Agricultural Competitiveness

Trade Enforcement Unit

2012-01-25T14:36:00.000-08:00

The President announced in his State of the Union Address the establishment of a trade enforcement unit charged with ferreting out "unfair trade practices" in countries "like China." Well, hoorah... First, the United States has negotiated, by and large, good trade agreements...especially bilateral agreements. But, the fact is that we are very poor at enforcing them. In large part, China has not adhered to its own agreements made when joining the WTO. We have been apparently loath to enforce agreements with the Chinese because we have needed their financing for our fiscal deficits.

I am less excited about this statement because: (1) I do not trust the President to follow through with any meaningful, pro-trade enforcement of existing trade rules, and (2) I believe this Administration will quickly turn any "enforcement" into a good excuse for protectionist actions to benefit his labor benefactors. China is definitively a rogue nation when it comes to trade. China will pursue reckless mercantilist policies to the detriment of the U.S. (and others) as long as they are allowed to do so...I just do not think this Administration has the moral compass to do anything more than provide lip service from a teleprompter.

Why the WTO is Irrelevant--or Should Be.

2012-01-24T13:19:00.000-08:00

Let me preface my comments by stating that I am a proponent of trade. I do not believe that isolationism or protectionism is good for our domestic industries, consumers, or the rest of the world. But let me also emphatically state that I believe the World Trade Organization (WTO) is a morally bankrupt and useless organization. Let me give a few reasons:

Trade agreements should not be superior to national sovereignty. Trade agreement must bound countries to certain rules of behavior that are agreed upon in the agreement. But the WTO is a bureaucracy that has taken on a life of its own. It continually monitors and attempts to alter domestic policy, which was never the intention of the WTO (or the General Agreement on Tariffs and Trade (GATT) that led to the establishment of the WTO). First and foremost the WTO was intended to address tariffs and quotas. In the early years of GATT when that was the focus, the agreement had great success in expanding trade through lowering trade barriers. But after have that success, the organization has looked for a reason to exist, which has become domestic policy.
One man one vote is not the way to run an international body. The WTO operates under the principle of one man one vote, so a county like Zambia has equal voting power to the United States. When you are the big target, it is easy to be attacked by just a handful of countries with little real impact on world trade (small countries that do not trade a lot). There is certainly some benefits to protecting smaller countries from being bullied by big ones, but tyranny of the minority is also a problem. Small countries can grind the process to a halt if they wish.
Power to the people...err, technocrats. The WTO, like the United Nations, is an organization made up largely of technocrats from developing countries. These technocrats are not accountable to anyone but themselves. They wish to do what all unaccountable people do...gather power. Unfortunately, that power accumulation comes at the expense of making rational, meaningful policy decisions for the betterment of society. After all, they need job security, right?

It is truly unfortunate that the WTO has become such a useless, impotent organization. The world has much to gain from liberalized, "fair" trade that allows countries to both make independent decisions as well as face the consequences of those decisions in the marketplace. Under the Bush administration, the U.S. Trade Representative all but gave up hope on reforms at the WTO and began negotiating bilateral trade agreements. The Obama administration has done little on that front in a nod to its largest benefactor...labor unions. We had best pull our collective head out of the sand and develop a cohesive, comprehensive trade policy that does not rely on the WTO and does not subsume U.S. sovereign power to obscure technocrats that do not have the best interests of our fellow citizens at heart.

Happy New Year!!

2012-01-01T09:05:00.001-08:00

Happy New Year!! May God bless us with a prosperous new year with plenty of rain, sun, and good times with friends and family!!

Economic Evolution--A Warning

2011-12-24T07:03:00.000-08:00

For those of you that think the European economic system is wonderful...please move there for a while. For those of you that do not, here is some historical perspective on the battles being fought politically and economically here today:

Dictatorial measures, rapidly multiplied, have tended to continually narrow the liberties of individuals and have done this in a double way. Regulations have been made in yearly-growing numbers, restraining the citizen in directions where his actions were previously unchecked, and compelling actions which previously he might perform or not as he liked; and at the same time heavier public burdens, chiefly local, have further restricted his freedom, by lessening that portion of his earnings which he can spend as he pleases, and augmenting the portion taken from him to be spent as public agents please.

This quote was taken from Herbert Spencer in his book The Man Versus the State published in England in 1884. I hope that as we move into this new year we will keep in mind that the political debates that are raging today are not merely rhetorical devices used by politicians...they are, of course, but they are also battles for the very soul of who we are and where we will head as a nation over the next 100 years.

Farm Bill Probabilties...and Merry Christmas!

2011-12-23T17:53:00.000-08:00

First, and foremost, MERRY CHRISTMAS to everyone out there. I hope everyone has a great Christmas season and is prepared for a great new year.

I ran into a friend in the grocery store yesterday, and he asked about the farm bill. Of course, he knew as well as I that what we have is chaos...on many levels. The US House leadership seems in disarray over issues like payroll tax relief extensions and political grandstanding (not that grandstanding is terribly new). Agriculture had a relatively bipartisan proposal on the table, but the "super-flunkee" committee scuttled that process. The question is, what chance do we have to revisit the agreed parameters in the new year?

Money would be on the current proposal being a good starting point for the next round of debate, but the dynamics will certainly be different. First, we will be in the heat of presidential politics. The left wing of the spectrum will certainly be pushing Congress and the president to keep funding for pet projects...in this case food assistance and conservation. Conservative elements will be keenly interested in pursuing deficit reduction and scoring political points by curbing entitlement spending. One could envision a world where more than $23 billion were pulled from agriculture, with a vast majority of that coming from commodity, crop insurance, and other farm spending, and little additional cuts coming from food and nutrition. That, though, is just one possible scenario.

It should be an interesting upcoming year, though. It seems that the move toward more risk management policy in place of traditional income transfers has not lost momentum (although there is less discussion given the failure of the "super committee"). As I have said before, that seems to be a good overall move, and certainly is a movement away from the "entitlement" culture to one of shared risk. But whether that that approach can survive a prolonged debate where the traditional vested interests have an opportunity to gather steam remains to be seen.

At any rate, I hope everyone has a very Merry Christmas!! And a Happy New Year!!

MF Global

2011-12-21T07:12:00.000-08:00

Well, I apologize again for being gone so long. What seems to me to have been the longest semester on record is now over...

As many of you know, MF Global has been in the news of late. First and foremost, I believe that Jon Corzine knew of the transfer of customer funds to corporate accounts and should spend the rest of his life in jail. This is the most disgusting type of corporate fraud because it involves violating the customer's trust in the proper use of their money. One cannot claim laissez faire, buyer-beware should prevail here. How am I to possibly know what they are ACTUALLY doing with my money. Cautious inspection of company credentials, sure, but I cannot monitor their daily activity. So, this egregious violation of the trust of customers must be heavily punished.

Of course, I am speaking about the welfare of those customers...but, more importantly, punishment must be swift and severe for the better functioning of commodity markets in general. Corzine et al. may have done more to damage the long-term functioning of these markets than we can probably anticipate. First, there is the short-run effect of the justifiable outrage and mistrust that individuals will have about the loss of money. Unfortunately, though, that outrage will lead to calls for ever-increasing amounts of regulation. Some (smart) regulation is good, as it promotes fair competition to the benefit of traders, companies, and society. But over-regulation leads to increased costs, reduced market innovation, and, by consequence, less overall risk protection potential for those most in need of the market...the actual producers and users of commodities.

Future of Farm Policy--A Cautionary Tale

2011-10-25T07:46:00.000-07:00

Whether we like it or not, farm policy will not likely look anything like current policy in the near future. Gone will be the direct payment, counter-cyclical payments, and perhaps only a modified version of the marketing loan will remain. As an economist, I am not sure I am really all that sad to see them go. Payment limits insured that (as a percentage of gross farm income), subsidies were reserved for the least efficient farms. The direct payments had become a political lightening rod, drawing unwanted (and unwarranted) attention to agriculture. But what will arise from the ashes?

Currently, all of the basic proposals center around, in one fashion or another, a program that is centered on risk management. My instincts tell me that is a much better approach, from an economic perspective. First, by basing the program on managing risk, it allows producers to optimize operations and market profitability rather than "farming the program." Of course, you can skew the insurance program benefits in favor of different crops, but an actuarial sound program should be "crop neutral."

Second, an insurance-based program (whether subsidized or not) insures that producers have "skin in the game." They are not "getting something for nothing" and must be actively engaged in the growing of a crop to receive the benefits for that crop. And, finally, crop insurance is not currently covered by payment limits, which would circumvent the very dumb problem of limiting program benefits to the smallest, least efficient farms.

Sounds great...what's the catch?

In reality, the programs are all, in one form or another, attempting to address "shallow losses," or losses that are more frequent but less financially catastrophic as individual events (cumulatively, they can be quite damaging which is the argument that preventing a string of shallow losses is as important as protecting against the "big one"). So, the proposals all center around a highly subsidized insurance policy for the "deductible" portion of the normal insurance plans...that is, typically farmers will have insurance up to 70% of expected gross income; these proposals would provide subsidized insurance for the 70-90% portion of expected income.

That sounds ok...but...

First, because losses in this region of the income distribution are much more frequent, the insurance can be quite expensive. In order to make this feasible for producers to purchase, the subsidy rates much be quite high. That is not necessarily a bad thing, but think about this. If everyone is protected at 90% of their gross income...what is the probability of failure? If there is no failure, how do new, young farmers get into business? Do we not need some turnover to keep the blood fresh? How competitive and innovative do you have to be if you are essentially guaranteed 90% of your average income?

Of course, the devil is in the details. There is considerable potential slippage between the county or district average incomes (where most policies would use as a baseline) and individual farms. The policy provides more flexibility for farmers to create risk management strategies that fit their individual needs, etc.

Overall, the move to a risk management centered farm policy is likely more desirable than the current approach. But, I do think we need to pause and think about the long-term implications of the policy proposals rather than being completely myopically focused on short-term payouts.

News Story on Drought

2011-09-22T11:05:00.001-07:00

Here is a CBS Evening News story on the drought. For a network program, pretty well done:

Jobs Debate--Deficit Reduction

2011-09-09T06:27:00.000-07:00

President Obama has touted a plan of roughly $400 billion for "jobs". To be sure, he was throwing bones to everyone--some New Deal style infrastructure spending...a few payroll tax cuts. But, he was very light on how to pay for it...continue borrowing or printing money I suppose.

Majority Leader Cantor has implied, 'fine, but you have to offset that additional spending from somewhere else...no net effect on the budget.' This will spark the usual firestorm from the liberal economists...especially Paul Krugman. There was an interesting parallel argument recently about disaster relief that has direct bearing on this comment. You can read Paul Krugman's ideas about how we should pay for that here. Another economist, Steve Landsburg offers a concise, correct rebuttal here.

To summarize, Krugman appeals to a well known and accepted principle in economics, the Ricardian Theory of Public Finance, to make his point. Basically, Krugman argues that if the marginal value of an additional dollar of spending in every government program is the same (we call that general equilibrium), then when you are forced to add spending for a new category, those dollars should be removed from all programs proportionately. A little spending cuts...a little new taxes...a little new debt. Landsburg provides an example of why that would be wrong in simple terms:

Rather than write down the relevant equations, let me give you an example: Suppose you’ve got a perfect kid, who divides his time optimally among schoolwork, sports, chores and socializing. Now he wants to go to the prom, which is going to cost him some time. Rather than take all that time away from any one activity, he’s best advised to cut back a little bit on schoolwork, a little bit on sports, a little bit on chores, and a little bit on non-prom socializing. (It takes some hidden assumptions to reach that conclusion, but they’re entirely reasonable.)

But suppose, on the other hand, that your kid has not done his chores in a month. Then even if you agree that he really ought to go to the prom, it makes perfect sense to say “You’re not going to the prom until you finish your chores.”

And if your government is as far behind on spending restraint as your kid is on his chores, then it can make perfect sense to say “You’re not providing any disaster relief until you catch up on your spending restraint”.

Basically, then, to accept Krugman's argument, you must first believe that every dollar of current government spending is being spent in its highest and best use. I doubt even he believes that.

So, back to the jobs plan. One can certainly have strong philosophical challenges as to whether what is being proposed is actually going to do anything to stimulate jobs. But assuming we decide to proceed, how are we going to pay for it? Are we going to simply borrow the money (or raise taxes) to pay for this plan or are we going to require offsetting spending cuts elsewhere. I guess it comes down to whether you believe that the government is already doing the best job it can with your money.

Brazil Article

2011-09-07T06:38:00.000-07:00

Go here to see the more complete description of the Brazil trip and some of the gathered data.

Spending vs. Revenue

2011-09-06T10:31:00.000-07:00

There has been a lot of hubub about the debt deal and future spending cuts versus raising taxes. I wanted to take a minute to present some revealing, if not troubling, numbers. First, let's look at expenditures.

This chart shows the accumulated values of future obligations (to avoid the inherent large numbers problem, I have converted them to percentages; the data were compiled by MIT researchers and presented in a recent issue of Bloomberg Weekly). As you can see, healthcare and social security make up about 75% of all future obligations. Imagine that...3/4 of all future spending in the government is consumed with providing medicare and medicaid and Obama's new healthcare plan plus retirement in the form of social security. The gold bar represents all other government spending on defense, ag, interest, research, roads, etc., etc., etc. That thin little sliver up there is what we owe to others currently.

What's the point? Well, all this ruckus over the summer was about that thin little sliver. Really?? That represents the ants in the kitchen eating the sugar...the rest represents the alligators in the living room waiting to eat you. So, on the one hand...fiscal conservatives are right. We have a spending problem. And, in particular, we have an entitlement spending problem. But, what about the other hand.

Here, over the same period, are our future receipts. The totals are made to balance with the obligations. The bottom 65% represents true government receipts (taxes). The rest is the "fiscal gap" which must be made up. How do you make up the fiscal gap?

Print money
Borrow money
Raise money (taxes)

The first one is irresponsible. Debasing the currency is a one-way ticket to a banana republic. Short-term, small amount printing happens all the time, and is not necessary currency-debasing. But, this scale of printing would be catastrophic to currency values, ceteris paribus. The second one is what we currently do...borrow 40% of our spending requirements. In this case, that little sliver in the top graph grows and debt service chews up the gold bar until there is no discretionary room left in the budget. Finally, you raise money.

I know that raising taxes is the kiss of death with most, but there are actually two ways to raise taxes. First, economic growth generates additional revenue with no change in marginal rates. Second, you can change marginal rates. Tax code simplification and "loop hole" closing does lead to higher taxes for some, but those additional revenues can be used to lower marginal rates for almost all, which is a pro-growth policy.

Let's talk about "loopholes" for just a second. I do not consider tax breaks for charitable donations to be a "loophole." It is a deduction that fosters activity to contributes directly to a positive public outcome...private provision of charity and care. So that loophole makes good public policy...in my opinion. But, what is the positive social value of providing a tax break for someone's vacation home in Vail, CO? Closing loopholes will require some hard choices...and those affected will fight for them vigorously.

The lesson of the graphs above is that closing the fiscal gap and reducing the future burden of debt cannot be done on the back of budget cuts alone. It is going to require that some level of additional revenue has to be secured. We can certainly be creative in doing it, and simply raising marginal rates on the "rich" is not going to work.

Brazil Part 2

2011-08-19T18:03:00.000-07:00

Well, I have made it to the beaches of Rio. The meetings have been quite interesting and I have picked up quite a bit of information. I will outline most of that in detail in the September issue of Competing for Profit. But, one interesting tidbit was is that transport costs from Mato Grosso (a key production area) to the Santos port (the primary port of export) is around $0.08/lb of cotton. U.S. transport costs from Lubbock to LA is in the neighborhood of $0.05-0.06/lb. Because the cotton in Brazil is on the east coast, ocean freight to buyers in China are also larger, meaning that U.S. cotton still has some advantage over Brazil there. But, that could change as discussed in a previous post. In my newsletter article, I will discuss in more detail production costs, ginning, and transportation of cotton.

Overall, this has been a very productive trip. I hope that the information we have gathered will be useful to others.

Brazil Part 1

2011-08-13T07:02:00.000-07:00

I am currently in Brazil on a project. We are attempting to gather information about costs of production and transportation infrastructure to better understand the future competitiveness of Brazilian agriculture.

Here, we (myself, Dr. Parr Rosson of the Center for North American Studies at Texas A&M, and Dr. A.C. Correa of the International Center for Arid and Semi-Arid Land Studies at Texas Tech) are meeting with the Minister of Transportation of Brazil.

I will go into more detail in an article for the Competing for Profit newsletter next month, but I will attempt to summarize a few key points now and in subsequent posts.

