Chicago — `When they talk about market-oriented farm policy, I wish I knew exactly what they meant,' says Bill Ramsey, rolling past snow-covered Illinois farmland in his pickup truck. `It does not exist.' John Gott gazed down at the bustling action at the Chicago Board of Trade and mused.
Imagine, he said, filling the entire hall with gold and imprisoning someone there overnight without food. How much would he pay in the morning for a loaf of bread?
Mr. Gott, a former Missouri farmer, didn't get an answer on that fall day, when he and other farmers picketed the world's largest commodity exchange. But his question went to the heart of an important change in US agriculture.
How do you price food?
In 1972 and '73, the Chicago Board of Trade witnessed an incredible price boom. The Soviet Union went on a buying spree of US grain. Expected fish-meal exports from Peru never materialized. Grain and soybean prices skyrocketed.
``Before the explosion in 1973, both buyer and seller assumed historical parameters that had never been violated,'' says David M. Bartholomew, senior soybean specialist at Merrill Lynch Futures Inc.
Up to that time, price swings were tame enough that Mr. Bartholomew had a hard time persuading soybean buyers to lock in prices with futures contracts.
But, he says, ``after 1973, it was amazing the number of people who called and said: `Remember us? We still don't speculate. But we realized we could lose our pants if we don't participate.' ''
For American farmers, it was boom times. They planted fence-row to fence-row, plowed up pastureland to plant more acres, tore out the fences that used to hold their livestock, and specialized in grain farming.
In the euphoria, many farmers were willing to let John Gott's loaf of bread be priced by the market.
``I was convinced -- and lots of us were -- that the world needed all that we could produce,'' recalls one Kansas farmer.
Many experts predicted the same thing. As late as January 1981, a US Department of Agriculture (USDA) report confidently proclaimed: ``The post-World War II era of chronic surpluses is over.''
But within a year, the surpluses were back. Farmers who had boosted production to feed the world rediscovered low grain prices. They also found that their leap into the export market had changed their industry.
Mr. Gott's imaginary loaf of bread would be priced a new way.
``When they talk about market-oriented farm policy, I wish I knew exactly what they meant,'' says Bill Ramsey, rolling past snow-covered Illinois farmland in his pickup truck. ``It's naive, at best.
``To talk about supply and demand, free-market system, it would be great,'' he says, but ``it does not exist.''
``It never has existed,'' adds Kenneth Farrell, of Resources for the Future, a public-policy research group in Washington, D.C. ``The North Dakota wheat farmer is, in effect, competing with the Canadian Wheat Board, the Australian Wheat Board, [and] highly subsidized European farmers.''
But the concept of free markets is useful, he says, to show what is happening in US agriculture.
Until the export boom of the '70s, the price of most major US farm products was largely determined by events in the United States. In the '50s, only 10 percent of US farmers' income came from exports.
Now, farmers are very dependent on world markets. Exports account for 30 percent of their income. The '70s boom integrated farming into the international economy, just as technology and other forces had meshed it with the national economy. Now, at the Chicago Board of Trade, Bartholomew says, a major drought in Brazil can have just as much impact on soybean prices as a major drought in Illinois.
For farmers, this integration process has profound implications:
1. At least in the short run, farm income will become less stable as agriculture enters the volatile world market, economists say.
2. The federal government's traditional farm policy, including commodity price supports, will have less influence than ever over farm income.
Even now, US monetary, fiscal, trade, and exchange-rate policies are more important to farmers than farm programs, says G. Edward Schuh, director of agriculture and rural development at the World Bank. It is not generally recognized that as agriculture and other parts of the US economy became more dependent on trade, the world market itself was changing.
After World War II, an international capital market developed -- flush with Eurodollars and petrodollars, which could flow in and out of countries. In the early 1970s, after the world's currencies were allowed to fluctuate, this international flow of money had dramatic effects. And suddenly, agriculture and other export-sensitive industries became greatly affected by a broad array of nonfarm government policies, Mr. Schuh says.
In the early '70s, various government policies caused world investors to sell off dollars, and the dollar's value sank. This cheap dollar had a major influence in fueling agriculture's export boom.
But in 1979, when the Federal Reserve Board decided to clamp down on inflation, interest rates soared, foreign money flowed in, and the dollar strengthened dramatically. President Carter also decided to embargo US grain exports to the Soviet Union.
Farm prices plummeted -- and would have fallen even further, except for the rigid farm price supports at the time, Schuh says. This in effect set a floor on crop prices, limiting the bad news for US farmers in the short run. But this floor allowed foreign competitors to undercut US prices and take away US farmers' markets.
Experts say this foreign competition is already fierce.
``In my view, we are in the midst of the most competitive decade in farm export markets that the world has ever seen,'' said Daniel G. Amstutz, undersecretary of agriculture for international affairs and commodity programs, at an agriculture outlook conference last December. And the short-term future is not bright, economists say.
The world recession in the early '80s not only stopped the '70s boom, it contracted it, says Dennis T. Avery, senior agricultural analyst with the State Department. The rapidly expanding food and fiber demands of developing countries -- whose economies in the '70s were growing at a phenomenal 6 percent or more a year -- dried up.
Furthermore, international debt problems forced debtor nations to boost their own agricultural exports in order to earn valuable foreign exchange. Brazil is encouraging soybean production for export by offering farm loans with below-market interest rates. Argentina recently reduced its export taxes.
Meanwhile, the European Community boosted its own production -- going from net grain imports of more than 2 million tons in the 1979-80 trade year to net exports of 10 million tons four years later. Last year, the EC raised more wheat than the United States.
With these rising surpluses, the EC spent $5.4 billion in 1984 on export subsidies to unload them on the world market.
In the past four years, the US has sharply increased its own export assistance programs (not including PL-480, known as ``Food for Peace,'' distributions). And some observers, such as Robert Wisner, agricultural economist at Iowa State University, are concerned about the possibility of a US-EC trade war.
Global competition will get even fiercer, Mr. Avery says, because of technology.
``The developed countries are all facing the same policy dilemma: rising farm productivity is threatening to overwhelm their farm policies and budgets.''
In the past decade, Latin America and major countries in east Asia have boosted farm productivity by 35 percent or more. Saudi wheat production, projected at 1.3 million metric tons this year, is 10 times higher than it was 10 years ago. British cereal production is up 1 million tons a year, thanks to new winter barley varieties.
These productivity increases are expected to continue.
``I would expect that in 10 years, they could do what it took us 30 or 40 years to do,'' says Donald Duvick, vice-president of research at Pioneer Hi-Bred International, who recently returned from a visit to Brazil and Argentia.
In this new international environment, there are actions the US government can take to help bring down the value of the dollar, economists and policymakers agree.
But ``people who think that the whole problem is the strong dollar are going to find themselves greatly disappointed when it begins to fall,'' says Marvin Duncan, vice-president and economist with the Federal Reserve Bank of Kansas City. ``The lingering aftermath of the worldwide recession is more important to agriculture.''
A recovery in agricultural exports could be more than two years away, says Patrick M. O'Brien, a deputy associate administrator at the USDA.
Even then, he says, real growth in world agricultural trade might be only one-half to three-quarters the pace of the rosy '70s.