By David Schaffer, Director of the Agricultural Policy Analysis Center
In any discussion of agricultural policy and strategies to overcome low prices, one of the solutions that always in on the table is exports. It doesn’t matter whether the farmers grow wheat or raise cattle, the great hope for overcoming low prices is to negotiate trade agreements that will open new markets for US production and result in higher farm prices. The hope is that we can export our way to prosperity.”
As Dr. Phil would say, “How’s that working for you?” To answer that question, let’s take a journey through history beginning in 17th century Colonial America.
In the early 17th century, tobacco smoking became fashionable in England so farmers in Colonial America received favorable prices for all that they could produce. The prices were so profitable that colonial farmers increased production to the point where 40 years later the price had dropped to a point well below the full cost of production. In response some of the American colonies enacted production restrictions on their farmers in hopes of increasing the price.
A similar story can be told for both indigo and cotton production. By the 19th century, the production of cotton in the colonies exceeded the amount that English cotton mills could weave into cloth and market. As a result, a once profitable crop was being produced at an extremely low price for lack of a profitable alternative crop for some of cotton’s acres.
In the mid-19th century as a sea of men flooded California in search of gold, some ended up in the Central Valley as farmers where they raised wheat on the flat fertile land. Their market was England and Europe and the prices were good, despite significant shipping costs. And then farmers in Argentina took note and began to grow wheat. With lower shipping costs between Argentina and Europe, the California wheat market collapsed.
Most farmers have heard stories about the agricultural boom during WWI and the bust that followed to the signing of the Armistice. A farm depression in the 1920’s was followed by the Great Depression in the 1930’s. WWII triggered an increase in production and exports to Europe followed by a slow slide in agricultural prices into the 1950’s and beyond.
The Soviet Union’s purchase of US wheat in 1972 triggered a surge in optimism about agricultural prices and farmers were encouraged to plant fencerow to fencerow by Secretary of Agriculture Earl Butz. Farmers took his advice to heart and the 1973-1975 price spike turned once again into a slump that resulted in the farm crisis of the 1980’s.
It could be argued that exports have been the great hope and great heartbreak of US agriculture while steadily growing domestic demand has been ignored. When faced with a new source of demand for one or more agricultural products, US farmers have repeatedly shown the ability to increase production to meet the new demand to the point of overproduction and falling prices. Export demand is ephemeral depending on the needs of others. The farmers in most nations are the same as farmers in the US, they want to feed their own people. For them local food production is a matter of national security and imports from the US or elsewhere become a necessity only when local production falters.
Historically, long-term high and ever-growing levels of exports have not been sustainable. While one does not want to minimize the importance of the trade agreements; a little restraint in expectations is in order. The thing that is the long-term source of increasing demand for US agricultural products is domestic demand. Perhaps then farmers and policy makers should design production systems and agricultural policies to meet this demand at a profitable price and treat exports for what they are: “icing on the cake.”