The Government of Brazil has undergone several rounds of serious strategic planning on transportation needs (rail, waterway, and road). If/when completed, the transportation network will be extensive and substantially reduce the cost of delivering Brazilian agricultural products to port for export.
Progress on these plans has been steady, but slow. Like everyone, they are cash strapped and these projects have been underfunded relative to needs.
They have serious regulatory issues to resolve. For example, they are required to do environmental impact assessments for all projects, but they have not even developed a method for doing those with waterway projects...thus, those major waterway projects are proceeding very slowly.
The private sector (read here producers and shippers) are taking the lead and self-funding many of the projects themselves because of the long delays by the government.

The gist of the story is this. Brazil continues to face major obstacles in terms of transportation infrastructure. But, do not kid yourself, there are major financial incentives to get these projects done (hence the high level of private investment) and when complete will greatly enhance an already very competitive Brazilian agriculture.

S&P Downgrade

2011-08-06T08:10:00.000-07:00

Standard and Poor's downgraded U.S. debt from its coveted AAA rating to an AA+ rating with a negative outlook. This from S&P:

The downgrade reflects our opinion that the fiscal consolidation plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government’s medium-term debt dynamics.

More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011.

Since then, we have changed our view of the difficulties in bridging the gulf between the political parties over fiscal policy, which makes us pessimistic about the capacity of Congress and the Administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics any time soon.

That is about as strong a political rebuke as their is in the world of finance and diplomacy. S&P has hit the proverbial nail on the head. The debt deal, while an important first step, is woefully short of being relevant. Keep in mind that the projected deficit over the next 10 years was north of $10 trillion. The debt deal if fully enacted would reduce that by roughly $3 trillion. That means we would still be adding over $7 trillion in new debt. Secondly, S&P is correct that in the absence of any sort of crisis, the political parties are showing an intransigence akin to an old mule. Solving this problem is possible, but definitely going to require some hard choices and significant reductions in entitlement spending and a growth focused tax code.

Interestingly, one of S&P's issues for a future further downgrades is higher interest rates. Well, that is kind of a self-fulfilling prophecy. The downgrade will likely increase borrowing costs at least some. That will increase the debt burden on the U.S. and further deteriorate the fiscal position of the government. This issue will have to be considered some further.

In terms of agriculture, this outcome will have some impact. In the short run, it may further depress the dollar leading to higher U.S. exports. But, eventually, it will increase borrowing and input costs. This could all be averted if Congress would just consider some simple, but politically charged, solutions to the U.S. deficit problem.

The tax brackets need to be flattened and loopholes closed. Consider, for example, that there is a very good public policy reason for a tax deduction for charitable contributions. I think it is probably a good idea that individuals give to charities that are more efficient at helping people than the government. But, is there a really good public policy reason we are giving deductions for vacation homes in Vail? By closing loopholes, we can actually lower marginal tax rates so that many will actually receive a tax cut, not increase. Why do we not tax the value of health insurance provided by employers? Is that not earned income? Many of these choices will not be popular nor easy, but we are in dire straits here people.
The corporate tax rate should be driven very low. At present, the U.S. has the highest corporate tax rate in the developed world. These high taxes provide a significant incentive for corporation to avoid them by moving jobs and profits overseas. The tax rate should be low enough so that it is more expensive for them to try to dodge the taxes than to pay them. By providing the proper incentives, the result could be higher job growth in the U.S. Because many corporations already effectively pay zero (read GE and Obama's job czar Jeffery Immelt), this may actually increase tax revenue in addition to the additional economic growth it would create.
In exchange for closing tax loopholes, the Democrats are going to have to make significant concessions on social programs. These entitlement programs have grown to such an extent that they are crowding out other critical areas of the government. We simply cannot afford these programs.

On the chopping block, of course, are agricultural programs. So far, they have not been attacked heavily. But, they are "low hanging fruit" in the debate. They will be tempting for legislators to rob to keep more politically popular programs. Keep your eyes open going forward...and make contingency plans.

Market Sell-Off

2011-08-04T11:05:00.000-07:00

Given the rapidity of the market sell-off taking place, I felt it warranted a few comments. I will begin by stating that movements like this can have significant impacts on a person's net worth and retirement savings (mine included). But, this sell-off is, in the long-run, healthy for the broader economy. First, one must remember that the stock market is NOT the economy. It is an imperfect reflection of the overall economy that is heavily influenced by expectation, tax policy, monetary policy, and the demographics of the population (how many people are investing versus cashing out to pay retirement expenses). Generally, the stock market does tend to tell us something about the health of the overall economy, but one should not read too much into daily changes.

However, this broad sell-off may be an indication that the traders are finally coming to grips with the fact that the overall economy is not in particularly good shape. What economic growth we have experienced is tied closely with cheap money...that is, it has been artificial. To the American public's credit, they have not fallen for this scheme and, instead, have chosen to reduce private debt. The fall in the market will hopefully refocus attention on the real economic problems of economic growth, jobs, and price stability. These are the things that will solve both the wealth problem and government debt.

Debt Deal

2011-08-01T09:05:00.000-07:00

With a tentative debt deal on the table, the question is what will it hold for agriculture? At least in the short-run, the cuts appear to be smaller that first feared. According to FarmPolicy.com:

Specifically during yesterday’s interview, Chairman Lucas indicated that, “Right now, as the Boenher plan stands, there are no specific cuts in the agricultural spending. The alternative plan, very similar, coming from the Senate under [Sen. Majority Leader Harry Reid (D-Nev.)] poses about $15 billion in immediate cuts in agriculture- with some increased requirements for spending- so it comes out to be about a net $10 – $11 billion cut. The way they do that is, they propose, in the Senate version of the bill, to recalculate how the Direct Payments would be made in October so that producers would only be eligible for [59%] of the acres that they had signed up in the five-year Farm Bill- for the Direct Payments- instead of 85%.

So, there would be a substantial reduction to direct payments immediately. But, they were not proposed to be totally eliminated. That could come, however, later as the congressional committee appointed as a result of the potential deal would need to deliver another $1.5 trillion in cuts by late November. That is where the really cutting could get serious with cuts in entitlements, defense, and non-defense discretionary spending. Coupled with caps in spending, even if there are no hard cuts, real (inflation-adjusted) spending will decline in almost all categories. We will keep our eyes on this one over the next several months.

Popular Vernacular

2011-07-26T18:45:00.000-07:00

You know you have reached a new level when your programs are singled out in AARP ads! View the following:

Note the first item discussed as a targeted cut. While the Brazilian cotton research money is not popular on many fronts, this ad shows that agricultural spending of any type is getting headlined and offered up as a sacrificial lamb to save other "sacred cows." The demographics of the U.S. population made this sort of singling out inevitable.

PS. Sorry for my long absence. Summers get quite hectic between kids and travel. Hopefully posts will get more frequent this fall. I will have a few items of interest soon.

Time to Jettison Farm Programs?

2011-06-24T09:44:00.000-07:00

The American Enterprise Institute is holding a series of panel discussions about the myths of farm programs and their perceived need to jettison these programs. Of course, their objectives are to convince Congressional leaders and the American public that subsidies are harmful and should be eliminated. As a preview, I will hit some of the common high points of these arguments and discuss them a bit as a primer for the debate that will rage in the coming months.

1. Subsidies only go to large agribusinesses. It depends, of course, on what you call agribusinesses. Do subsidies go to large family farms...yes. That is a true statement. But, as I have stated on this blog before, these large farms are generating many times the amount of agricultural sales per dollar of government expenditure than smaller farms. So, I am forced to wonder what the objective of the programs are...to be as least efficient as possible.

In reality, farm programs primarily serve to keep the least efficient farms in business in only moderately economically stressful times and serve as a safety net for the most efficient farms in times of high economic stress. One can certainly make an argument that it would be socially desirable to minimize the amount of inefficient farms we support, and this has certainly been happening as the amount of government outlays for direct income support have declined. Interestingly, this approach runs exactly counter to some of the opponents of farm programs who wish to prevent large farms from participating to protect small farms. It is these smaller farms that are generally the least efficient, and thereby contribute the least to overall food and fiber production.

2. Markets will take care of agriculture and direct resources where they are needed. As an economist, I am particularly fond of this argument. Yes, markets will generally perform in this manner when left alone as long as there are no unpriced benefits or costs in the market (externalities) and/or the rest of the world is following suit. For one, we know that there are unpriced effects in markets (soil erosion, for example) that must be remedied by some form of government intervention (subsidies, taxes, regulations, etc.). Second, we know that the rest of the world is subsidizing agriculture too. So, in both cases, we know that we cannot achieve that ever-elusive "social optimal" perfect competition to which pure economists so dearly cling. Do not get me wrong, that method of analysis is quite useful for understanding policy impacts and markets, but because the assumptions are not met, it makes a poor prescription-making device. In more populist vernacular, this argument is akin to unilateral disarmament of nuclear weapons.

Is a world free of farm subsidies and trade barriers preferred to what we have...almost certainly. But, we have to ask ourselves whether we will ever reach that state.

3. Agriculture is not special. It should not be treated differently than any other industry. Certainly, agriculture is just one of many industries in the U.S. Why should it receive preferential treatment? I can almost guarantee that a cornerstone of many of the arguments that will be made at the AEI meeting will be that subsidies distort resource allocation, and, therefore, reduces the efficiency and economic welfare of the United States. I am an economist and can understand and appreciate that argument. But, the economic profession's single-minded devotion to the "efficiency" of a system is not productive. Economic systems must fit within and satisfy political and social goals. The economist's job is find the most efficient way of achieving a particular goal...not necessarily determine the goal.

Interestingly, though, you will hear opponents of agricultural policy speak about homeland security or national security policy as if that should carry special weight in funding arguments. What could be more strategic than food? How much political instability in the world is directly attributable to lack of food? How long does anyone think the thin veneer of civilization in this country would last under a condition of food shortages? I am not advocating here some "nationalization" of food or some other radical response. Rather, I do think it behooves us to think strategically about food production. What are we and are we not willing to pay for in terms of lost efficiency or higher prices to achieve some level of food security? These are debatable, but viable questions that must be addressed and that will not necessarily coincide with the economists' narrow view of efficiency.

4. Agricultural policy is a throwback to the Depression Era. Yes, absolutely it is. The construction of our policy today is largely an artifact of the conditions (crops grown, regional distribution, payment mechanisms, etc.) that were present in the 1930s. Does that mean that we should carefully consider options for construction of a program that more closely mirrors the needs and objectives of today's agriculture. Sure. Streamlining programs and better fitting programs to needs may result in efficiency gains and less government expenditure. Does the historical baggage of the Depression Era structures mean that there is no strategic rationale for programs today...hardly. We have had years and years of rising incomes, better education, and more complex financial instruments developed, but does that mean we should end social security?

5. Subsidies are harmful to American consumers. Really? There is an interesting two-sided argument that occurs with subsidies and food prices. On the one hand, some (read Michael Pollan) argue that agricultural subsidies dramatically lower food prices contributing to obesity. Others argue that agricultural subsidies have little impact on food prices and therefore do not benefit consumers. So which is it? Most of the evidence to date sides with the latter and concludes little overall effect of direct farm support on food prices. This is great if you want to counter obesity arguments, but not great if you want to argue that farm programs cheapen food. Although agriculture proponents often make the last argument as a rationale for programs, the evidence simply does not support that assertion. But, where is the harm to the consumer? It certainly is not higher prices, so a better definition of the harm is needed to evaluate the statement.

These are but a few of the items that will likely be discussed in Washington at the AEI conference. I am quite sure the debates will be heated, but hopefully their will be real debate and not the one-sided choir-preaching that typically occurs at these think-tank meetings.

Do We Really Understand What is Happening??

2011-06-11T11:17:00.000-07:00

"May you live in interesting times." That is an often-cited Chinese curse. Well, we live in interesting times. Markets are highly volatile. Do we or do we not have inflation? What will happen with changes in the federal budget?

There are a number of issues that are highly related, and standard economic models do provide some guidance. For example, there is, in general, an inverse relationship between commodity prices and interest rates (though interest rates are only one of many variables affecting prices). If an end to QE2 leads to a rise in interest rates, will commodity prices drop? Typically, we would answer yes. But, we are WAY outside our typical range of experience. At no time in our history have we had such a massive increase in money supply. How long will it take for that money to result in inflation? What other conditions must be met?

The point here is that our standard economic models are useful, but until we can begin to sort out the new dynamics, there is likely a large margin of error in expectations (not that any of us are particularly accurate in the first place!!). But, as we move forward, we must be cognizant of the facts that are influencing markets in the near and medium term.

Funny Observation

2011-05-19T06:54:00.000-07:00

I just noticed something the other day...it seems interesting to me how the people yelling the loudest for "sustainable" and/or organic food systems are the ones with enough money to pay for the higher price of food should the world "convert" to their way of thinking.

Does Cuttting Subsidies for Large Farms Make Sense?

2011-05-19T06:49:00.000-07:00

Farm subsidies are on the chopping block again as we move forward in debt-reduction mode. Rep. Ryan touted the oft-misused mantra that subsidies are going to large corporate farms. In fact, this post dispels that error. The reality is that larger farms are more efficient. Here, I outline a simple fact. Yes, larger farms get more payments. But, if you examine the economic output per dollar of government subsidy, "large" farms ($1 million+ in sales) generate over $100 per dollar of government subsidy. Farms at or below $500K in sales generate $20 or less in sales per dollar of subsidy.

To ask the question why we subsidize is legitimate. Obviously, the data clearly indicate that larger farms are being more efficient and generating more economic activity per dollar spent. Now, one can certainly make the case that these larger farms are getting only 10% or less of farm income from subsidies, so they will survive without them. But that smacks of means testing, and if you are going to means test in agriculture, why not means test for Social Security? How is "subsidizing" oil companies any different from subsidizing food? Should we be subsidizing farms or rural communities? Is the current system of subsidizing particular crops an historic relic?

These are all questions that will be raised in the near future (or are already being raised). It is clear that agriculture is going to have to give up things. The question will be what can/should be saved and what can be jettisoned with the least impact. That will be the subject of future posts. But for now, I wanted to focus a little data on misuse of terms. If we are going to proceed in a policy debate and reach a reasonable conclusion, we must first start by not distorting/misstating the facts.

Inflation??

2011-05-09T14:13:00.000-07:00

Inflation is a hot topic of late. I did a spot on Tom Keene's Midday Surveillance today (May 9) on Bloomberg TV. It seems that some experts agree and some don't (big surprise there). One expert talks about tight supplies and fundamentals, but still some support for commodity prices. Another expert believes that inflation is muted despite the rise in commodity prices. Interestingly, both Paul Krugman and Greg Mankiw agree with the last expert (highly unusual that these two agree on anything).

Here is my take...inflation is low as measured by the Bureau of Labor Statistics for prices excluding energy and food. Typically, we exclude food and energy because those price are volatile (the title of Krugman's post). Ordinarily, that makes perfect sense. But consider the following month graph for the CRB Commodity Index from 2004 through present:

Folks...that is not volatility. That is a steady increase in the price of commodities interrupted by the "Great Recession." I am not sure you can make a solid case to exclude commodity prices from an inflation picture when they look like this. Do these prices ebb and flow from quarter to quarter...sure. But, commodity price inflation is real right now. That inflation is being passed into product channels now...the more processed the good, the longer it will take to filter through, but it is there.

Generally, inflation is about too much money chasing too few goods. We have plenty of money but it has not been chasing too few goods as of yet. That is likely why many believe inflation is not a real problem. But do not hold your breath that will continue indefinitely.

Say it Ain't So...U.S. Cotton Subsidies DON'T Suppress West African Prices?

2011-04-29T07:16:00.000-07:00

This Bloomberg story brings into sharp relief what most researchers and analysts have said for some time...U.S. subsidies do not affect West African Farmers despite what OxFam and others would like the public to believe. No, the story does not directly say that. What is does say, however, is that despite record high world prices for cotton, West African farmers were not seeing the benefits. Why? Because their government pays them a fixed price regardless the world price. So, if they are not benefiting from higher world price, they were not affected with "lower" world price from U.S. subsidies. On this issue, its just that simple. Now, perhaps, we can get on with our lives.

More "Food for Thought"

2011-04-26T11:52:00.000-07:00

I was recently asked by a philosopher (really, one with a philosophy degree) to ponder the question of why we eat meat. After all, we pump a lot of grain into animals, there are environmental problems with animal agriculture, and according to the World Watch Institute, animal production is so energy intensive that is might as well be a subsidiary of the energy industry. Below is my response to him. In an earlier exchange, I had mentioned that rice was the most highly cultivated crop in the world yet produces more methane that cattle feeding and that meat was an efficient way of getting protein in human diets, so that is the reference there. With that background, here goes:

I suppose you can ask the same of consumption of ANY product. Not just meat. Do you have any idea how much water in in the Florida oranges or California grapes you eat? What about the food miles of the coffee or tea you have every morning? You want to ship cotton from West Africa to China and then around the world...how much energy would that take? Meat is no more of an energy hog than any product we consume. It is just the target de jure of the left wing at the moment (this while they are eating their imported grass-fed Argentine filets). Corn does consume water. In Texas, however, producers in the heavy corn producing areas are limited to the amount of water they can pump [a reference to a statement he made about depleting aquifers]. Also, new varieties are being tested than can be grown on half of the water currently required. Manure is composted and used as soil amendment, fertilizer (both retail and commercial), etc. Antibiotics are a real issue, but one that is quickly being addressed by the industry [a reference to a statement he made about antibiotic use damaging everyone]. Quickly, meat is being produced with no antibiotics (except for dosages for actual illnesses). There are no more fossil fuels being used to produce beef than the cotton you wear, corn you eat, coffee you drink, etc. The fossil-fuel consuming, greenhouse gas emitting myths of meat have largely been debunked by researchers at UC-Davis (cannot think of the name off the top of my head).

