Carolyn Sherwood-Call

English

Research Papers in Economics

FR8SF
July 10, 1987 WEEKLY LETTER
Outlook for u.s. Agriculture
While many other sectors ofthe economy have
grown substantially during the recovery of the
past four-plus years, America's farm economy
has suffered from a prolonged and deep reces-
sion. Data on farm incomes, farm exports, farm-
land prices, and the prices of agricultural
commodities all illustrate the severity of recent
agricultural problems. This Letter describes the
origins of these farm problems and the improv-
ing prospects for u.s. farmers.
"Murphy's law" comes to the farm
In a sense, the farm economy in the United
States during the past five years has provided a
real-life enactment of Murphy's Law: If anything
can go wrong, it will. In the first half of the
1980s, debt burdens and other production costs
of farmers mushroomed while exports and the
prices received by farmers plummeted. An
increase in worldwide production was one
cause, and the increase in the dollar's value, was
another.
By 1986, farm income had fallen substantially
from its healthy 1982 levels. Agricultural prod-
ucts generated an estimated $132 billion in total
cash income (excluding Commodity Credit Cor-
poration loans and government payments) for
American farmers in 1986, or 7.7 percent less
than the peak level of $143 billion attained in
1982. Moreover, since the overall price level
increased by some 14 percent during this
period, real farm incomes fell by about 20
percent.
Differences between farm sectors and regions
As is true with most generalizations, the overall
decline masks large differences among agri-
cultural products and among different regions in
the country. For example, grain producers have
borne the brunt of the problems while producers
of some other products, including most fruits
and vegetables, have experienced somewhat
less serious hardship. In addition, farmers whose
land can support a greater variety of products
have been able to adjust their production plans
as market conditions have changed.
These differences show up in geographical vari-
ations in the severity offarm problems. Grain-
producing regions and areas with less diversified
farm sectors have suffered particularly severely.
In Arizona, for example, cash receipts to farmers
fell 16.6 percent between 1982 and 1986. In
contrast, farmers in California have more flex-
ibility in choosing what products to grow from
year to year. Their problems therefore have been
somewhat more manageable, and their farm
receipts fell only 3.5 percent during the same
period.
Roots of the problem
The many sources of the u.s. farm problem
have been well-documented. The profitability of
farming during the late 1970s led many farmers
to expand their acreage. Escalating land prices
further increased farmers' wealth, but, in com-
bination with high interest rates, meant that
farmers took on large debt burdens when they
expanded.
Over the last five years, the world supply of
many agricultural products has soared while the
growth in demand for those products has
slowed. As a result, prices have fallen dramat-
ically. The index of prices received by farmers
fell by 11 percent between 1981 and 1986.
Farmland values fell even more dramatically, by
an average of 29 percent during the same five-
year period. American farmers ended up in a
tight financial squeeze, caught between low
prices and high costs.
Weak prices hurt farmers throughout the world,
but American farmers also lost market share.
Many developing countries that previously had
imported vast quantities of food from the U.s.
were fast becoming self-sufficient. For example,
India used to be a major market for u.s. grain,
but production gains have enabled India to pro-
duce most of its own grain products. In fact,
both India and Pakistan currently enjoy sizable
grain surpluses. The rising value of the u.s. dol~
lar during this period added to the problems
faced by American farmers by increasing the for-FRBSF
eign currency prices that foreign buyers had to
pay for American products, and thereby driving
down the dollar prices received by farmers.
The loss of export markets hurt American
farmers seriously, since about a quarter of U.S.
farm products previously were exported. In
recent years, the dollarvalueof agricultural
exports has plunged. From $44 billion in fiscal
1981, it dropped to $38 billion in 1984, $31 bil-
lion in 1985, and $26 billion in 1986.
It is worth noting that the deterioration in farm
exports also contributed significantly to the
decline in tota.1 U.S. exports during the first half
