Dean Chen

English

Research Papers in Economics

12
Nowthat most crops are in the
ground, agricultural planners
generally agree that a sharp
increase in crop production is
virtually certain this year-given
the usual proviso about the
weather, of course. Stimulated
by record high prices and heavy
worldwide demand, the nation's
farmers have risen to the
challenge by planting a total of
nearly 320 million acres. This
8-percent increase in acreage,
although falling below the
Administration's original goal,
represents the largest annual
expansion of the past three
decades.
These crops won't be harvested
until next fall, however, so
obviously they are not much help
in the immediate food crisis. Even
so, they should cause a significant
shift in the demand-supply
equation when they finally reach
market.
Viewing the recent upsurge in
food prices and the peak levels
of farm income, some observers
contend that the decades-old
problem of excess capacity has
now been solved, thereby per-
mittingthe dismantling of
government production controls.
However, skeptics argue in
rebuttal that the present situation
is only temporary, and that
farmers still have more capacity
than the market can absorb at
reasonable prices. Some light
may be thrown on this contro-
versy by a review of the market
factors which have stimulated the
recent price upsurge, and thus
called for such a major shift in
supply.
Explosion in prices
The recent explosion in farm
prices has brought near-record
increases in wholesale and retail
indexes in its wake, and has
placed in jeopardythe Adminis-
tration's anti-inflation program.
But perhaps luckily for con-
sumers, the farm-price index has
far outstripped the other indexes
in recent months, in contrast to
the usual price relationships.
Historically, the food component
of the consumer price index has
advanced at a much faster rate
than the farm-price index-with,
for example, an increase of 3.4
percent as against 1.8 percent in
1971. In some years, such as
1967, the retaiI price of food even
rose in the face of declining farm
prices. This situation reflects the
long-term decline in the relative
importance offarm products in1973
'70 '72
a fairly stable pace, reflecting
the slow growth ofthe civilian
population-roughly1 percent
annually-as well as the generally
strong growth of personal in-
come. However, the rise in per
c"pita incomes has helped bring
abouta shift in consumption
patterns, in view ofthe low
income elasticityofdemand for
starchy food and the high
elasticity ofdemand for meatand
other protein products. This
1972
100
'66 '68
110
Over the past decade as awhole,
domestic demand has grown at
(1967=100)
120
because of reduced acreage and
assorted weather problems, but
also a period ofvery exuberant
demand. Domestic demand in-
creased on the basis ofthe
natural growth of population and
the strong expansion ofthe
national economy. Atthe same
time, foreign demand soared to
spectacular levels.
120
100 ...I--'--.&......a.....lL....l........L -L-L .L...L..L...IL-I.....
1971
160
(1967=100)
140
Changes in the market
The price situation in 1973
reflects the dramatic changes
which took place in the market
in 1972. This was a period of
declining grain production,
finished food items. It is also
attributable to the increase in the
marketing price spread, as farm
products are transported, proc-
essed and packaged to satisfy the
ever-rising demand for quality
food services.
Over the past year, however, farm
prices jumped 33 percent (March
to March), with half ofthat gain
occurring in the last quarter
alone. (That was the largest
quarterly increase since 1946.)
Throughout this period, most
nonfarm products were subject
to control whilefarm products
were not, so that retail prices
failed to reflect the full increase
in farm prices. Even so, retailers
couldn't absorb the entire in-
crease, and surging farm prices
thus meant a substantial boost in
consumer prices. Moreover,
because of response lags, the
latest acceleration in farm prices
should affect the retail and
wholesale indexes for some time
to come. This may have been
involved in the President's deci-
sion to impose ceilings on retail
meat prices in early April.
1310
Clearly, a sharp expansion of
crop acreage is in store, because
of favorable price trends for most
crops and the Administration's
efforts to ease planting restric-
tions. As noted at the outset,
planted acreage is likelyto
approach 320 million acres,
year's production program. The
order came too late to have any
effect on winter wheat, which
comprises almost three-fourths
of total wheat acreage, but it gave
farmers an opportunityto expand
their spring wheat acreage and to
produce corn and soybeans on
their remaining idled land.
In the case of feed grains-a key
influence on livestockoutput-
the Administration has revised
provisions several times since
last December. Originally, it had
ordered a set aside of 25 million
acres-compared with the 1972
figure of 37 million acres-but by
March it had cut the requirement