One acre of rice produces the same amount of methane as a ~55,000 head feedlot in one year. You do the math on GHG emissions per calorie consumed on that one. There are 120 grams of protein in one pound of steak (slightly less cooked because cooking will denature the protein). There are 10.7 grams of protein in one pound of cooked white rice. So, over 10 times the protein. There are roughly 2 pounds of corn to produce one pound of beef. There are 11 grams of protein in one pound of corn. Therefore, by utilizing 22 grams of protein (in the corn), you get 120 grams of protein in meat. Comparably speaking, you need over 10 pounds of rice to get the same level of protein (and the associated water consumption...talk about a water hog...and methane emissions). That is what I mean by meat is a much more efficient source of protein.

I'm just going to guess here (and you correct me if I am wrong), that you have spent considerable time reviewing literature from sources like Greenpeace, World Watch Institute, OxFam, Gates Foundation, etc. I think sources that challenge the status quo are useful in forcing changes for the better. However, most of these sites have taken on the aura of "religion" in that they refuse to have their sources, motivations, etc., challenged. They are beyond reproach because they are "just trying to make a difference" and because the media share their value set, they do not challenge them. They simply "yell louder" than more rational, scientific voices. Note that the founder of Greenpeace left the organization because of what he deemed to be "unscientific, unsupported" proclamations from the organization (referring specifically to Greenpeace's call for a worldwide ban on chlorination of water) (http://www.churchofglobalwarming.com/2010/06/greenpeace-founder-explains-why-he-left/ ; I apologize for the obscure source, but it is a reprint of the article from the Wall Street Journal (linked there) but you must have a subscription to read the full document). There are a number of changes that I would like to see, for example, in beef production. I think a diet with relatively more grass and less grain would lower overall cholesterol and fat in beef (I have no proof of that statement, its just an assertion at this point). It will come at a cost, though...higher cost of production because of lower average daily weight gain. Working scientifically on genetics that better utilize grass would close that cost differential a bit, but not completely. But until the ECONOMICS drive that choice, there is no other way to do it besides outright bans (the socialist/communist approach).

Ultimately, the functions that produce, process, ship, and deliver food to you must be performed by someone...you, your neighbor, or multi-national corporations. Consider the tomatoes growing on your back porch. Tasty? Yes. Fresher than those at Wal-Mart? Yes. Sustainable? No. Did you realize that you will use nearly 10 times the quantity of water to grow those than that California or Canadian grower? He is set up to handle large scale watering...knows exactly how much and when to water so as to maximize yields, etc., etc. Does this mean I want you to quit growing tomatoes...no. That is YOUR choice. You pay your water bill. You decide how much time and money you are going to devote to your tomato sandwich. You make that choice. Not some intellectual who THINKS he knows better than you what, where, and when you should eat.

Take a look at this article for a bit of perspective: http://cookingupastory.com/organic-agriculture-is-it-sustainable-is-it-viable If you note the comment at the bottom from Organic Trade, they use a UN study to counter my claim that we cannot feed the world with organic methods. They claim the report says that organic production may be their best hope at growing food sufficient for them. Hogwash. They ARE GROWING ORGANICALLY and are literally starving in many places. The more proper response might be that growing organic foods for rich markets may be the best way of raising income levels...that may be true. But, again, I would note that Europe precludes imports from many of these countries on "safety concerns." That is another debate for another day.

I share this with you so that you may understand the frame of mind of some of the even less adamant opponents of U.S. production agriculture. This gentleman has made many good points in our exchanges. Asking tough questions forces us to hone our own arguments. But, unlike these sorts of academic question/answer sessions, these sentiments are being foisted on the American public by some groups as facts. Without some self-defense, agriculture will lose the PR battleground.

Public Pressure and Budget Priorities

2011-04-21T07:50:00.000-07:00

This Washington Post article is revealing about the pressures that will mount over time for agricultural programs, big and small. In particular related to cotton:

Also unchanged: a program that pays cotton and peanut farmers to store their bales and bushels in warehouses. The idea is to let farmers keep their crop off the market while prices are low. The federal government will still budget $2 million a year, despite criticism from Obama and before him George W. Bush.

What they author did not quote, but I provided him for the story was this report that shows that the costs of not having that $2 million in potential expenditures was in the $100-$300 million range to U.S. cotton producers. Also mentioned in the report was the market access programs at the Foreign Agricultural Service. These issues are really just heating up, but the Post article is just the tip of the iceberg on what is likely to be called on the carpet in the near future. Some of these programs should and will go, but everyone better be prepared to justify the return on investment of programs if they exist.

More on China Cotton

2011-04-20T09:35:00.000-07:00

The news just keeps rolling out on China and cotton. In particular, data coming out of China indicate that perhaps their plans of increasing cotton acreage have not been met. This will likely provide some support to cotton prices in the short-term. But the drought situation in Texas will likely have a larger impact this year. It could be that China has excess cotton and are trying to talk the price up so they can sell, but it is more likely that they truly believe the crop will be smaller than anticipated due to lower plantings that they would have preferred. Keep an eye on this situation in the short-term for selling opportunities if you are a producer.

Food for Thought...

2011-04-18T13:05:00.000-07:00

This hypothetical presidential address for 2026 gives some good perspective on the fiscal mess we are in and the hard choices that must be made today to avoid this outcome. Note, the author considers agricultural subsidies as "non-essential" government activities. This might provide some perspective on where agriculture is in the pecking order of programs moving forward...

China and Cotton

2011-04-18T09:35:00.000-07:00

China recently announced that it will initiate a purchasing program for cotton for the coming year, with the stated purchase price at $1.40 per pound. That would seem like a good thing, right? After all, their purchasing would lend support (some think a base around $1.20/lb at port given that price) to U.S. cotton prices.

A recent study released by us, though, brings that conclusion into question. The program would, in fact, increase carryover stocks in China by around 10%, on average, over the 5 year baseline period. And, the program will likely result in about a 1% increase in U.S. farm price in year one. But, every year after that, the average U.S. price will be slightly less than the baseline with slightly higher exports and slightly lower U.S. carryover.

The result of the policy, then, is minimal at best on U.S. cotton producers, but will increase Chinese stocks (interestingly, the policy only modestly, about 2%, increases global stocks). So, why are the Chinese embarking on something that will have such a small overall impact. A few thoughts:

The Chinese mills were caught flat-footed this past year with empty warehouses and spiking demand. The result was that they were forced to enter cash markets with a short supply and pay premium prices to keep mills running. They do not want that to happen again because that made them lose their competitive edge with some other countries.
They are trying to talk down December 2012 prices. They are pretty sure that they can do nothing about this year, but if they can talk down prices in out years, they can lock in supply if/when supply runs short then.
They are, like everyone else, responding to the demands of farmers. Farmers have received much higher prices of late and want to lock in those gains for the longer term. They understand that prices will likely recede over time, and want to make sure that they capture those gains, even if they come from government support.

The policy is likely a combination of many factors. But, it seems apparent that they are trying to balance low stocks for cotton with high prices for other commodities and producers that seem reluctant to dramatically increase acreage.

Corn, Energy, Food, and Some Thoughts on Problems Ahead

2011-03-02T10:47:00.000-08:00

Recent price volatility (more on this later) has piqued everyone's interest in basic commodity prices. I am going to focus here on corn because of its broader implications and linkages in other sectors. Take this long-term price chart to start.

The long term average price of corn prior to the 2006-07 period was around $2.20 per bushel. But note what happened at that time...we have jumped to a much higher average price with a strong floor in the $3.30-3.40 per bushel range. Why? The Renewable Fuel Standard is a primary culprit. Of course there are many variables at work here, but the ethanol mandate placed a clear floor under corn consumption. Don't believe it, just check out the following patterns in corn usage (credit for the following two graphs goes to Mark Welch in Texas AgriLife Extension):

The ethanol mandate has subsidized the usage of corn tremendously. The use of corn for ethanol has, so far, been an issue of surplus extraction. That is, ethanol has drawn down corn stocks. But, consider the following:

The historical long-term average stocks for corn were about 89 days of use. We are currently sitting around 53 days of use. Certainly ethanol is not the only cause of this, but it sure is not helping the stocks situation. Critically, though, when stocks are low relative to use (or historical averages), price volatility tends to increase. Volatility in itself is not necessarily "bad," especially if you are a speculator. But, it definitely complicates the price discovery process. Volatility represents uncertainty about the impacts of new information on future projections of market outcomes. But, volatility also increases the price of risk management instruments like options which are priced to some extent off that volatility. So, to the extent that ethanol has drawn down stocks and increased volatility, it has also increased the cost of doing business for corn farmers...be careful what you ask for...

But the story does not end there. Corn is a primary input into livestock production. A previous graph shows that corn consumption for feed has been on the decline as rising prices from ethanol pressure have increased the cost of feeding animals. Due in part to this rise in corn prices, we are at an all-time high in retail beef prices as shown below (thanks to Don Close at Texas Cattle Feeders for the use of his graph):

The lower lines show average retail beef prices for the last several years and 5-year average. The red solid (then dashed line) shows this year (and projected for the remainder of the year). WOW! But even more startling is the dotted red line above. That is the "projected" retail price of beef taking the current price of feeder cattle going into the feed lot plus normal margins and cutout percentages. So, do you still think that corn prices are having no effect? Certainly we will likely see a demand response before retail prices reach that level, but the point is still made.

The food argument is particularly disconcerting. In the U.S., food price inflation could have an impact on slowing down economic growth (along with energy price inflation). Ben Bernanke recently commented that he did not think this inflation was permanent. We will see. But, even if it does, it will hurt the U.S. far less than other places. Consider the following picture on population growth:

Clearly, population growth is the highest in the poorest countries. While that does not directly affect the United States, social unrest on many of these places can have profound impacts on energy prices (witness recent events in North Africa) as well as social costs for attempting to maintain the peace through military or public intervention. And if we look at current demand for grains:

We have returned to the highest levels of per person grain consumption...with a lot more people. Bottom line is that the upward pressure on grain prices from demand is not going away soon.

So what does all this mean? Here are a few thoughts:

Expect price volatility to result in political volatility as politicians wrestle with out-of-control budget deficits, but growing uneasiness about food price volatility,
Expect ethanol policy to become increasingly under fire as a primary culprit of food price volatility, and
Expect the developing world to be used as a weapon in the arguments about ethanol policy (witness former President Clinton).

The debate is just beginning.

ICE Futures and Speculation

2011-02-09T08:26:00.000-08:00

The ICE has attempted to put a clamp down on speculative trading in the cotton market. Uh-huh. It sounds like a reasonable idea to say, "hey, we don't want to drive out speculators, we just want to limit their size relative to the overall market." After all, the 2008 fiasco was largely due to large speculators in the market. Not that these speculators were attempting to "manipulate" the market. Rather, these speculators were just so large relative to the overall market, their moves had huge price implications.

So, flash forward to today. Rapid run-ups in price...ICE has learned its lesson and is going to jump in to save the day. Only problem...this run-up in price is being heavily driven by market fundamentals. But, given the short supply, the Exchange believes it must intervene to prevent manipulation...OK...laudable goal.

Question? How are you going to implement it? If the speculator is making sufficient money influencing the market, are position limits going to be effective. If I had 900 contracts and you told me I could only have 300, would I not just create three entities and still have 900 contracts? Surely there is some thought going into this and I am just not aware.

At any rate, I appreciate attempts to keep futures markets viable for the price discovery process. One of the key competitive advantages US producers have had over the years is the ability to forward price based on the futures market and get equity financing for their operations. I would hate to see that destroyed because some large speculators destroyed the functioning of the market.

Again, however, we best be careful. This is not 2008. Political/emotional responses to this market may do more damage than the market itself.

The Ostrich

2011-02-09T08:04:00.000-08:00

This article in the New York Times shows the Struthio camelus (the ostrich) in his natural habitat. Ben Bernanke seems to be operating in some sort isolated vacuum, or has his head in the sand. Consider the following:

“On the inflation front, we have recently seen increases in some highly visible prices, notably for gasoline,” Mr. Bernanke wrote in his statement. “Indeed, prices of many industrial and agricultural commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply.”

Mr. Bernanke added: “Nonetheless, overall inflation is still quite low and longer-term inflation expectations have remained stable.”

This sounds remarkably like comments from Mr. Greenspan years ago..."what housing bubble?"

There are certainly downward pressures on price left in the system, and we are certainly not in some sort of rapid economic recovery. But, if we do not recognize that countries like China are growing and experiencing inflation and that is going to have an impact on us...we have our head in the sand.

Land Values

2011-01-26T08:43:00.000-08:00

As we enter the farm subsidy/budget cutting debates, one of the oft-cited drawbacks of farm subsidies is that they increase land values by capitalizing the value of the subsidies into land. This argument makes sense from a conceptual standpoint. In general, the value of land should reflect the discounted value of net cash flows. Because farm program payments enter into net cash flows, then, they must affect the value of land. How much is an empirical question.

Proponents of farm subsidy cuts often cite the higher land values as a reason why U.S. agriculture is not cost competitive with other countries and that cutting subsidies will improve competitiveness of U.S. agriculture. Defenders of farm programs often state that wealth is tied to land values and reducing farm subsidies will damage the equity that farmers have built in land values. And, even other groups will argue that farm subsidies only benefit large farmers to the detriment of smaller farmers. Who is right?

We have been examining this issue for a while now, and I want to summarize some key findings. First, there are a number of factors that will influence farm land values: agricultural productivity (the ability of the farms to generate profits), potentially farm program payments (for the reason mentioned above), but also non-farm items like alternative competition for the land, population density, and proximity to urban areas undergoing growth. We conducted an analysis of land values on a county-level basis across the U.S. controlling for those factors (I will post a full paper later with all the technical details when we finish it). We were then able to isolate the effects of farm program payments on land values after controlling for other factors. The graph below is illustrative:

The blue counties are where, after controlling for other factors, farm program payments actually had a NEGATIVE effect on land values. Yes, that's right...negative. But, this graph is a little misleading because it includes all counties with agricultural production irregardless of how much agricultural land was used for farming (as opposed to ranching). So, we limited our analysis to the counties where over 50% of agricultural receipts were from crops. The resulting graph is below:

Here, we see a much more diverse mix of where the impacts of farm program payments are having a positive or negative on agricultural land values. But why the negative values? The best explanation is that after controlling for population pressures and agricultural productivity, the program payments are essentially keeping less productive farmland in production. That is, the farm programs essentially subsidize smaller, less efficient farms to stay in production rather than selling out to larger farmers or having that land developed (higher, more profitable uses in either case), hence resulting in lower land values where that outcome is more predominant.

But, keep in mind that the effects of either the positive or negative effects are VERY SMALL. In general, the effects range from -1 to 0.5% change in land value. Compare this with the positive effects of higher farmland productivity accounting for 10% or more land value enhancement.

Bottom line...agricultural subsidies have marginal impacts on land values at best (and there is not a general rule that applies across the country as a whole). More likely, however, is that these subsidies are keeping less productive farms in business. So, politically if you are after goring the ox of large farms and agribusinesses, farm program payments may hurt, but they will likely hurt smaller, less efficient farms more.

Direct Payments

2011-01-25T05:42:00.000-08:00

As the budget-cutting begins to heat up in Washington, it is becoming increasingly apparent that direct payments are on the chopping bloc. This article highlights the quandary the Republican majority is in regarding farm program payments. Of course, at present, counter-cyclical payments are barely operational due to high prices, so there will be no projected budget savings from axing those programs. So, direct payments are the only real place to get any money out of the farm subsidy pot for deficit reduction.

The real problem facing farm subsidy advocates is that farm income without farm program payments is at record levels and, at least some parts of agriculture (read corn), are getting substantial direct and indirect subsidies from ethanol and biofuels. So, in a time of tight budgets, farms are an easy target.

I know...ag subsidies make up a small fraction of USDA's overall budget and a tiny fraction of overall spending. But, as reported here, everyone's ox is going to be gored...some more than others. The trick will be designing a program that gives risk protection, but is only operational when it has to be (direct payments come irregardless of the level of farm income) so that it demonstrates budget savings under current prices, but provides a safety net for farmers in case prices come crashing down.