of the decade. In 1981, agricultural exports
accounted for about 19 percent of total U.S.
exports, but they comprised 70 percent of the
decrease in the total value of U.5. exports during
the past five years.
Improvement in the agricultural outlook
Despite these recent problems, the outlook for
American farmers is in some ways brighter now
than it has been for several years. Improvement
is expected partly because of an anticipated
increase in the rate of growth in world demand
for food products. The U.5. Department of Agri-
culture (USDA) forecasts that world demand will
increase by 2.6 percent during 1987, which is a
faster pace than that seen during the first half of
the decade.
In addition, the competitive position of the U.S.
is expected to improve because of some lower
production costs and the decline in the value of
the dollarrelative to the currencies of most of
our important trading partners. Moreover, wide-
spread participation in government acreage-
reduction programs has limitedproduction to
levels that can be absorbed better by world mar-
kets at existing prices.
As a result of strongerworldwide demand and
lower world prices for U.5. products, the USDA
expectsU.5.export volume to rise by 3.6 per-
centin 1987 for the first time in seven years.
However, because prices are expected to fall by
about 5 percent, the USDA forecasts that the
value of exports will drop by about i percent.
Declining costs
Some production costs paid by farmers have
fallen in recent years. In particular, interest rates
remain significantly below their levels of the
early 1980s despite the sharp rise seen during
the past few months. Not all farmers currently
benefit from lower interest rates, however. Some
farmers still carry long-term debt at high interest
rates. Moreover, those who borrow through the
Farm Credit System currently pay a premium for
funds because the system is financially troubled.
Land prices also have fallen substantially. The
USDA estimates that farmland values are likely
to continue to fall during 1987 but that their rate
of decline will slow. Although lower farmland
values reduce the wealth of established farmers,
they also enable new and expanding farm enter-
prises to buy land more cheaply. Over time, as a
greater proportion of all farmers pay the new,
lower prices for their land, farming will become
more profitable.
Other costs of farming also have fallen substan-
tially.ln 1986, the costoffuel stood 21 percent
below its peak level in 1981. Fertilizer costs fell
14 percent during the same period, while feed
costs fell 19 percent. These cost reductions were
partially offset by increases in the costs of seed,
chemicals, machinery, and wages.
Overall, the index of farm production costs fell
by about one-and-a-half percent in current dol-
lars. Since other prices in the economy rose
almost 14 percent during this period, relative
farm costs actually declined by about 15 percent
between 1981 and 1986.
Other competitive improvements
High participation rates in government acreage-
reduction programs. also improvedthe U.S com-
petitive position in world markets. By lowering
U.5. production of some important crops, those
programs should reduce the extent of the global
oversupply of those products. In addition, the
provisions of the 1985 Farm Bill should reduce
the gap between the prices of American farm
products and the prices of corresponding goods
on the world market. Although lower product
prices make profitable farming more difficult,
they should allow American farmers to increase
their share of the world market.
As mentioned, the decline inthe value of the
U.S. dollar duringthe past two~and-a-half years
has helped make some American products more
competitive on world markets. For example,growers of grapes and almonds have attributed
climbing sales largely to the decline in the value
of the dollar.
Limitations of the improvements
Most American farmers, however, have yet to
benefit from the reduced value of the dollar.
One possible explanation is that the currencies
of many newly industrialized countries (NICs) in
Asia and Latin America have remained stable
relative to the u.s. dollar. Consequently, our
products are no less costly to these countries
than they were two years ago.
Despite the lack of improvement in our competi-
tive position relative to the NICS, demand for
our agricultural products from these nations may
improve during the next year or two. Some of
these countries, particularly those in Asia, have
been growing very rapidly, and their economies
have benefited from declines in the values of
