest appropriately in agricultural science and technology, food problems will continue to moderate.

Much of the AIC discussion with Professor Johnson dealt with the implications for California agriculture, where the outlook is somewhat different. California agriculture tends to specialize in high-quality dairy products, fruits, vegetables, tree nuts and other horticultural commodities. As income growth takes off again in developing nations and markets continue to open, demand for many of these California commodities is expected to continue expanding.

Professor Johnson’s stimulating discussion at AIC was the first of what we hope will be annual events, with distinguished scholars and leaders invited to discuss important agricultural issues with AIC board members and supporters.

Executive Seminar Covers Food Marketing System

Despite growth trends, enormous pressure remains on the state’s agriculture, according to speakers at AIC’s annual Executive Seminar on Agricultural Issues in December.

Titled “Risks and Opportunities for California Agriculture,” the program explored overall production and economic trends, as well as outlooks for fruits, nuts and vegetables, field crops, and animal agriculture. A few highlights:

  • Globalization of markets means consolidation of food distribution systems. However, the existence of global retailers has not yet led to widespread global sourcing. On the world food retail scene, Wal-Mart Stores, Inc.-USA, heads the list and The Kroger Company-USA is number three. Domestically, Kroger and Wal-Mart are first and second.
  • Key economic drivers in the food-distribution system are global retail players, global retail brands, the growing role of private labels, and an increase in retailer-supplier contracts with a declining role for the spot market.
  • A quote: “More fresh produce is being exported from more countries to more markets via more diverse marketing channels. Yet the pressure is on to streamline distribution systems, reduce transaction costs and eliminate non-value-adding activities and costs.”
  • The food marketing system’s share of disposable personal income in the US has declined steadily in recent decades, but at a slower rate since 1985. In 1996, it was 10.9% (compared to 17.4% in 1960).

On the political front, Dan Dooley, vice-chair of the AIC Advisory Board told the audience of well over one hundred that:

  • While traditional San Joaquin Valley agriculture was not a strong supporter of Governor Gray Davis during the campaign, the governor will be listening to the Valley.
  • Water policy is a crucial issue for the new governor.
  • A few key appointments and policy changes will have profound implications for agriculture as well as other constituencies.

Seminar Covers the Gamut of Agricultural Risks

Risks faced by California farmers-ranging from water shortages and labor supply to environmental regulations and inheritance taxes-as well as ideas on how to deal with them were examined during a seminar presented by the AIC and US Department of Agriculture in October.

Among the salient topics in the morning session:

  • How agricultural borrowers might approach the task of preparing a risk management plan to satisfy a lender’s need for risk analysis in a loan application.
  • Research on risk management tools, including results of statistical analyses that indicate producers accurately identify their most important sources of risk most of the time.

Afternoon sessions covered labor supply and management, environmental regulations, water transfer issues, and family finance and estate planning. Among the main points:

  • Through water marketing, farmers with ability to fallow lands or with flexible cropping patterns can provide insurance against water shortages to urban dwellers or other farmers. A study of an electronic market within the Westlands Water District, which is especially suitable for internal transfers to balance shortages, is providing confirmation.
  • To manage some forms of risk, agriculture must be a player in the regulatory arena. For example, the rice industry has forged effective partnerships with the environmental community to reduce environmental problems.
  • Alternative business structures have important implications for both management and business issues, and for estate planning.

Morning speakers, introduced by Dan Sumner, AIC director, included Joseph W. Glauber, deputy chief economist, USDA; Cornelius L.(Corny) Gallagher, senior vice president, agribusiness portfolio manager, Bank of America; Russell M. Scheeline, senior vice president and chief credit officer, Sacramento Valley Farm Credit, ACA; and Steven C. Blank, farm finance management specialist, Agriculture and Resource Economics, UC Davis. A.J. Yates, Under-Secretary, California Department of Food and Agriculture, was the luncheon speaker. Afternoon concurrent sessions featured panels moderated by Under-Secretary Yates, Blank and Howard Rosenberg of the UC Department of Agricultural and Resource Economics, and Stephen R. Sutter, UC Cooperative Extension personnel management farm advisor. Panelists included representatives of federal and state agencies, agricultural industry, law firms, and UC.

Impact of Asian Crash on State Ag is Reviewed

Current and potential impacts of the Asian financial crisis on California agriculture are the focus of research by Center Director Daniel A. Sumner and JooHo Song, an economist with the South Korean Ministry of Agriculture and Forestry. Song is currently a visiting fellow at the California Department of Food and Agriculture (CDFA) and AIC.

A report, updated as part of a continuing review conducted by the Center, describes the Asian market for California agriculture, the current Asian economic situation, initial impacts on California and U.S. agriculture, and prospects for future exports to Asia and impacts in California. Research results were presented at the 17th annual Agribusiness Management Conference in Fresno on November 10, and were provided as a briefing to the Secretary, CDFA, last fall.

A current update will be available soon as an AIC Issues Brief.

State Ag Trading is Workshop Topic

The global marketplace role of state agricultural trading enterprises such as the Canadian Wheat Board and the Japanese Food Agency has been examined by economists, industry representatives and government officials in a workshop co-sponsored by the Center.

Chief focus of the November 19-21 event, held at Stanford University and also sponsored by the North American Forum, was Canada-U.S.-Mexico trade in agricultural commodities, particularly grain and dairy products. State trading and private sector marketing, regulatory policy and trade disputes were topics of discussion.

Featured speakers were Charles Mayer, former minister of agriculture for Canada, and Ann Veneman, director of the California Department of Food and Agriculture. Center Director Daniel Sumner and Associate Directors Colin Carter and Julian Alston were among the speakers, as were Dr. JooHo Song and Dr. Jung-Sup Choi from South Korea, visitors to AIC this year.

Many of the research papers delivered during the workshop are available on the Center’s web site) and are found by clicking on “Research Working Papers.”

Problems of Complexity in Exotic Pest and Disease Policy Study

When public policy deals with natural systems, it’s important to acknowledge the biological and economic complexity without unnecessarily adding to it. The integration of biology, economics and risk assessment is one goal of the 14 research teams now active in AIC’s current study of Exotic Pest and Disease Policy.

One complicating factor for researchers in the project is that the threat of, and policies in response to, exotic pest invasions come in various shapes:

  • Pests and diseases that have thus far been excluded from California.
  • Those that have been eradicated and not re-introduced.
  • Recent invaders with an eradication program now under way.
  • Recent invaders that are established and spreading and for which there is not an eradication program.
  • Long-established pests or diseases, in some cases still spreading.

The AIC project includes 14 case studies designed to reflect these complexities and others, and also to arrive at conclusions broad enough to use in formulating public policy. Research topics and team leaders were announced in the last issue of AIC Quarterly. A conference to outline research results and conclusions is being planned for late spring of 1999.