Bottom line...expect some very strong challenges to farm subsidies going forward in general, with direct payments being particularly in the cross-hairs. This spring is likely to be a very interesting political season.

Locavore's Dilemma

2011-01-24T06:27:00.000-08:00

The term "locavore" has sprung up of late, meaning people who believe we should only eat (or predominantly eat) foods grown locally. This movement has pushed for laws requiring school cafeterias to purchase local produce, etc., to "help the local economy" or "provide more nutritious foods" for kids. All of these arguments are mom and apple pie...they sound good.

But, good friends and colleagues from Oklahoma State Jayson Lusk and Bailey Norwood recently published an article that is worth reading (it is not very academic and accessible to all so take a short read). Basically, they argue that the locavore's typical arguments are false. They rely heavily on a 200 year old principle of economics called comparative advantage, which holds that everyone is better off when each individual (country, region, etc.) specializes in producing what it is comparatively better at producing. Why would people in North Dakota produce pineapples in expensive green houses when they could import it from Hawaii and send wheat to Hawaii so they can have pasta in their Italian restaurants?

But, that is precisely what the locavore advocates. An economist would answer that if it were cheaper to produce pineapples in North Dakota, they would already be doing that. Passing a law that forces stores or school cafeterias to purchase it just does not make sense. If you want to mandate better nutrition in school cafeterias, fine. But, why not do it in the least cost manner?

Now, this is not to say that there is anything wrong with someone wanting to raise their own garden. I do that myself. But, I do that for the enjoyment of it, not for cost reasons. It would cost me a lot less to buy my food at the store. The article by Lusk and Norwood clearly demonstrates, though, that forcing the system to purchase locally makes everyone worse off in the aggregate...they have spent more for less food and did not really stimulate the local economy (that is, the added costs of the food negate the added benefits of income in the local area).

I know a lot of you out there are saying, "yeah, that's right...those locavore nuts are crazy to think that forcing us to buy that locally grown organic stuff is good policy." But if you agree with that statement, ask yourself if you agree with the "Buy American" provisions in trade law. It's the same principle.

China Subsidies

2011-01-24T05:58:00.000-08:00

China released information recently that it will infuse about $15 billion in agricultural subsidies. According to the news story, the bulk of the funding (about $12.4B) will be spent purchasing farm equipment such as tractors and harvesters. The remainder will be spent on direct subsidies to farmers to encourage production of grains and cotton.

This story is worth of a couple of comments/thoughts. First, this amount is roughly the total U.S. direct spending on agricultural subsidies. Given that the U.S. economy is roughly three times that of China, this means that their spending is roughly three times as large as a percentage of gross domestic product (GDP). But, this does not include items such as the effects of their state trading enterprises and other forms of indirect subsidies (such as lower environmental and labor regulatory costs, copyright infringement effects, etc.).

Second, the signal of the choice of subsidies is, as it always is with China, a quandary. Are they signaling an expectation of labor shortages in the industrial sector and therefore replacing labor on the farm? Or, are they simply under the assumption that farm equipment will make farming more productive (and profitable), thereby encouraging food production. I'm assuming that they are not stupid, but in desperation to increase self-sufficiency in grain production, they may be making a fatal error of releasing too much labor from the rural areas that will migrate to the cities increasing demands on social services and crowding already overcrowded urban areas.

Whatever the case, China has clearly and unambiguously stepped into the world of subsidizing agriculture. The long-term implications of this move is more competition for U.S. agricultural products if and only if Chinese production rises faster than their population. Something to keep in mind...

Water Research

2011-01-20T09:00:00.000-08:00

After a long "vacation," I am finally back in a position to post more thoughts and ideas. Here is a short article on a project we are conducting involving the economic impacts of water policy in the Texas High Plains. Basically, we are examining the impacts of water availability changes on the farm and agribusiness sectors. As those results become available, we will release them and I will post them here. There are some interesting findings.

Agricultural Research

2010-12-14T05:36:00.000-08:00

Agricultural research has long been the key to competitiveness in U.S. agriculture. But, we are entering a critical phase. Below is an opinion piece I penned at the request of the College of Agricultural Sciences and Natural Resources at Texas Tech found here. What is not covered explicitly in this piece is that the university, state and, federal government are facing budget issues and agricultural research funding is on the chopping block in many areas (the administration at Texas Tech, for example, has already indicated it will voluntarily give up specially appropriated "line-item" funding for agricultural and other research areas, which will effectively gut some research programs, in an attempt to cover projected short-falls; but that may have been premature). Spending control is a critical part of future government action, but it is important to recognize the priorities and tradeoffs that are being made.

Agricultural research is often long-term, so a budget reduction today is not felt today, but over the ensuing years to come. And, once that capacity is lost (a valued researcher or program leaves due to lack of funding or retirements are not replaced with new researchers), it takes many years to rebuild. So, we need to carefully consider where we are going to cut budgets because some have short-term and some have long-term implications.

Agricultural Research

Carrying the Water for U.S. Competitiveness
By Darren Hudson

Less than 2 percent of the American population lives or works on a farm. But, supplying input to those farms, processing the product, transportation, and retailing of food and fiber products collectively accounts for nearly 20 percent of U.S. employment and economic output. On the Texas High Plains, that percentage is much higher – about 40 percent. And, around the globe, agriculture forms the foundation for the economies of many nations.

Food and fiber production represents a cultural fabric that has bound together communities and fostered economic development across the country and the world. Rural communities have long depended on agriculture as the lifeblood that funded schools and communities and provided employment for much of the rural population. The fact is, our present position is the result of many, many years of agricultural research.

Food Availability. Beginning in earnest in the 1800s, agricultural research focused on increasing the amount of product produced per farmer through breeding, mechanization, and chemical applications. These developments reduced the need for labor on the farm, thereby freeing up labor for industrial development. The progress has been such that a farmer typically fed 4 to 5 people in the 1800s, and now a typical U.S. farmer feeds around 150 people.

Along with the increase in food availability, real food prices have declined. Coupled with increasing real incomes from industrial development, the United States went from spending almost 50 percent of its income on food in the early 1900s to less than 10 percent today. That means more money can be spent on education, housing, entertainment, etc. And, most all of this decline can be attributed to agricultural research.

Technological Development. U.S. farmers are productive as a result of past research. But, they’re facing increasing competition from foreign producers who face lower labor, chemical and other costs. We will not have abundant, cheap labor in the United States again. So, technological development is the primary means of maintaining competitiveness.

Why should we care? If foreign food is cheaper, why not just import it? Well, first and most obvious, food security for this country is a vital element of national security. But, as already noted, agriculture forms a foundation for nearly 20 percent of U.S. economic output. Losing that production would both undercut our security, as well as our sources of employment and income.

Global Population. Put simply, publicly funded research has been the cornerstone of agricultural development. Most studies of rates of return to agricultural research generally indicate a return of between 30 to 70 percent. That is amazing considering the rates of return of many other types of research. But, agriculture has become a victim of its own success. Because food is available, cheap and safe, the American public takes for granted that we will continue to have our food without continuing to focus on agricultural research.
Out of sight, out of mind… But, the fact is that global population continues to expand. Food production must continue to expand if we are to meet the needs of a growing population. And, with growing incomes in China and other parts of the world, they’ll be demanding higher valued food products, increasing prices at home.

Large Dividends. Tighter budgets at the government level, changing short-term priorities at universities and government agencies, and the comfort level of the American public with current food production levels have all conspired to pressure future funding levels. Unfortunately, there are significant time lags, often as much as 30 years, between investments in basic agricultural research and the ultimate outcomes in the private sector. So, decisions we make today will affect both short-term research priorities and investments, as well as long-term agricultural productivity and competitiveness.

Clearly, past research expenditures have paid large dividends for society in terms of food supply, price and safety. Future competitiveness of U.S. food production hinges on technological advances from research. Investing in the future of U.S. agriculture is a sound, profitable decision. Agricultural research cannot become a relic of the past if we hope to sustain our economy and nation in the future.

Cottonseed Endorsement Announced

2010-12-10T12:53:00.000-08:00

This was prepared by Shawn Wade of Plains Cotton Growers and is provided for your information...

New Cottonseed Insurance Endorsement Expands Cotton Risk Management Portfolio

Friday, December 10, 2010 By Shawn Wade

A two-year effort by Plains Cotton Growers, Inc. (PCG) to develop an all-new cottonseed insurance endorsement under the umbrella of the federal crop insurance program has cleared its final hurdle and is now ready to be offered to cotton producers throughout the Cotton Belt during the 2011 growing season.

Officially known as the Cottonseed (Pilot) Endorsement, the product will be available for purchase as an optional insurance endorsement to cotton producers (Upland or Extra Long Staple) who purchase a qualifying buy-up policy of insurance on their cotton lint through the federal crop insurance program for the 2011 growing season.

The Cottonseed Endorsement is best described as a companion endorsement that extends yield-only coverage to growers who purchase a qualifying APH-based buy-up plan of insurance (Yield or Revenue) under the new Combo Policy provisions for cotton. The endorsement will not be available to growers who purchase CAT, GRIP or GRP cotton policies.

“From the start of this process in late 2008 PCG’s goal has been to do everything we could to facilitate the development of an insurance product that cotton producers can use to insure some portion of the value of the cottonseed they produce,” says PCG Executive Vice President Steve Verett.

A prominent feature of the Cottonseed Endorsement was its establishment as a nationwide pilot program, which means the product will be available for purchase by growers in every cotton-producing county in the United States during its evaluation period.

Premiums for the Cottonseed Endorsement will be calculated using a national cottonseed price (which has been set by USDA RMA at $0.09 per pound, or $180 per ton, for the 2011 growing season) and the premium rate applicable to the growers approved lint yield for Yield coverage under USDA RMA’s Combo Policy provisions. Growers purchasing Revenue coverage on their cotton lint will also have their Cottonseed Endorsement premium calculated based on the rate applicable to Yield only coverage at their approved yield level.

Premiums applicable to the Cottonseed Endorsement will qualify for the same level of federal premium subsidy as the producers underlying cotton lint policy.

From an implementation standpoint, the Cottonseed Endorsement is designed to be easy to understand and administer and requires no additional record keeping by participating producers or insurance providers.

To avoid producers having to provide additional cottonseed production records, cottonseed yields used to establish coverage under the endorsement will be calculated using a state-based cottonseed conversion factor multiplied by the producers approved cotton lint yield.

The cottonseed production guarantee will then be determined by multiplying the resulting approved cottonseed yield by the coverage level selected by the grower for their cotton lint policy (Yield or Revenue). Multiplying the cottonseed production guarantee by the national cottonseed price established by the USDA RMA will determine the total value of coverage provided under the endorsement.

In the event of a loss, growers incurring losses to their cotton lint sufficient to trigger an indemnity would be paid for the corresponding level of loss on cottonseed. Cottonseed losses will be determined by subtracting the cottonseed production to count (determined by multiplying the total production to count of cotton lint before quality adjustment by the cottonseed conversion factor) from the cottonseed production guarantee.

For additional information about the Cottonseed (Pilot) Endorsement producers are encouraged to contact their insurance agent or crop insurance provider to learn how the endorsement can work for their operation.

Yet Another Climate Conference

2010-11-29T08:51:00.000-08:00

Farmpolicy.com has a lengthy discussion today of an upcoming trade conference. A couple points are worth noting. From the Washington Post: "Mexico is battling billionaire drug mafias armed with bazookas, but when President Felipe Calderon ranks the threats his country faces, he worries more about methane gas, dwindling forests and dirty refineries." Uh-huh. The article goes on:

“Calderon hopes to play a leading role as host of the United Nations climate conference starting this week in Cancun, where he will advocate a ‘third way’ for developing countries such as Mexico: making commitments to serious, verifiable reductions in greenhouse gases in exchange for billions in aid and technology transfers from big polluters such as the United States and European Union."

I see...so another way to transfer wealth from the developed nations to the developing world. Yes, that makes for good environmental policy. And then there is this oft repeated little falsehood out of the Financial Times:

“The figures are stark. Livestock produce 18 per cent of global greenhouse gas emissions, more than all the aeroplanes, trains and automobiles combined. They chomp what grows on 80 per cent of the world’s agricultural land and swallow up, directly or indirectly, 8 per cent of our water."

In fact, the Environmental Protection Agency puts animal agriculture at 2.8% (see here for an earlier blog on the subject with a link to the EPA study). But, I suppose if you repeat a lie often enough it become the truth. In fact, the 18% number includes the transportation of animal products to consumers, so they are double-counting transportation. See below from the EPA study:

Clearly, transportation and electricity generation are the primary polluters here. The evidence is pretty clear that animal agriculture is not the culprit behind green-house gas emissions. But, the evidence is also pretty clear that the global re-distributors and apologists do not care. Here we go again...

Happy Thanksgiving

2010-11-29T06:03:00.000-08:00

Well, I am a few days late, but I wanted to wish everyone a Happy Thanksgiving! I am thankful for a lot of things, but one that often gets left by the wayside is farmers and agribusinesses. I am thankful for the men and women that grow, process, and transport, and sell the food that we put on our plates last week. They work hard and deserve our thanks. If you are not thankful, try not eating for a few days to change your perspective.

Another Dismal, Poorly Written Cotton Story

2010-11-17T13:33:00.000-08:00

The "Fair Trade Organization" has just released another attempt at discrediting the cotton industry in the U.S. and other developed countries. They craftily utilize pictures of poor West African families to generate a sympathetic mood while the reader is led through a long series of painfully inaccurate or incomplete logical arguments about subsidies in cotton producing countries.

Here are some things to consider about these West African countries:

The governments are corrupt and do not allow pass through of world prices to local producers--even though current cotton prices are at all-time highs, the structure of the government-owned exporters will absorb those higher prices for cotton and local farmers will receive little or no benefit from those prices.
The tribal infighting in those countries has forced a compromised marketing system that is highly inefficient and does not respond to prices. Farmers 100 miles from the gin must be paid the same as the farmer next to the gin...that does not induce new investment in processing and/or transportation infrastructure, which means that their markets will continue to languish in utter disarray.
West African yields continue to deteriorate--signaling that both their lack of technological adoption is resulting in lower yields and the economic incentives for producers to innovate are not present (even if you grant that global subsidies depress prices, West African farmers still should response to price signals if they were operating in an open market; but they are not).
Not only does the government set the prices (at very low levels) in these countries, but many of them also tax exports, further depressing their internal prices.

There is much to discuss in global subsidies (see here for a good description of global subsidies in countries outside of the U.S.). But these sort of agenda-laden hack jobs are counter-productive to reaching reasonable, workable solutions.

Economic Trends

2010-11-17T13:17:00.000-08:00

An interesting line of thought has developed about the inflation/economic growth trends and the similarities between the current situation in the U.S. and Japan years ago, highlighted in this graph.

The core inflation numbers released today show that core inflation, excluding energy and food, was only 1% over last year. The Japanese experience resulted in the "Lost Decade" of little economic growth. This graph is being used by many pundits to suggest we need more stimulus because Japan did not. But, the truth is that Japan did inject a lot of debt-derived liquidity into their system, resulting in a debt-to-GDP ratio over 100%.

There is only on question we need to ask about where we are headed...when are consumers going to start spending again and businesses return to hiring workers? Consumers are deleveraging from past excess spending. When they feel comfortable enough to begin spending again (reduced debt and/or job security), there is more than enough liquidity in the system today to remove all fears of deflation.

So, while this story of long-term deflation is certainly plausible, I question its use to justify creating a long-term financial morass for our country with only a slim chance we can avert the Japanese experience if that is where we are headed.

Food Price Inflation to Remain Low

2010-10-26T13:53:00.000-07:00

A recent USDA report cited in this Wall Street Journal article suggests that food price inflation is to remain relatively tame this year. USDA forecasts food price increases between 0.5% and 1.5% this year, the lowest increase since 1992. Because of surging commodity prices, though, the forecast is for a higher (3%) increase in food prices next year.

Food prices are traditionally very volatile, and a 3% increase may be optimistic given the current commodity price increases. But, given that food costs are a shrinking percentage of overall food costs, these price surges may have a smaller overall impact on retail prices than in the past. Time will tell...

A Note on High Prices

2010-10-25T06:43:00.000-07:00

Just a quick note on the current high prices, especially cotton ($1.24 for December delivery at this writing).

High prices beget low prices...if you can lock in a good price for next year at this point for some of your crop, do it. While the fundamentals point to reasons to believe that prices will stay high (and, here, I mean in the 80s) for a while, too many things can happen to change that between now and next year.
Periods of extended high prices are quickly followed by higher input costs...if you forward contract some of your crop for next year, forward contract or pre-purchase some seed, fertilizer, and diesel as well. Pre-purchasing by December 31 can help offset some of that higher income for tax purposes if you have storage for it.
Pay the tax man. Don't go out and purchase new equipment or other capital purchases unless you need it just to avoid taxes. Pay down some debt, put some in the IRA, and save some for the inevitable lower prices to come.

