Agricultural Trade, Politics or Reality?

During President Trump’s speech at the American Farm Bureau Federation’s Convention in New Orleans on January 14th, he spent most of the time justifying the boarder wall, but he assured Farm Bureau members that trade negotiations were going to result in long term gain for farmers. “We’re doing trade deals that are going to get you so much business that you’re not even going to believe it. Your problem will be, what do we do? We need more acreage immediately! We need to plant!” Trump said. I noticed that the audience was silent after this remark, unlike the standing ovations that he got when listing accomplishments of tax reform, repeal of the EPA Waters of the U. S. rule, modifications to the estate tax, and passage of the farm bill. 

Indiana Corn

President Trump was probably telling farmers and ranchers what he thought they wanted to hear about prospects of trade. However, I suspect that his audience didn’t buy into his somewhat flippant remarks that insinuated that the “trade deals” would be so successful, that they could produce as much as they wanted and the world would come to buy it. The reality is that “trade deals” can’t artificially increase demand for agricultural products.

Producing agricultural commodities is a different game than that of factories manufacturing industrial or consumer goods, or retail establishments that sell items produced in factories, whether it is automobiles, farm and industrial equipment or consumer goods. A farmer or rancher can’t interrupt their production process whenever the market price drops below their cost of production. Factories on the other hand, can shut down assembly lines, lay off workers and stop purchasing inputs when demand is sluggish or prices are unfavorable for making a profit. Retail businesses may lower prices to move inventory, find substitute products or alternative suppliers that will deliver items that allow the business to make a profit.

Farmers and ranchers world wide don’t set prices based on what they have invested in their crops or livestock when it comes time to market what they produce. They are price takers, and farm commodity prices respond more slowly to market signals than other sectors like retail and manufacturing.

For example, a farmer decides in February that he will allocate 400 acres to corn production, and 400 acres to soy beans. Based on potential returns for these crops, he purchases seed for both crops in March and plants corn in April and soy beans in May. If the market price of corn rises substantially in June, and soy bean prices plunge, he can’t allocate more acres to corn because he has already planted the soy beans. Terminating the soy bean crop to plant corn in June would make no sense, because late planted corn would not have time to mature, and the investment in the soy beans would be lost. The only option is to hope that soy bean prices rise after harvest, and that he can sell both corn and soybeans at a profitable level that allows him to pay his debts and provide family living expenses.

Another example is a rancher who decides that she wants to increase the size of her herd by holding back a heifer for breeding that was born in the spring of 2018, rather than sell it for $700 in the fall . She feeds the animal over the winter and exposes the animal to a bull when the heifer is about 15 months of age in 2019. If the heifer is bred after the first exposure, it will calve in March or April of 2020. The heifer’s calf will be weaned and ready to sell in October of that year, hopefully providing a return on the $700 investment she made in 2018. The rancher has some flexibility to sell the heifer sometime before it calves. However, if calf prices are projected to be low when the heifer’s calf is ready to be sold in fall of 2020, the value of the bred heifer will also decline.

While we often hear the mantra, “American farmers feed the world,” in reality, American farmers are an important piece of the world’s food supply chain, but they don’t set prices for agricultural commodities by themselves. U. S. farmers produce 35% of the world’s corn, China is number two, producing 21% of the total, followed by Brazil and Argentina. The U. S. produces 31% of the world’s soybeans, Brazil produces 25% and Argentina produces 15% of the total supply, which when combined, amounts to 10% more soy beans than is produced in the U. S. China produces the most wheat, followed by India, Russia and the U. S., whose production is a third of what China produces. The top pork producer is China, followed by the European Union and the U. S. The U. S. is the largest beef producer, followed Brazil, which is the largest exporter of beef in the world, while India is number two.

All of us have a stake in maintaining sustainable agricultural practices and policies that are not influenced by political rhetoric and wishful thinking. Agricultural trade can’t solve the problem of over supply. We have competition for export markets. Farmers who attempt to mitigate low prices by increasing productivity through the use of expensive inputs to gain a few more bushels of yield are fighting a losing battle. Increased supply without increased demand leads to lower prices.

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