for idled land to only 9 million
acres. The latest reduction
occurred when the March pro-
jection of 1973 corn output (5.8
billion bushels) turned out to be
4 percent below the target figure
for that crop.
Over the past decade, wheat
exports have increased modestly,
but feed-grain exports have
almost doubled and soybean
exports more than tripled. A
sharp expansion in physical
volume has accounted for most
of the increase in dollarvolume
of exports, although rising prices
have also played a role.
Over the 1963-72 period, agri-
cultural exports increased at a
7-percent annual rate, but the
rate has accelerated in the last
several years, because ofthe
Russian demand for food grains,
as well as the Japanese and West
European demand for feed grains
to supporttheir growing livestock
industries. Exports rose 22 per-
cent in 1972 alone, to $9.4 billion,
as foreign customers absorbed
three-fourths ofthe 1972 wheat
crop and one-half ofthe year's
soybean production, as well as
a substantial share offeed-grain
output.
Attacking shortages
In the present tight supply
situation, the Administration has
begun to sell grains from
government stocks and has lifted
import quotas on meat and dairy
products-and in particular, has
released production restraints
on 1973 crops. In the case of
wheat, the Administration in
January eliminated the "set
aside" requirement underthis
Per Capita
Consumption
\
'67 '68 '69 '70 '71 '72
Civilian
I Population
5
o
20
15 Agricultural -
Exports
-5
Foreign demand, in contrast, has
been an increasingly important,
but unstable, element in the
market foru.s. farm products.
factor, of course, has been
involved in the recent pressure
on meat prices.
Percent Increase
25
14As a consequence of the heavy
worldwide demand for high-
protein feeds, U.S. soybean
production has jumped 83
percent over the past decade.
The market remains under
pressure this year, partly because
ofsubstantial Russian purchases
and partly because of shortages
of competing products such as
Peruvian fishmeal. Yet, despite
the heavy demand expected from
foreign and domestic sources,
the projected supply of1.5 billion
bushels could permit an increase
in the carryover into next year,
and thereby permit some easing
of the pressure on soybean
prices.
Gains in major crops
Nonetheless, growers' intentions
for 1973 plantings (as of March 1)
indicate acreage increases for
practically every major crop
except cotton, with soybeans,
wheat and corn accounting for
most of the gain. Ifactual
plantings match intentions, the
1973 soybean crop could reach
a record 1.5 billion bushels, and
the wheat crop could total a
record 1.7 billion bushels. In the
Some farmers may be avoiding
heavier plantings, possibly be-
cause of shortages of seed, fuel
and fertilizer-but possibly also
because of fears of a price
decline, such as occurred in other
years (such as 1967) when plant-
ings expanded rapidly. In those
earlier years ofgovernment-
sponsored production increases,
the nation's farmers produced
Heavy worldwide demand spurs U.S. farmers to plan for record grain harvests
significantly higherthan the with their expanded cropland far case of corn, the latest revision
range of 291 to 306inillion acres more than domestic and foreign in the feed-grain program should
maintained throughoutthe past markets could absorb. (For ex- helpto boost outputto nearthe
decade. However, this antici- ample, crop prices declined 5 USDA target of 6.0 billion
pated increase represents only a percent in 1967.) Unlikely as that bushels.
little over one-half of the 40 prospect might seem in the
million acres released from set- present period of intensely heavy
aside requirements. demand, the possibility may have
led some farmers to plant rather
conservatively when they went
into the fields this spring.
15(1967=100)
With the help of sharply rising
yields per acre, corn production
has risen 36 percent on declining
acreage over the past decade.
This year's expected increase
could make up for last year's
3-percent decline, and thus per-
mit some carryover despite the
very strong demand from domes-
tic and (especially) foreign
sources. In this event, some
easing of prices could develop
during the 1973-74 marketing
year.
On the heels of a 35-percent
increase in production over the
past decade, the 1973 wheat
harvest is expected to be 14
percent larger than last year,
reflecting a rise in the winter-
wheat crop as well as a sharp
upsurge in spring-wheat plant-
ings. This supply should outpace
the projected increase in
demand, and thus permit a 20-
percent increase in carryover (to
540 million bushels) in the
1973-74 marketing year. Thus,
with a record crop in prospect,
wheat prices could lose some of
their present vigor, although still
remaining above the levels of
other recent years.
'72 '70 '68
90
'66
80
70
110
100
Dean Chen
16

Horn of plenty

http://www.frbsf.org/publications/economics/review/1973/econrev_73marap_12-16.pdf

Horn of plenty

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