These are great prices and are needed in agriculture...and will have a positive impact on local communities as well. But, do not fall into the trap of thinking that prices will continue to rise or that you are some kind of marketing guru because you got $1.10 by not contracting when your neighbor got $0.85 by contracting. Just remember, you could just as easily have received $0.52 when they had $0.85 as well.

Best of luck to everyone on harvest and marketing a great crop!

Tax Policy as Viewed from a Bar Stool

2010-10-21T12:11:00.000-07:00

This story has circulated the internet. The authorship is a matter of debate, but the calculations are approximately representative of U.S. tax code...enjoy:

Bar Stool Economics

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that's what they decided to do.

The ten men drank in the bar every day and seemed quite happy with the arrangement, until on day, the owner threw them a curve. "Since you are all such good customers," he said, "I'm going to reduce the cost of your daily beer by $20."Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his 'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

"I only got a dollar out of the $20,"declared the sixth man. He pointed to the tenth man," but he got $10!"

"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too. It's unfair that he got ten times more than I!"

"That's true!!" shouted the seventh man. "Why should he get $10 back when I got only two? The wealthy get all the breaks!"

"Wait a minute," yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor!"

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn't show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

Firemen and Safety Nets

2010-10-12T11:37:00.000-07:00

Recently, a lot of controversy was created when fireman watched a man's house burn because he had not paid the fee for that service ($75 per year). Many prominent people argue that the actions of the firemen were immoral. After all, should we not expect the firemen to put that fire out no matter what? One problem...this had been the policy for over a decade and these residents did not pay taxes to support the fire department. They paid fees to cover that cost.

I'm not in favor of letting a person's house burn, but it does bring up an opportunity to raise an important issue going into the farm bill debate. That is, what is the proper level of the farm safety net? Let me first begin with a basic concept. If I were to completely protect you from any risk, you are less likely to be concerned about taking action to avoid those risks. After all, if I am going to pay for your mistakes or misfortunes, why should you worry? Economists call this moral hazard. It is not that everyone will behave this way...just that there is a strong incentive to do so.

Now, in the case of the fire department, if I were to put out your fire even though you did not pay the fee, what would be the incentive for everyone else to pay their fee? What would be your incentive to take necessary precautions to avoid the fire in the first place? It is easy to say that we should have mercy on the poor homeowner, but we must think of the ramifications on the actions of others (including this person) in the future.

So, let's turn our attention to the farm safety net. The safety net performs important functions. For example, the safety net allows some degree of planning by farmers about investment and spending levels, crop mixes, etc. But, and perhaps more importantly, the safety net facilitates financing of agriculture. That is, the safety net allows bankers to have some degree of certainty about repayment capacity, thereby lowering overall lending rates and increasing capital availability to farms.

Why not just guarantee income, then? After all, that would shift all the risk and allow farmers to focus on making a crop. Well, by taking on all the risk (or, more generally, reducing the probability of failure to near zero), what would be the incentive to innovate or remain competitive? Would individuals have much incentive to try new technologies and techniques to increase profits/stay competitive?

By guaranteeing income, we would make farming more profitable, on average, attracting more players into farming. This, in turn, would bid up land and input prices, thereby increasing the cost of production to the point where the safety net would become almost meaningless again and need to be raised to prevent firm failure.

But, what would happen if the safety net were set too low (or did not exist)? The biological nature of farming is such that crop failures would necessitate firm failure at a much higher rate than with a high safety net. To be sure, private products such as crop insurance could mitigate some of that effect, but the actuarial fair (unsubsidized) rates could result in higher costs of production and higher food costs. The system would survive, albeit likely with fewer producers and higher food costs to consumers.

There appears to be some positive impacts of having food price stability such as improved planning, lower risk premiums (and food costs) within the system, greater degree of food security, etc. Therefore, we have traditionally subsidized agriculture to secure those benefits.

As we enter the debate once again for a farm bill, we should avoid the temptation to raise the safety net too high to avoid the problems associated with moral hazard. Some firm failures are necessary to rejuvenate the capital stock with fresh ideas and techniques to remain globally competitive. But, the temptation to strip away the safety net should also be equally measured so as to avoid sacrificing too much of the efficiencies in financing and opening the door to potentially increased volatility in firm survival that can severely damage the food and fiber production system. A delicate balancing act...

Family Farms

2010-09-28T10:31:00.000-07:00

I was gathering data on farms for the Texas High Plains for a little project, and I thought these data were interesting (all data sourced from the 2007 Census of Agriculture):

There were a total of 18,573 farms for the region.
Of those, 92% were family owned and operated.
There were 23.1 million acres in farms in the region of which 88% were family owned and operated.
The average farm size was 1,244 acres, with farms in the Northern High Plains roughly 30% larger than in the Southern High Plains.
Total value of production for the region was about $10.4 billion.

The spreadsheet data are below if you want to see about your county (click to enlarge). Bottom line...family farms still dominate the overall farm structure in the region, despite how the press portrays it most of the time.

Addendum: A friend asked a good question...what is the influence of pasture on average farm size. The answer is quite a bit. In district 1N, many of those counties have considerable pasture acreage, therefore resulting in higher average farm size in those counties/district. Keep that in mind as you view these numbers.

A Random Thought on Estate Taxes

2010-09-28T05:44:00.000-07:00

I take my son to swim practice at 5am. Often, I am incoherent at that hour, but sometimes I have random thoughts. This morning was an interesting one...

Have you ever thought about the inconsistency between estate taxes and social welfare. On one hand, some make the economic argument that accumulated wealth is composed both of taxed income and income that successfully dodged taxation through its life. As an economist, I understand, but do not agree, with that argument.

But, more often, there is the emotional argument that the heirs did not "earn" that money, and that the $1+ million exclusion is "more than enough for them to live on." After all, society is replete with examples of trust fund babies that are spoiled and incapable of getting past their adolescent, posh lives, isn't it? In essence, they are making an argument that passing along that kind of wealth provides no incentive for wise management or hard work.

Interestingly, these same people then argue that the wealth that is taxed away with an estate tax should be transferred to those "less fortunate" is society. And what kind of incentive does that create??

The reason this issue is important to agriculture is that a substantial portion of wealth is tied up in the land. It does not take long with today's land prices to surpass the exclusion, and when the tax man cometh, he demands cash, not land, often forcing dissolution of the estate to pay taxes. And, if the pundits are correct, land values are likely to exacerbate this problem in the future.

It is difficult to tell how often this problem arises. But, one thing is for sure...farmers are having to spend valuable time and money figuring out how to pass along their farms without having to lose it to the tax collector.

Chinese Chicken Tariffs

2010-09-27T07:03:00.000-07:00

The Chinese government has announced that it will impose significant tariffs on imports of U.S. chicken.

The Chinese government said the new duties will replace ones imposed in February after preliminary results of the probe showed U.S. chicken was being sold at low prices -- a process called "dumping."

All I can say is, seriously? Really? This coming from a government where NO firm pays close to the full cost of production. Little or no environmental regulations, health and safety regulations, etc., and the government supplies health care to all the workers (albeit, probably not particularly good health care). Our poultry farmers must be VERY efficient to be able to sell chicken into China below their cost of production (the technical threshold for dumping duties to be legal).

Bottom line...there are two most likely explanations for this action. First, the Chinese government has chosen to protect its domestic poultry industry that is inefficient. Much of the poultry produced in China is on small farms, which will tend to be relatively inefficient. The international competition is placing political pressure on the Chinese government to act in order to prevent too much direct competition with these small producers (think migrations from rural to urban areas to look for jobs and social unrest).

Alternatively, the Chinese government could be selectively applying push-back to the U.S. government for its rhetoric on currency valuation. So far, the Chinese have selected very "low-level" industries to target (I put that term in quotes because it says that agricultural exports are relatively unimportant to U.S. politicians as compared to aircraft or computer software.). These are "warning shots."

It is always difficult to tell the real motives of the Chinese. They do not approach problems in the traditional Western way of thinking. They also treat signed documents such as their accession into the WTO as "suggestions," not binding legal documents. So predicting their behavior is dangerous.

But, I use this opportunity to remind readers of the complexities of international finance. Our knee-jerk reaction is to demand Chinese currency appreciation to help the trade balance (that is, increase U.S. exports and decrease U.S. imports from China). But, remember, (1) that increases the price of imported goods to the detriment of already strapped U.S. consumers, and (2) that decreases the capacity of the Chinese to finance U.S. debt. Now, either of those might not be a bad thing. But, getting our own fiscal house in order would go a long way to reducing our need for Chinese financing and give us much more flexibility to give more than hollow threats for trade retaliation in the face of manipulated Chinese currency.

AgJobs

2010-09-24T09:51:00.000-07:00

The AgJobs bill was being discussed in the House Judiciary Committee today, with "special guest star" Steven Colbert of The Colbert Report. The idiotic display of having a comedian as an "expert witness" before a House committee aside (he was invited by Zoe Lofgren, D-CA, Chair of the subcommittee), the issue of migrant labor and illegal immigration are hot topics. If you look at the actual bill linked above, you will find a long list of supporters of the bill, with The Heritage Foundation as the sole listed opponent (of course, these are just this listed supporters/opponents, which may be influenced by who compiles the list).

The key issue, of course, is the path to citizenship for illegal immigrant labor. If workers fulfill particular employment requirements, have not committed a felony, etc., they receive a "blue card" which entitles them to work legally in the U.S. After additional employment requirements are met, their immigration status can be upgraded to a "green card," or permanent residency. That leads to a path for citizenship.

Now, I am not a "pro-illegal immigration" person, and do not favor amnesty. But, I also believe that the standard arguments about jobs taken away from Americans is generally false (not always, but generally). Unless you are going to "force" people off unemployment rolls and into the fields, then agricultural producers are faced with a quandary of where to get a reliable source of farm labor. So, if we can find a way to rationally allow workers that want to work on farms into (or legalize) the United States, it is a good thing for the competitive position of U.S. agricultural producers and American food consumers. But, I certainly understand the resistance to "rewarding" illegal immigrants.

A Note on Economic Activity

2010-09-24T05:53:00.000-07:00

The graph below shows the Philadelphia Fed's estimate of states showing increasing/decreasing economic activity.

You can see the obvious correlation between state economic activity and recessions (the blue shaded areas). Note that almost always after the end of a recession, there is a rapid increase in economic activity followed by a contraction. In most cases, this is an "inventory effect" where companies scramble to refill inventories in anticipation of consumer demand. Once that is filled, there is some contraction. But, most often, the recovery continues. You will note that in the 80-83 period, we had the "double-dip" recession. We have had a pretty sharp drop in this index of late, but yet as severe as the 02-03 contraction. Is this the lead in to a double-dip? Hard to tell, but there is definitely downside weakness.

School Lunches

2010-09-23T07:38:00.000-07:00

The New York Times editorial board penned a piece calling for the U.S. House to swallow a pill and pass a reduced U.S. Senate version of school-lunch program revision and expansion. According to the article:

The Senate has approved the Healthy, Hunger-Free Kids Act, which sets new nutritional standards and provides an additional $4.5 billion over the next decade for child nutrition programs, including healthier school meals. It would also expand the number of low-income children eligible for free or reduced-priced school meals.

I mean, who would vote against a bill titled this way?? Seriously, I tend to shy away from anything that purports to expand entitlement programs. But, I generally argue in favor of school lunch programs for two reasons. First, healthier kids tend to do better in school and live less expensive (in terms of health care) lives as adults and make more productive workers and business owners. Thus, I consider expenditures on the health of kids as investments in the long-term health and competitiveness of the United States. Second, school lunch programs do provide a stable, basic demand source for many U.S. agricultural products like milk, cheese, and fruits and vegetables.

This is certainly not to say that there is no abuse, fraud, and inefficiency in the system. It is run by the government...what can you say? But, I have lived in places where I see low-income kids in school where, rightly or wrongly, the only decently healthy meal they get in a day is what they get at school. The personal responsibility argument does not apply here because to be personally responsible, you must be free and capable of making responsible choices. Kids do not have that choice.

Laffer Curve and Tax Policy (Technical)

2010-09-21T10:07:00.000-07:00

There will be a lot of debate about tax policy in the coming months, and you may even here the term "Laffer Curve." So, I wanted to spend a little time de-mystifying the terminology at bit. First, the Laffer Curve is named for the economist Arthur Laffer who served on the Council of Economic Advisors under Ronald Reagan. The curve is used to explain the relationship between tax rates and tax revenue.

Quite simply, there are two points where tax revenue is $0...0% and 100% tax rates. 0% is obvious, but at 100%, everyone quits working or does not report income. The equilibrium point does not have to be 50%...in fact, that is the matter of debate. The curve can be skewed to the right or left giving more or less emphasis to tax increases or decreases.

What the Laffer Curve says is that at any tax rate lower than the rate that generates maximum total revenue, raising taxes will increase revenue. But, once you go beyond that point raising taxes decreases revenue. The Democrats will contend that we are at point A, where our taxes are "too low" to generate maximum total revenue. Republicans will contend that we are at point B (or at least we are not farm from the equilibrium point) so that raising taxes will actually lower overall revenue.

Where are we? Well, nobody really knows. I suspect we are just to the right of the equilibrium point. That means that incremental decreases in tax rates are not going to get you much additional revenue (and let me be clear that we are talking about individual income taxes, not corporate taxes; corporate taxes, I believe are to the right of point B). But, incremental increases in tax rates will have proportionally larger impacts on tax policy.

At any rate...there you have it. When the debate about taxes is raging, you can refer to this simple diagram to understand that arguments that are being made.

A Note on the Bush Tax Cuts

2010-09-21T08:41:00.000-07:00

Professor Krugman is at it again with his obfuscation of economic policy. Here, he uses himself, George Soros, and Barak Obama to argue that "small businesses" will not change hiring decisions because they do not have any employees. Well, the absurdity of Three Stooges references would be humorous, but let's skip it for now.

The logical error made by Krugman today is that he assumes that the Three Amigos are representative of small business owners. But, that is not likely the case. Let me set up a straw-man scenario. It will be necessarily simplistic so you tax attorneys out there please do not call me with bloody details.

Let's assume that you have a great job and make $175,000 per year. You are well off, but not "rich" by tax standards. Your tax rate is 28%, meaning your federal income tax liability (again, we are ignoring deductions here to keep the math simple) is $49,000. Now, let's assume that your wife has started a business where she nets (after all the business taxes and self-employment tax) $76,000. You are now in the second highest "rich" tax bracket of 33%. Your tax liability just increased to $82,830, or an increase of $33,830. That means that the increase in your family tax liability is equal to almost 45% of the increase in your family income.

Now, let's assume that the Bush tax cuts expire. Your tax liability just increased to $99,396 (a 7% increase over pre-expiration levels). That means that the additional tax due to your wife's income "pushing you into" the higher tax bracket is $50,396, or 66% of her income.

And some people wonder why small business owners would be a bit skeptical of letting the tax cuts expire? If you look at the margin, the Bush tax cut expiration would hit this family with a 7% increase in their tax bill. This is not huge, but not inconsequential. Will she shut down the business? No. But, it sure does not provide a strong incentive to take the risk to go out and hire more people and expand your business when your net (and therefore, rate of return on invested capital) just went down. One can make an argument that expiration of the tax cuts are needed to help reduce the deficit and get the fiscal house in order, but don't try to make the argument that letting them expire will not provide negative incentives to small business owners.

Note: As I say above. I am keeping the math simple to be illustrative, not definitive. I am not including standard/itemized deductions and we are talking about marginal rates. Total values will be different when you consider those factors, but the relative changes remain fairly close to those presented here.

"De-Development" and another Obama Appointee

2010-09-16T12:34:00.000-07:00

The truth is sometimes stranger than fiction. This story illuminates yet another of President Obama's appointee's strange and incoherent ravings on economics. A few excerpts are worth repeating:

“A massive campaign must be launched to restore a high-quality environment in North America and to de-develop the United States,” Holdren wrote along with Paul and Anne H. Ehrlich in the “recommendations” concluding their 1973 book Human Ecology: Problems and Solutions.

“De-development means bringing our economic system (especially patterns of consumption) into line with the realities of ecology and the global resource situation,” Holdren and the Ehrlichs wrote.

“Resources must be diverted from frivolous and wasteful uses in overdeveloped countries to filling the genuine needs of underdeveloped countries," Holdren and his co-authors wrote. "This effort must be largely political, especially with regard to our over-exploitation of world resources, but the campaign should be strongly supplemented by legal and boycott action against polluters and others whose activities damage the environment. The need for de-development presents our economists with a major challenge. They must design a stable, low-consumption economy in which there is a much more equitable distribution of wealth than in the present one. Redistribution of wealth both within and among nations is absolutely essential, if a decent life is to be provided for every human being.” [my emphasis added]

"De-develop"...what the heck is that? Does that mean no more washing machine? We have to go to the washboard? I am sure my friend's attorney wife is going to think that is grand...

