THE UC/AIC QUARTERLY
THE NEWSLETTER OF THE UC AGRICULTURAL
VOLUME 12. NO. 4. 1998
Economist Provides AIC with a Glimpse of the Future
Seminar Covers Food Marketing System
Covers the Gamut of Agricultural Risks
of Asian Crash on State Ag is Reviewed
Ag Trading is Workshop Topic
AIC Video List
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
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
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.
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 worlds 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
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).
Johnsons 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
Professor Johnsons 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.
Despite growth trends, enormous pressure remains on the states
agriculture, according to speakers at AICs 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:
On the political front, Dan Dooley, vice-chair of the AIC Advisory
Board told the audience of well over one hundred that:
- 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 systems 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).
- 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.
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
Among the salient topics in the morning session:
Afternoon sessions covered labor supply and management, environmental
regulations, water transfer issues, and family finance and estate
planning. Among the main points:
- How agricultural borrowers might approach the task of preparing
a risk management plan to satisfy a lenders 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.
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.
- 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.
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)
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.
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 Centers web
site) and are found by clicking on Research Working
When public policy deals with natural systems, its 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 AICs 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:
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.
- Pests and diseases that have thus far been excluded from
- 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
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