their own currencies relative to the Japanese
yen. Moreover, the potential sizes of the farm
sectors in South Korea, Taiwan, and Hong Kong
are limited by both their small amounts of avail-
able land relative to population and their cli-
mates. As a result, the prospects for growth in
American sales to these middle-income Asian
NICS are quite good.
Growth in purchases ofU.s. products by other
countries faces additional obstacles. First, some
of our products, particularly grains, remain
uncompetitive on world markets. Second, no
country can import U.s. products if it has no for-
eign exchange with which to buy them. Debt
problems in many countries make u.S. dollars
hard to come by, and hence limit the extent to
which purchases of American farm products are
possible. Finally, the government policies of
many countries subsidize their own production
and often severely limit the extent to which their
foreign markets are open to American farm
products.
Government policies
The importance of government policies, both
here and abroad, cannot be overemphasized in
discussions of the prospects for American
farmers. Many governments provide direct assis-
tance to farmers through loans or price supports
and, in addition, provide indirect assistance by
restricting agricultural trade. Because both types
of policies currently are so widespread, world-
wide agricultural production has exceeded con-
sumption by a wide margin in the last few years.
Several governments recently have indicated a
desire to reduce farm subsidies and protectionist
policies in recognition of worldwide surpluses
and the counterproductive effects of severe trade
restrictions. However, their discussions have yet
to yield tangible outcomes.
Conclusion
The problems faced by American farmers have
been severe and are likely to affect some finan-
cially troubled farmers for a few more years.
Nevertheless, evidence suggests that deteriora-
tion in the farm situation is unlikely to continue,
and that many remaining farmers should see
modest improvements this year. Lower interest
rates and land prices, the reduced value of the
dollar, and effective government acreage-
reduction programs should allow American
farmers to fare better in world markets than they
have during the past few years.
Carolyn Sherwood-Call
Opinionsexpressed in this newsletterdo not necessarily reflect theviewsofthemanagementof the Federal Reserve Bank ofSan
Francisco,orofthe Board ofGovernorsofthe Federal Reserve System.
Editorialcommentsmaybeaddressedtotheeditor(GregoryTong) ortotheauthor....Freecopiesof Federal Reservepublications
can beobtained from the Public Information Department, Federal Reserve BankofSan Francisco, P.O. Box 7702, San Francisco
94120. Phone (415) 974-2246.uo~6u!4S0m 4o~n U060JO OpOA0U
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BANKING DATA-TWELFTH FEDERAL RESERVE DISTRICT
(Dollar amounts in millions)
Selected Assets and Liabilities
Large Commercial Banks
Amount
Outstanding
6/17/87
Change
from
6/10/87
Change from 6/18/86
Dollar Percent?
Loans, Leases and Investmentsl 2 205,130 - 136 3,206 1.6
Loans and Leases1 6 181,679 - 277 1,704 0.9
Commercial and Industrial 52,858 - 712 591 1.1
Real estate 69,430 738 2,835 4.1
Loans to Individuals 36,667 - 324 - 4,148 - 10.1
Leases 5,392 3 - 214 - 3.8
U.S. Treasury and Agency Securities; 16,200 149 5,261 48.0
OtherSecurities2 7,251 - 6 - 352 - 4.6
Total Deposits 207,153 - 222 1,702 0.8
Demand Deposits 52,655 - 130 1,037 2.0
Demand Deposits Adjusted3 37,099 - 253 1,447 4.0
OtherTransaction Balances4 19,514 - 302 3,264 20.0
Total Non-Transaction Balances6 134,984 210 - 2,599 - 1.8
MoneyMarketDeposit
Accounts-Total 45,079 172 - 1,671 - 3.5
Time Deposits in Amounts of
$100,000 or more 32,157 - 4 - 4,160 - 11.4
Other Liabilities for Borrowed MoneyS 22,445 - 331 - 1,018 - 4.3
Two Week Averages
of DailyFigures
Reserve Position, All Reporting Banks
Excess Reserves (+)jDeficiency(-)
Borrowings
Netfree reserves (+)jNet borrowed(-)
Period ended
6/15/87
51
8
44
Period ended
6/1/87
56
52
4
1 Includes loss reserves, unearned income, excludes interbank loans
2 Excludes trading accountsecurities
3 Excludes u.s. government and depository institution deposits and cashitems
4 ATS, NOW, Super NOWand savings accounts with telephone transfers
S Includes borrowingvia FRB, TI&L notes, Fed Funds, RPs and other sources
6 Includes items notshown separately
7 Annualized percentchange
f

Outlook for U.S. agriculture

http://www.frbsf.org/publications/economics/letter/1987/el87-28.pdf

Outlook for U.S. agriculture

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