More seriously, the fundamental misunderstanding/ignorance of people like this is that consumption patters, investments, etc., are based on the combination of consumers seeking out what they desire and can afford and producers producing what goods/services maximize their profit. Who determines what is frivolous and wasteful versus what is useful and efficient?

Of course, distortions can be introduced by government policy. For example, a "cheap money" policy causes people to "over-consume" relative to what they would consume if the government were not intervening in credit markets, resulting in things like housing bubbles. But, that is a condemnation of the government intervention, not the system or even the resulting allocation of resources. In policy, costs and benefits of intervention matter, but the intervention is the source of the costs and benefits.

Thus, this neophyte is focused on the wrong issue...my, isn't that surprising. In addition, I added emphasis on perhaps the most telling (and damaging) statement. Economist do not "design a stable..." blah, blah, blah. First, Economists do not, God forbid, design anything. My job is to help sort through the myriad of confusing and contradicting pieces of data to hopefully make some sense of what is happening in the world. Second, economics, as a science, has a difficult time with "equity." What is equitable? We can discuss costs/benefits; winners/losers; etc., but it is much more difficult to assess what is "fair." Finally, this whole phrase is laced with value-laden words like "equity," "decent," etc. all require a value-judgments that are beyond the scope of economic science. In other words, economic science is ill-equipped to address the very political issue of wealth redistribution and equity. That is not to say that I do not have an opinion...

Oh, and this graphic I found funny:

"Policy Yo-Yo"

2010-09-16T10:27:00.000-07:00

The website The Hand that Feeds Us recently posted an opinion piece entitled The Farm Policy Yo-Yo. In it, the group chastises opponents of farm subsidies for being inconsistent. On the one hand, they argue farm programs depress world price hurting poor countries. And programs like biofuels cause price to be too high, thereby hurting poor countries.

These arguments are not wholly inconsistent, however, On the one hand, IF farm program suppress world prices, it would harm world producers. And, IF biofuels programs raise world prices, it would hurt world consumers. Of course, the inconsistency is explaining how prices are both "too high" and "too low" at the same time as pointed out in the article.

Rather, I think the commentators miss a golden opportunity to illuminate a more glaring inconsistency. Farm programs do, in fact, cost taxpayers money. But IF farm programs, in fact, lower prices as the opponents use in their argument on poor country producers, does that not lower food prices for American AND global consumers? With lower food prices, does that not contribute to increasing caloric intake and thereby health in the poor countries? Why not?

The usual answer will have some vague reference to the cost of food and availability in the poorest of countries. Food availability is a problem, but more often than not, it is a structural problem with corrupt governments, poor infrastructure, etc., and less about global food prices. To be sure, we need to carefully examine the intended and unintended consequences of our policies and seek policies that meet domestic needs with minimum side effects to others around the world. But, the arguments often put forth by opponents of farm policy are often disingenuous at worst or misguided/misunderstood at best. Better, less politically motivated information is needed.

Risk Management and Farm Bill

2010-09-16T09:28:00.000-07:00

The namesake of my chair, Chairman Larry Combest, recently penned an editorial in the Lubbock Avalanche-Journal, where Mr. Combest makes an argument for the benefits of risk management (crop insurance primarily) in farm legislation. Correctly, I believe, Mr. Combest asserts that a risk management portfolio of programs would likely benefit producers more, and cost taxpayers less, than current proposals. Unfortunately, that sentiment has not been shared by the current administration at USDA.

The upcoming farm bill debate is likely to center largely around how to make farm programs: (1) less costly, (2) more "insurance-like" in terms of risk management properties, and (3) WTO compliant. #'s 2 and 3 are not going to be an easy task. But, one thing is for sure...there will be less money to work with and a Congress that will write the bill that will look remarkably different than the current Congress.

1099 Issues

2010-09-14T05:48:00.000-07:00

The "hidden" 1099 issue in the health care bill has received a lot of attention of late (see here for an editorial by the Heritage Foundation and here for a more general view with supporting estimates of potential revenue generation by the IRS). In essence, the new health care bill mandates the generation of a 1099 statement to anyone you spend over $600 with in a transaction.

What does the health care bill have to do with your purchases of parts at the John Deere house, you ask? Good question. This is first and foremost about revenue. By inserting that provision in the bill, it was believed that it could generate $300 billion per year, according to the IRS. That goes a long way to covering the costs of the health care bill if it were possible...but, it is not. Revenue is only one side of the equation. First, you have the direct costs of the administration of this provision (more IRS agents/workers to handle the flood of 1099s, etc.). And then you have the massive indirect costs on businesses that will damage the long-term competitiveness of firms. Can you imagine how many 1099s the average farm would have to issue? Insane...

The good news is that there are already bills working their ways through Congress to repeal that provision. Another bit of good news is that provision would not kick in until 2012, so even if they do not manage to pass a repeal this fall, they will have many opportunities in the spring.

Interest Rates???

2010-09-07T13:19:00.000-07:00

Some, including the prominent economist Paul Krugman, have asked of late why interest rates have not risen in response to "inflation fears." (His questioning is rhetorical in order to set up his straw man to justify more stimulus spending.) First, in the parlance of economics, inflation is a function of money supply and money velocity (with the latter being the speed at which money is being turned over in the economy. Nobody is spending, so velocity is near zero, giving us the current situation of no real inflation to speak of irregardless of the supply of money.

Now, the bond market should reflect the risk of inflation through higher interest rates (lower bond prices), but as Professor Krugman correctly asserts, this is simply not happening...case closed. In the words of the TV pitchman: "BUT WAIT!"

There is an interesting development afoot. The Federal Reserve has been buying treasuries. This is nothing new. The Fed buys and sells treasuries all the time to control the supply of money and combat inflation. However, now, the Fed is buying treasuries at first auction. That is, they are intervening in primary bond auctions to support the price of treasuries (keep interest rates low). So what, you ask? Ordinarily, others would be in that market to purchase those bonds, but they are not, thus requiring the Fed to intervene. This action means that if the Fed were not buying, interest rates would already have risen to attract sufficient sales to fund the U.S. debt. Government intervention is not in the Krugman model of "the bond market speaketh, or does it?" commentary.

We can also add another feature. The Fed is paying interest on excess reserves (or reserves held by banks in excess of those required by the government). Normally, no interest is paid on these reserves, and, therefore, inflation would deteriorate the value of those reserves (make them costly to hold). We have virtually no inflation, but the Fed is paying banks to hold these excess reserves. Why? Best I can figure is that the Fed does not want those bank reserves out in circulation. That is, they want that money held out of lending to the public so as not to increase the money supply and more and create inflationary pressures. That may not be the objective, but it is certainly a consequence.

So there you have a very complicated discussion that indicates two things. First, inflationary risk is real. Maybe not today, but it is certainly present enough to be worrisome. Second, were it not for the Fed, interest rates would already be on the increase reflecting the true state of beliefs about the fiscal shape of the United States.

More Economic Obfuscation

2010-09-03T11:11:00.000-07:00

Again, in the vein of keeping everyone informed of the misinformation about economics, this from a Wall Street Journal editorial by two economists regarding the effect of tax cuts on small businesses:

Recently, for example, Vice President Joe Biden harshly rejected House Minority Leader John Boehner's assertion that the hikes would harm small businesses, saying that "he has created this myth that a tax cut for millionaires is actually a tax cut for small business. There aren't 3% of small businesses in America that would qualify for that tax cut." House Speaker Nancy Pelosi flipped the number around, saying that the planned tax increases would exempt "98% of American families and about 97% of small businesses."

The impact is far more severe than Mrs. Pelosi and Mr. Biden suggest. In fact, the sound bite about 3% of small businesses, which has been picked up by numerous pundits, is one of the more misleading statements in the long history of economic propaganda.

The 3% figure, which is computed from IRS data, is based on simply counting the number of returns with any pass-through business income. So, if somebody makes a little money selling products on eBay and reports that income on Schedule C of their tax return, they are counted as a small business. The fact that there are millions of people in the lower tax brackets with small amounts of business income may be interesting for some purposes, but it is irrelevant for the assessment of the economic impact of the tax hikes.

The numbers are clear. According to IRS data, fully 48% of the net income of sole proprietorships, partnerships, and S corporations reported on tax returns went to households with incomes above $200,000 in 2007. That's the number to look at, not the 3%. Would Mrs. Pelosi and Mr. Biden deny that the more successful firms owned by individuals in the top income-tax bracket are disproportionately responsible for investment and job creation?

Of course, farms and many small agribusinesses are included in this category as well. No wonder businesses are sitting on what cash they have...

Economic Obfuscation (and Absurdity)

2010-09-01T15:45:00.000-07:00

I usually try to avoid out-right political posts, but this one involves an economically absurd statement by President Obama. In his speech on the Iraq war (transcript here), he said the following related to costs:

Unfortunately, over the last decade, we have not done what is necessary to shore up the foundation of our own prosperity. We have spent a trillion dollars at war, often financed by borrowing from overseas. This, in turn, has short-changed investments in our own people, and contributed to record deficits. For too long, we have put off tough decisions on everything from our manufacturing base to our energy policy to education reform. As a result, too many middle-class families find themselves working harder for less, while our nation's long-term competitiveness is put at risk.

Ok. GIVE ME A BREAK! First of all, according to the Congressional Budget Office, the total duration of the Iraq war cost less than the stimulus bill. Second, he referred to that cost AS IF stimulus spending was not based on foreign borrowing. Finally, the President makes an obtuse reference to "competitiveness" as if the taxes in the new health care bill are going to make us more competitive... The truth is often stranger than fiction.

GIPSA Rule and Competition Meetings

2010-08-26T05:41:00.000-07:00

The USDA Grain Inspection, Packers, and Stockyards (GIPSA) administration's proposed livestock competition rule continues to draw a lot of heat from all sides (which usually means its about right...) and will be the focal point in another town-hall style meeting on agricultural competition in Colorado on Friday (see FarmPolicy.com for a look at the issue in the news). There are strong arguments for and against the rule...hence the divided nature of the debate.

Proponents of the rule believe that contracts/packer ownership creates a thin cash market leading to lower prices for cattle producers. There is certainly some logic to this argument because thin markets may be susceptible to manipulation. But, my own (very preliminary) research suggests that it is more likely about the number of buyers, not the form of contracts or thinness of the market. That is, contract design and thin cash markets appear to be less important than having a few number of buyers, which depresses price in itself.

To be clear, however, my research at this point has not included differential qualities. There is at least some anecdotal evidence that the current system results in higher quality cattle being sold via contract, with lower quality cattle being pushed into the cash market. If this is the case, the cash market prices may be depressed due to quality considerations rather than directly related to thinness. If so, contracts that are triggered off cash market prices may be adversely affected as well. Keep in mind that there is no direct evidence that I know of to support this explanation. Rather, it is just thinking through possibilities.

Opponents of the rule believe that the efficiencies (both food safety and cost) gained through the contracting process far outweigh the potential negative effects on producers. After all, if it is more economical, it should lead to pressures to move in that direction, right? And there are pressures to move toward more contracting, so it must be a good thing, right? Again, there is a certain logic to this argument. But, the argument hinges on the assumption that both parties to the transaction have equal bargaining power, and, thus, the resulting relationship is socially optimal and mutually beneficial. However, if one party has more bargaining power over another, the outcome will be skewed in favor of the party with more power.

I do not know the right answer. My instincts tell me that I prefer a world where the government insures as competitive a system as is feasible. There are extenuating circumstances where we allow the scales to be tipped in one direction or another, but for the most part prefer competition to concentration. But, this should be an interesting debate tomorrow. I am sure it will get heated.

Bleak Federal Debt Picture

2010-08-25T10:46:00.000-07:00

A recent report by the Congressional Budget Office (CBO) has some stark warnings for the U.S government. This graph shows the bleak picture:

We can see that our debt load is not yet unprecedented, but the forecasts are dire. The lower line in the forecast paints the most rosy picture (not likely), and the upper line is probably high, but a bit more realistic given political realities. Even if we hit the mid-point and end 2030 with debt-to-GDP somewhere around 100%, that would not even be unprecedented. But, at the end of World War II about 85% of federal spending was military, which you can see disappeared rapidly. Now, about 85% is mandatory spending on entitlements, which will not go away.

Why is this relevant to agriculture? Because this picture means less discretionary spending (if any at all) in the future for things like farm programs, disaster assistance, etc. In addition, higher debt will mean higher borrowing costs for all, which, of course, affects the bottom line of farms and businesses in the food and fiber supply chain. Just some food for thought to cheer you up today...

How Government Can Quietly Affect Competitiveness

2010-08-24T06:48:00.000-07:00

This story highlights how government can affect competitiveness. The EPA, through a risk assessment process, deemed the pesticide Temik as a food safety threat and Bayer CropScience has agreed to phase-out the product. I cannot speak to the validity of EPAs claims about the product. Rather, I point this out because of the cost competitiveness implications of their decision. From the story:

“There is nothing that can compete with Temik today,” said Kerry Siders, AgriLife Extension integrated pest management agent for Cochran and Hockley counties. “I don’t think people realize it’s going to be a major blow to the cotton industry.”

In economic terms, the removal of the Temik product will increase the cost of production either through higher cost for alternative products or lower efficacy for alternative products at the same price. If it really has the impact on children's health that the EPA claims, it may well be worth the added costs to avoid those effects. But, this decision does provide a clear example of how agencies like the EPA have a direct and significant impact on the competitive position of U.S. agricultural products.

Food Miles and Local Production

2010-08-20T14:06:00.000-07:00

This NT Times Op-Ed piece on food miles and local production is quite an interesting read. A little be of refreshing logic in an otherwise illogical paper. Don't get me wrong. There are benefits of local production and many people prefer locally produced goods. That is fine. But, this piece brings to front the outright obfuscation that has occurred on this issue. I'm all for anyone who wants to pay for these products if they so choose. But, this article clearly highlights some of the problems with the "local food" movement. Here are a few highlights:

without any real scientific basis, are repeated as gospel by “locavores,” celebrity chefs and mainstream environmental organizations. Words like “sustainability” and “food-miles” are thrown around without any clear understanding of the larger picture of energy and land use.

or this:

It takes about a tablespoon of diesel fuel to move one pound of freight 3,000 miles by rail; that works out to about 100 calories of energy. If it goes by truck, it’s about 300 calories, still a negligible amount in the overall picture. (For those checking the calculations at home, these are “large calories,” or kilocalories, the units used for food value.) Overall, transportation accounts for about 14 percent of the total energy consumed by the American food system.

or this:

Agriculture, on the other hand, accounts for just 2 percent of our nation’s energy usage; that energy is mainly devoted to running farm machinery and manufacturing fertilizer. In return for that quite modest energy investment, we have fed hundreds of millions of people, liberated tens of millions from backbreaking manual labor and spared hundreds of millions of acres for nature preserves, forests and parks that otherwise would have come under the plow.

The key here is that you must be careful about what numbers you believe. The real energy hog in the system is you...the consumer. Drives to the store, refrigeration, etc.

This should make some interesting "fuel" for the debate about "industrial" agriculture.

Future Agricultural Growth in Brazil??

2010-06-08T16:23:00.000-07:00

I am just returning from a recent research trip to Brazil. I know…what am I doing “consorting with the enemy?” In reality, we have a USDA funded research project there to examine, among other things, why models of Brazilian agriculture of late appear to overestimate Brazil’s productive capacity. I started my journey with the hypothesis that transportation infrastructure was developing more slowly than believed, and, therefore, causing us to expect greater production than we were observing. I reasoned that if we could get a better handle on that information, we could better forecast future changes in Brazil’s production.

To be sure, roads there are terrible. In a major coffee, cotton, and soybean production area of Bahia, a two-land road that would qualify as a farm-to-market road in the U.S. is the major thoroughfare for the regional production to markets and ports. The remainder of the roads are (sometimes) passable dirt roads that significantly reduce speeds and significantly increase discomfort for travel (I have bruised kidneys to prove it!). And, the recent economic downturn has greatly slowed the rate of growth in infrastructure projects.

But an interesting fact emerged from my discussion with the big commercial farms, gins, and agribusinesses. I provided a list of potential factors affecting future growth of Brazilian agriculture including things like transportation, weather, labor, technology, etc. What was the first response to a person…labor. Brazilian farms are suffering from the same shortage of competent labor as U.S. farms. In fact, many places are importing illegal labor from Paraguay and other places further south. They even have jokes about how fast a gin will empty out when the Policia Federal truck comes to the gate.

Then on the plane, the thought hit me…if they are already having to import illegal labor, is their future growth in agriculture in jeopardy? This is just food for thought as we begin to really wrestle with our largest agricultural competitor in this hemisphere. I will post more information from the trip as I get it developed and formatted.

Supplemental Aid for a 5% Loss??

2010-05-31T04:45:00.000-07:00

The news that House recently passed a disaster/biodiesel tax credit/supplemental loss assistance bill includes the puzzling addition by Sen. Blanche Lincoln for a supplemental direct payment for producers losing more than 5% last year. I say puzzling because I am not sure that this program sets a good precedent. Are we now going to have the government guarantee income to the 95% level? Really?

I know that this proposal sounds appealing. But think about the implications of this proposal. First, and most obviously, if income can be guaranteed at that level it will attract more investment in agricultural land, thereby bidding up the price of land (in the lingo of economists, the benefits of the program will be capitalized into the value of the land), thereby increasing the overall cost of production for agriculture. Less obviously, this kind of program will likely increase the long-term political pressure on agriculture. If the public understands that income can be guaranteed at the 95% level, they are likely to demand reductions in agricultural support.

These, of course, are just speculations. But, I worry that short-term extractions of support for agriculture will ultimately damage the long-term position of agriculture, both financially and politically.

A Global Food Subsidy

2010-05-20T06:50:00.000-07:00

The end of the semester always bring about chaos. I missed this article from the April 22nd issue of the Wall Street Journal. The article is an opinion piece penned by Treasury Secretary Tim Geithner and Bill Gates issuing a call to the world to create a global food subsidy. It is somewhat humorous (or sad, depending on your perspective) that the U.S. Secretary of the Treasury has been shunted off into a dark closet and apparently forbidden to talk about any sort of domestic monetary/fiscal policy issues, but is instead being paraded out to call for just another apparent step toward one-world government. But I digress...

The critical error in this opinion piece is the underlying assumption that we are somehow short of food. Amartya Sen, 1998 Nobel Prize winner in economics, was a first-hand witness to the massive famine in Bengal in 1943. He devoted a large portion of his career to studying famines to look for root causes. Guess what? Food production/supply is rarely on that list. More often, rapidly declining wages/income, massive unemployment, and food distribution/political systems are the root causes of famines. Even direct food aid from the United States, which has its own set of negative economic consequences, rarely reaches its intended target because of outright corruption in the receiving countries.

The irony is that it is the Bill Gates' and Oxfams of the world that are behind such initiatives, but are also the most vocal opponents of developed world farm subsidies. You cannot have it both ways. You cannot claim that developed world policies are creating over-production and depressing world prices AND call for a global subsidy to increase production. But here we are...

I applaud the concern for the fate of starving, hungry people. I also appreciate the old proverb of: "Give a man a fish and feed him for a day, teach a man to fish and feed him for a lifetime." But the opinion expressed by Geithner and Gates is short-sighted and simply bad policy. The corruption and political/social/economic institutions in these countries are the real roadblocks here, not food production.

More Exchange Rate/Macro Information

2010-05-13T13:08:00.000-07:00

In this chart, we can clearly see what has happened over time to the Euro/$ exchange rate:

The precipitous fall in the Euro against the dollar over the last 120 days or so reflects the expectations of the relative strength of the U.S. versus European economies. I say relative because neither the U.S. nor Europe are in particularly good economic shape.

While slowing the slide of the US$ overall (and outright appreciation relative to the Euro) is a sign of some resilience of the U.S. economy in the current economic session, it does put pressure on exports. Because agriculture is export dependent, a strengthening dollar can mean reduced exports in the future. So far, exports have not been particularly sensitive, but whether that trend continues remains to be seen. The open question is not whether dollar strengthening will affect exports, but how much effect will it have?

Nevertheless, my previous post critiquing Paul Krugman's analysis appears that it is being borne out in the data.

Ceteris Paribus

2010-05-04T06:20:00.000-07:00

Ceteris paribus is a Latin phrase meaning all else equal. It is a term economists use a lot to signify that a cause/effect relationship will take a particular form holding all other things constant.

Here is an example of an analysis that does NOT employ the ceteris paribus logic. Nobel Prize winner Professor Paul Krugman (part-time Princeton Professor, and full-time devout progressive columnist for the New York Times) purports to have evidence that the bond market does not have expectations of the U.S. becoming overloaded with debt (he is a BIG supporter of more stimulus spending). His evidence...the U.S. 10-year Treasury yield spiked from 3.67% to 3.9% in a matter of a few days. But, then the rate decreased back to 3.65%...ergo, no debt fears.

This might be good evidence that the bond market is not particularly afraid of U.S. debt. After all, the demand is relatively high to send rates back down (the price of a bond an it's yield move in opposite directions). But consider what else was going on in the world at that time. Greece has been in a death spiral with yields on their bonds skyrocketing to over 20%. Europe has been dragging its feet on what, if anything, to do about Greece. All of this means money has been flowing out of European markets looking for a safer place... That means more money is flowing into U.S. bond markets, driving up the price of U.S. bonds and driving down yields.

So, it is not that the bond market does not fear U.S. debt. It's that it fears U.S. debt less than European debt. In a ceteris paribus world, Professor Krugman's simplistic analysis of the bond market would make sense. But I would have hoped he would be smarter than that and understand we live in a world where factors are changing and take those changes into account. At present, I see no reason to conclude that the world does not fear U.S. debt. My conclusion right now is that we are just the lesser of a lot of evils when it comes to sovereign debt. Make no mistake, though. What is happening now in Europe will be arriving at our shores soon if we do nothing with a minimum effect of significantly higher borrowing costs.

New Meat Packer Rules

2010-05-03T06:39:00.000-07:00

Everyone awaits the new anti-trust rules for animal agriculture. I have no inside information about how those rules may appear and/or enforcement mechanisms. But, I thought it useful to discuss some of the implications of those rules. First, it is important to note that at present about 80% of the beef processed in the United States is handled by just four companies. This level of concentration evolved over time through processes that are not necessarily illegal (I say not necessarily because I will not state that NO illegal activity took place, but I certainly have no evidence that it has). There are many reasons for this evolution, but conspiracy theories are not usually the correct reasons.

There are reasonable debates about the costs and benefits of the concentration. See here and here and here for some examples of the debate. A paper we did in the past on the subject can be found here. My own view is this... Concentration in itself is not necessarily an economic "bad." Rather, concentration can arise from firms seeking out efficiencies that are found in economies of size. In addition, in a world where consumers demand ever greater degrees of quality control and consistency, the transactions cost of operating small slaughter operations is quite high. These economies can be captured in larger processing firms, and therefore, the industry has evolved along these lines.

But, absolute power corrupts absolutely, as the saying goes. Being a large buyer has its advantages. Contracts can be designed that are disadvantageous to sellers. "But they can go elsewhere" you say. Remember that 80% of the beef processed is by four firms. There are not a lot of outside alternatives. This is not intended as an indictment of processors. Everyone in every transaction tries to negotiate the best deal for themselves. Rather, my comments are to point out that the existence of market power gives both the incentive and the opportunity for packers to exploit that relationship to their maximum advantage.

Some on-going experimental research that we have suggests a couple of key factors. (1) It matters some, but not a lot, what form contracts takes; contract form does not seem to affect the net returns to the producer and/or the packer (this is a general statement; there are obviously better and worse contracts). (2) The number of buyers matters A LOT when it comes to price determination. A small number of buyers (say 2-4) results in significantly lower prices to producers than more than 4 buyers. Generally, then, more buyers are preferred to less when it comes to market prices received by producers.

This is a crucial topic. I encourage everyone out there involved in the livestock industry to examine these rules closely as they are presented in the Federal Register, become informed, and take your opportunity to provide comments in the public comment period. Keeping our livestock system efficient, but with a clear set of rules for fair play, is critical to the long-run competitiveness of this sector.

Cotton and India

2010-04-26T05:11:00.000-07:00

Most people by now are probably aware that India has placed limits on exports (or outright banned new export applications). This decision had the expected effect of increasing cotton price, at least in the short-run. But what does this decision tell us about the cotton market?

Global stocks are disappearing faster than we thought signaling a faster turn-around in global mill demand.
The Government of India (GOI) is withholding cotton from the market to create upward pressure on price, and when the price gets high enough, reopen exports and capture some profits from higher prices (at least temporarily).
The GOI is attempting to subsidize cotton spinning by depressing internal vs. external prices by holding greater stocks.

Of course, I cannot possibly know the complete answer here, but it may be a combination (well, #2 is a bit cynical, but is a trick the Chinese have pulled in the past). I suspect that we are seeing more recovery than what is in the official data because of the time lags in data reporting and the rapidity at which mills can increase throughput. But, I also suspect that textile mills in India are exerting some influence here as well. If exports are slowed or halted, internal prices will decrease relative to world price giving Indian spinners some advantage over other spinners. This is the "to maintain adequate carryover stocks" in the GOI release that signals this behavior to me.

Whatever the motivation, one thing is clear. The GOI's decision makes U.S. cotton look quite attractive on international markets.

Dangerous Quid Pro Quo Trade Disputes

2010-04-13T09:30:00.000-07:00

An article on the Wall Street Journal outlines a recent decision by the Chinese government to slap countervailing duties and anti-dumping tariffs on imports of U.S. and Russian steel for particular uses. This follows closely on the heals of a U.S. decision to slap tariffs on nearly 100% of imports of Chinese steel pipe.

Now, I know the International Trade Commission's (ITC) procedures in trade disputes. But, I would not put it past the system for a little union involvement in the pushing of this issue. I do not, however, have a clue as to how the Chinese government analyzes or justifies its analysis. The only clue in the piece is that the Chinese government has "adhered to Chinese law and World Trade Organization principles." In my experience, that often means "we did whatever we wanted and if that happened to be legal, all the better."

The dangerous aspect of this development is that is smacks of quid pro quo decision-making. You did, so it justifies my doing it. I have no real idea whether the merits in each of these cases warranted the actions, but we are quickly sliding down a slippery slope of increasingly protectionist policies. We better guard against the natural proclivity to become more protectionist both for ourselves and our trading partners, or we could end up right back to dangerous situations we have seen in the past.

Brazil and Cotton Part Deux

2010-04-12T13:48:00.000-07:00

The news continues to roll out about the temporary settlement between Brazil and the U.S. As expected, there remains considerable confusion on the topic. Here and here are some recent examples. The recent piece by Grunwald in Time is particularly egregious. First, the author continues to rely on an outdated, and flawed study from Oxfam about the impacts of U.S. policy. This study was refuted by the Cotton Economics Research Institute at Texas Tech University (see here for the full paper).

The Oxfam study cited suggested a 10% increase in the world price of cotton, with a large benefit going to subsistence farmers in Africa. The TTU study showed an average 2% increase in world price, with almost no benefit going to African countries. The debate about U.S. farm programs is not whether they affect world price, but by how much? Unfortunately, though, no matter how high world prices go, that will not benefit African farmers. The government structures are constructed to prevent that. All price increases do is enrich the governments, not the farmers.

The pundits out there miss a very critical couple of points. First, countries like Brazil lavish subsidies on their cotton farmers at rates higher than the U.S. As I said previously, Brazil offers direct price supports to cotton farmers at higher rates than the U.S. This fact is supported by the documentation of foreign subsidies and trade barriers found here (see page 27 of the document for cotton subsidies in Brazil). Second, the impacts of policies in other countries has a substantial effect on world prices as well. Brazil was already mentioned. But, Chinese import policy, for example, has roughly twice the impact as all of U.S. cotton policy (see here for the documentation). At the same time, the recent increase in the minimum support price in India alone has a larger impact on world market price than the entire U.S. cotton program (see here for the documentation).

It is important to remember that countries like Brazil, India, and China are allowed to self-designate as "developing countries," which allows them to circumvent subsidy disciplines under World Trade Organization rules. The evidence presented here clearly demonstrates that: (1) yes, U.S. policy has a clear, but small, impact on world market prices, (2) the policies of other countries have an equally large or greater impact on world market prices, and (3) no matter what changes take place on world markets, African farmers will receive no benefit.

There is room to debate the future of farm policy and the effects of subsidies inside and outside the U.S. But, those debates must be informed by information that accurately reflects the situation at hand. The blog post at the San Francisco Chronicle and the article in Time, however, are indicative of the uninformed commentary out there that obfuscates the issue and misleads the public. They should at least bother to try to understand the facts of the case at hand before proffering "expert" advice. There are two approaches regarding one's ignorance. Keep quiet and keep people guessing, or open your mouth and remove all doubt.

Brazil and the Cotton Case

2010-04-08T08:22:00.000-07:00

Well, it appears that the Government of Brazil has decided to play kumbaya, let's all just get along. Farmpolicy.com has a few comments (here and here) that are probably worth reading if you are interested in the subject.

My take on this development is this: Brazilian legislators were receiving serious heat from their domestic industries because they knew that the sanctions against the U.S. were ultimately going to hurt their consumers. So they say: "Hey there. How's about you put a little money in a pot for compensation for us, and, in exchange, we won't push this issue in a critical election year for you." To which, our negotiators said: "Uhhh, sure."

So, now, the political hot potato has been passed back from Brazil to the U.S. But, the fun is just beginning. Part of the "can't we all just get along" deal is that the Brazilian's require "serious reform" in the next farm bill. First, and most obviously...seriously?? What could Brazil mean by this? After all, is this not the same Brazil that has a direct price support for cotton above 72 cents per pound (higher than the U.S.)?? Second, what reform is on the table? The Step 2 program (the only thing that was deemed illegal under the ruling) was eliminated.

The remainder of the debate centers on whether the U.S. actually exceeded it subsidy commitments. To arrive at the conclusion that we had, the WTO relied on an obscure provision that prohibited plantings of fruits and vegetables in order to receive direct payments as the linchpin of our violation. First, I seriously question whether that had anything to do with cotton production (and excessive production to lower prices). But secondly, remove the provision and the basis for the case goes away.

So, the Brazilians simply punted the ball and have backed the Congress into a politically dangerous battle when the next farm bill comes up.

VAT Folly

2010-04-05T11:04:00.000-07:00

This article on the Value Added Tax (VAT) should be read in its entirety, partly because it is informative, but partly because it is quite informative. A couple of brief passages for a sample:

The tax sounds simple, but don't be fooled. Because both upper- and lower-income families pay the tax at an equal rate, the VAT is considered regressive; that is, it hits the poor harder than the better-off. So it is the practice in countries such as Britain to exempt food, which lower-income families spend a greater proportion of their income on. The technical term is "zero rating," meaning that exempt items are taxed at a "zero rate."

However, wait until the folks at the IRS get their hands on the regulations for the application of the new tax. They will undoubtedly turn to their more experienced British counterparts for guidance.
"Food of the kind used for human consumption," to a British bureaucrat, is something "the average person, knowing what it is and how it is used, would consider it to be food or drink; and it is fit for human consumption. . . . The term includes . . . products like flour, which, although not eaten by themselves, are generally recognized food ingredients . . . [but] would not usually include . . . dietary supplements, food additives and similar products, which, although edible, are not generally regarded as food."

And so, in the United Kingdom, according to the regulations of Her Majesty's Inland Revenue Service, crackers made from tapioca starch carry no tax; prawn crackers made from cereals do. Frozen yogurt that needs to be thawed before eating is zero rated, frozen yogurt bears the tax. Get it? If you don't, too bad—Her Majesty's tax collectors are not in the habit of offering an explanation for their regulations.

Food for animals creates other problems. If it is "suitable for all breeds" it is taxed, but if "it is held out for sale exclusively for working dogs" it is not, unless, of course, "it is biscuit or meal," in which case it is taxed.

So dog food for "sheepdog breeds" is taxed, but dog food for "working sheep dogs of any breed" is not; food for greyhounds is taxed, food for "racing greyhounds" is not. This may be the only tax in Britain that favors work over leisure.

From a technical standpoint, a VAT is preferred to an income tax primarily because the VAT is a tax on consumption, not a tax on productivity. It is true that a VAT is regressive, which makes it less politically popular, especially within liberal circles.

But, a VAT would not likely be utilized along. That is, the VAT will likely be implemented in CONJUNCTION with the income tax, not in PLACE OF. So, it would simply be another layer of taxation. Because food/agricultural products figure so prominently in total consumption, the distortions alluded to in this article are important for members of agriculture to remain aware.

The Future of Crop Insurance, Land, and Production Lending?

2010-03-30T12:41:00.000-07:00

I apologize for my absence. I have been on a long tour this month: San Diego, Washington DC, Houston, Corpus Christi, Saigon, and I am currently in New Orleans. I hope to be back on track now.

Today, President Obama touted the little discussed provision nationalizing student loans. First, a little background. The federal government has traditionally "guaranteed" student loans by providing backing to those loans (so-called PLUS loans), but has also provided direct lending through Stafford loans. Private banks administered these loans and collected interest and fees, which amounts to billions to the banking industry. Now, the government will directly lend, thereby eliminating the interaction with private banks and eliminating billions in income to banks. The change is suggested to save billions to the federal government, which they say they will use to expand financial aid access.

OK. But is this setting a dangerous precedent for U.S. agricultural programs? The federal crop insurance program operates similarly to the "guaranteed" portion of student loans. The federal government underwrites crop insurance (and subsidizes it), so that private insurance firms are willing to write and sell insurance products into agriculture, where they may not be willing to do so otherwise. Here, within the rules outlined, the companies are allowed to design products they think fit their customers well.

Based on the logic used for student loans, would it be more efficient for the government to supply crop insurance? It may or may not provide some cash savings to the government (not including the net increase in government employees to administer the programs). But, it would likely mean the end of product innovation and development. It would also mean that the government would have complete control over enrollment, indemnities, etc.

This same logic could then be applied to things like federal backing on land and production loans. Should the government make loan decisions? Certainly, one can make an argument that the government is paying. Why not save a few bucks? One could also ask whether the government should be in the business of making loans in the first place.

Some of these questions are philosophical and I cannot hope to answer them here. Rather, I am raising a question of whether these changes are likely to impact agriculture adversely and whether the precedent is being set for nationalization of more and more programs where the federal government provides indirect support.

Genetic/Geographic Modification

2010-03-02T07:24:00.000-08:00

Two articles in the recent Economist magazine (here and here) (you may need a subscription to view...I apologize if that is the case) highlight the shift in attitudes in the developing world to genetically modified crops. Adoption rates have been growing quite rapidly as the graphic here shows:

Some would argue that actual GM area in Brazil is much higher because of stolen technology...but that is for another story. Clearly, though, many developing countries are embracing this technology, which may be a double-edged sword for the U.S.

If many developing countries are rapidly adopting GM crops, it will be more difficult for food importers such as Europe to continue to justify GM import restrictions, thereby increasing market access for U.S. products that are already GM, but
The adoption of GM crops in these regions also means that they are capturing cost-savings with these crops as well, increasing their competitiveness with U.S. agriculture. Anecdotal evidence suggests that many of these countries are not even paying the full technology fees associated with the GM crops unlike U.S. farmers.

It should be noted that many developing countries simply have farms that are too small to benefit from the economies of scale offered by GM crops. This may explain why places like India have adopted these technologies more slowly. But, clearly, countries like Brazil do have large enough farms to capture the benefits, so their adoption of GM poses a competitiveness challenge to U.S. farms. So, increased market access through greater acceptance of GM around the world will likely come at a price of greater competitive pressures on U.S. agriculture.

Organic Viability

2010-02-19T08:51:00.000-08:00

The website, The Hands that Feed Us, posted a well-balanced article on organic agriculture in a critique of the author Michael Pollan. I have discussed in other places the same topic. A recent Wall Street Journal article illustrates the fact that organic agriculture is a small overall portion of the pie.

This is definitely not to say that organic products do not have a home in agricultural production. Rather, my argument would be that decision should be left to the market, not the ballot box. Initiatives and judicial jockeying to force the U.S. in the direction of organic production would be detrimental to the welfare of average consumers. If affluent individuals wish to make that decision, good for them (I, myself, consume several types of organic foods). But, even the most ardent supporters of organic agriculture have been forced to admit that we have insufficient labor to produce all goods organically, and costs would increase.

So, there is room in the market for organic products, but conventional agriculture with current technology is necessary to feed the world's population.

Inflation Down???

2010-02-19T06:54:00.000-08:00

The Bureau of Labor Statistics reported this morning that core inflation was down. This was the first monthly decline in that measure (less food and energy) in more than 27 years. How can that be? Aren't we supposed to be at risk of very high inflation? Two things to remember:

Core inflation in the consumer price index (CPI) is dominated by shelter expenses, or something called "owners equivalent rent, or OER" OER basically describes the average rent for your house in a competitive market. Well, guess what. Rents have been declining as we have had household contraction (kids moving home because they have lost their jobs, etc.). This decrease in demand has led to lower rental rates, and, therefore, lower OER.
But, January Producer Price Index (PPI) was up a greater than expected 1.4%. That is, the prices that producers were having to pay for basic materials was increasing. Producers cannot sustain cost increases for long without passing those on to consumers...that is, an increase in the CPI.

So how can inflation in one part of the economy be increasing, while we have deflation in another part. The short answer is time. The CPI is a lagging indicator. The deflation now is a result of actual deflation that has been occurring over the past several months culminating in a decline in OER and the resulting decline in CPI. But, clearly, the PPI is indicating that basic materials are starting to inflate, which will eventually be passed on to consumers. This is partially a result of capacity utilization increasing in U.S. manufacturing. Right now, we are only at 72.6%. This utilization rate is 6% higher than its recent low (a sign of strengthening in manufacturing), but is still 8% below its 1972-2009 average.

The skinny...inflation, while still relatively modest, is being baked into the pie so to speak. We are getting indications of the start of an inflationary cycle at the producer level. That will take a while to work its way to the final consumer, but the pie is in the oven, which has been pre-heated by loose monetary policy. Pay attention to the PPI and other producer level inflation measures over the near term to guide thinking about consumer inflation further out. These indicators will help you anticipate changes in interest rates over the short- and medium-term.

Conflicts of Interest

2010-02-18T12:14:00.000-08:00

The recent flap over Toyota recalls raises some interesting conflict of interest issues. The United States is a major stockholder in the largest domestic car company, General Motors. How can the Secretary of Transportation, a representative of the U.S. government, be objective when regulating one of GM's largest competitors? There are obviously some quality issues with some Toyota cars, and it would appear that Toyota was slow to react to consumer reports of safety issues. So, clearly, someone needed to ring Toyota's bell on the recalls. But is the U.S. government in a position to handle this issue?

I am no conspiracy theorist. But, ask yourselves this question. We have serious financial problems in government finances today. We have laid out large chunks of money to bail out companies like GM by taking ownership stakes in these firms. If we wanted to reduce future deficits, it would behoove us to increase the value of those investments...you see where I am going.

I am not the only person concerned about these types of Constitutional/legal issues. For example, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, has expressed concern about the Fed's role in taking on debt instruments (primarily mortgage backed securities). By taking on this debt, the Fed is beholden to maintaining low interest rates so that it can unload those debt instruments in the future. Interestingly, Mr. Hoenig singles out agriculture as a sector for future bailout. The article says:

Mr Hoenig painted a picture of a slippery slope, where a less independent Federal Reserve was asked to find ways to support other ailing sectors, such as agriculture.

Because agriculture is not in particularly bad shape compared to housing, I can only presume that Mr. Hoenig was referring to the possibility of agriculture being in dire straits and the Fed being pressured to bail out farms to prop up land prices.

In either case, I agree with Mr. Hoenig that the mortgage situation is untenable and should probably have never happened. By allowing the Fed to become embroiled in this situation, they are ultimately tied to keeping interest rates too low (a key factor in this latest financial crisis in the first place) and may have their "hands tied" when it comes to fighting the likely inflation to come.

Government Budgets Again

2010-02-17T06:52:00.000-08:00

Martin Wolf published an interesting piece in the Financial Times on the budget deficit and why we should not be worried about it. In a run-of-the-mill recession, I would tend to agree that using fiscal policy to "smooth the bumps" through deficit spending would be OK. But, as I said yesterday, we are far outside our normal realm of experience. Namely, entitlement spending makes up a huge portion of government spending, and that is not going to go away without major political upheavals. Commentators like Paul Krugman favor more stimulus spending ON TOP OF more entitlement programs through socialized medicine.

Arguments like Wolf and Krugman's for more stimulus are based on an assumption that the reduction in aggregate demand is real. The reality is the the level of aggregate demand before the recession was unsustainable. It was based on cheap money and over-leveraging. So, that level was artificial. Do we really want to re-inflate the bubble??

The long-and-short of it...Deficits don't matter when you have the ability to adjust fiscal policy after the recession is passed. As best I can tell, most budget doves at this point want to have their cake and eat it too. They want to spend more to soften the recession, but also want that new spending to become part of the government baseline, thereby never to be pulled out of the government budget. In my opinion, this is dangerous thinking.

Government Budgets

2010-02-16T09:17:00.000-08:00

President Obama's budget has been out long enough now to make the rounds. Here, Professor Gregory Mankiw (Chair of the Council of Economic Advisers under President Bush) takes some issue with the President's budget. The graph below produced by the Congressional Budget Office is illustrative:

As you can see, government outlays have increased sharply, as has the deficit and the resulting debt. According to Mankiw's article, the President's own projections show that the deficit will not drop below 3.6% of GDP and will be 4.2% and rising at the end of the forecast period. This level of deficit spending will result in a debt-to-GDP ratio of 77.2% (you can think of this number somewhat like debt-to-asset ratios, but with a slightly looser interpretation for the national economy).

Two things should be kept in mind here:

The level of 77.2% is not unprecedented. We have had higher debt-to-GDP ratios, but
That level will not stop at 77.2% on the current path, but will continue to grow.

We have seen higher debt loads--at the end of World War II. But, at the end of WWII, 85% of government spending was military, which quickly subsided after the end of the war. Today, 85% of government spending is entitlements, which will not change significantly without serious political fallout. So, we just do not appear to have the capacity to "grow out of the debt" in any meaningful way after the end of the recession. Short story...we are going to have to start making some hard choices.

If It Sounds Too Good to Be True...

2010-02-16T08:45:00.000-08:00

This Wall Street Journal article illustrates that time honored saying, "if it sounds too good to be true, it probably is." Unfortunately, these farmers from The Netherlands were lured to the United States with promises of expanding dairy operations in a country with less regulation. What they got, however, was a classic under-financed and over-simplified relationship with someone in clearly over their head (if not an outright scam).

But, this story is an important reminder to all of us that, even when the situation seems desperate, be very wary of people offering high rates of return on very little money. Don't "double down on stupid" as the saying goes. It may be true that those opportunities exist, but by the time these chances hit the world of advertising, they are already gone. I think of the gold commercials on TV now.

But, it could be that the Dutch are particularly susceptible to this. After all, they did give us tulip mania. Just kidding. Bubbles, hysteria, and herd mentaiity are all parts of human action...like it or not. Just keep your eyes peeled and make sure that any opportunity that arises fits into your long-term goals for your operation.

Water Meters

2010-02-16T07:52:00.000-08:00

In a recent speech to the Texas Alliance for Water Conservation meeting, I made a few points about water research and/or policy for the High Plains of Texas. In particular, I wanted to make the point that water meters were needed. A little example we developed illustrates that with even modest differences between perceived and actual pumping rates, costs savings (about $9 per acre in the example) for producers could be achieved with knowledge of actual pumping rates. Of course, there are non-economic reasons for not wanting a water meter, such as fear of regulation. But, regulation is likely to happen whether producers have meters or not. It just makes sense to use water meters...you should know how much of an input you are using for management purposes. I will try to develop more material on this later.

Signs of the Times--Budget Priorities

2010-02-04T14:57:00.000-08:00

"These are the times that try men's souls" is a famous Thomas Paine quote (something tells me that Mr. Paine would have even more colorful metaphors for today's government). Record budget deficits and high unemployment are just a few of the variables that are causing stress in the population today. President Obama released his proposed budget this week, and touted the fiscal responsibility of his plan. His budget probably caused a lot more stress in the population if you believe the latest poll numbers. I will not delve into the whole budget issue here, but focus on agriculture, the details of which are summarized here. The full budget proposal for USDA can be found here. (large PDF file)

I will not focus on the details...you can read those for yourself. But, I wanted to make a few comments on the broader issues.

Budgets are about priorities, not necessarily specific programs. Clearly, the Obama Administration has higher priorities than traditional farm programs and crop insurance. Areas receiving increases are food and nutrition and food assistance programs. As one might expect from a liberal administration, the relative focus has shifted to consumer assistance programs. The President is targeting a few programs that he has consistently targeted, like the cotton storage credit program.
There are shifts in spending, but no total decrease. The total USDA budget is increasing from $142 to $146 billion dollars, but discretionary spending is proposed to decrease by $1 billion with the remaining increase coming in mandatory spending. But, one has to keep in mind that the USDA budget in FY2009 was $115 billion. So, USDA's budget has increased by about 30% under Obama, with most of that going to food and nutrition assistance programs.
Presidential budget proposals make good doorstops. As Blanche Lincoln (D-AR), Chair of the Senate Ag Committee has said of this proposal: “I thank the President for his recommendations, but Congress writes the budget. I intend to support measures to reduce the deficit but fight many of the President’s proposed cuts that will harm farmers, ranchers and rural communities.”

There is much that can be said about agricultural policy and its impacts, both pro and con. But, what is clear is that the President would like to shift priorities away from traditional agricultural programs in favor of other food nutrition and assistance programs. What is also clear is that he has an uphill battle in Congress to pull that off.

National Export Initiative--Further Information

2010-02-02T08:11:00.000-08:00

In his State of the Union address, President Obama outlined a new "National Export Initiative" discussed in a previous post. Scott Graves, Legislative Aide in Rep. Mike Conaway's (R-TX) office, sent me a few figures out of the proposed budget relating to this issue. According to the budget document, a total of $534 million additional money is being budgeted to the International Trade Administration (a 20% increase), so it can "help launch the National Export Initiative." The document goes on further to say:

ITA will strengthen its efforts to promote exports from small businesses, help enforce free trade agreements with other nations, fight to eliminate barriers to sales of U.S. products, and improve competitiveness of U.S. firms.

...whatever that means. Of course, the budget document is an outline that must be fleshed out over time. But, as I stated in my previous post, this issue deserve some hard questioning because of the very tenuous relationship between government action and increased exports.

More specifically, the USDA-Foreign Agricultural Service budget is more telling. Note the graphic to the right. Note that the base funding for 2011 is relatively flat (the blue and green bars).

The orange, red, and purple bars are new. The purple area (marked A) is a $10 million increase in the export promotion activities of FAS. The USDA budget (p. 52) says this increase is "to expand FAS exporter assistance and in-country promotion activities and to meet higher operating costs at FAS overseas posts. The last one makes some sense given the weakness of the U.S. dollar (higher costs in overseas currencies). The first two, however, are a bit nebulous. The orange section (marked B) represents a $34.5 million increase that is used solely to increase FAS salaries and expand expense accounts in the foreign market development program. The red section (marked C) is a $9 million increase in technical assistance for specialty crops program solely for salaries and expense accounts. So, of the $54 million increase for the "National Export Initiative" at USDA, 81% is purely to increase salaries and expense accounts for FAS personnel.

Now, don't get me wrong. I know many good people at FAS, and FAS employees are notoriously underpaid (especially the foreign attaches in dangerous countries). But, one would be hard-pressed to see how salary increases can be called a new export initiative. I certainly do not mind increasing their salaries and adjusting overseas operating budgets to reflect a weaker dollar, but that should not be considered spending on a new initiative that will have little impact on U.S. exports.

State of the Union--Exports

2010-01-28T07:33:00.000-08:00

President Obama presented his State of the Union address last night. There are a lot of things to quibble (fight) over, and I may get to more. But, I did want to point out a particularly puzzling section:

Third, we need to export more of our goods. (APPLAUSE)
Because the more products we make and sell to other countries, the more jobs we support right here in America. So... (APPLAUSE)
So tonight, we set a new goal: We will double our exports over the next five years, an increase that will support 2 million jobs in America. (APPLAUSE)
To help meet this goal, we're launching a National Export Initiative that will help farmers and small businesses increase their exports and reform export controls consistent with national security. We have to seek new markets aggressively, just as our competitors are. If America sits on the sidelines while other nations sign trade deals, we will lose the chance to create jobs on our shores. (APPLAUSE)
But realizing those benefits also means enforcing those agreements so our trading partners play by the rules.

How, pray tell, does one double exports in two years. I can think of only two ways to achieve such a goal. First, once can massively depreciate your currency, thereby making your goods cheaper overseas. Well, we have managed to depreciate our currency with cheap (low interest rates) and printed money as a result of our huge budget deficit. But, those exchange rates are largely determined by markets. Second, one could institute policy that restricts domestic consumption of goods to create a larger, exportable surplus (you know, like they do in banana republics). Hopefully, this is not the objective. So, one is forced to wonder whether this will simply be another broken promise or something more nefarious.

The National Export Initiative is an interesting concept. How will it be constructed? What is it's purpose. We already have the export programs through the Foreign Agricultural Service. So how would these work? And, of course, he brings up the Doha round of the World Trade Organization, where the U.S. proposal is to eliminate all export subsidies. Would this new initiative run counter to that proposal and his seeming commitment to finish the Doha round?

In short, this was a very weak performance by the President as it relates to his understanding of trade.

Update: A news story by Reuters puts a more positive spin on this than I do. I just do not think his goals are reachable and are, therefore, nothing more than an attempt to sound like he is focused on liberalizing trade.

Economics Rap

2010-01-26T12:50:00.001-08:00

A little economics humor. WARNING: The video is about 6 minutes; its a rap parody; and it contains a LOT of economics jargon. But, it succinctly lays out the debate raging about how best to address the current economic times.

Budget Freeze

2010-01-26T09:43:00.000-08:00

The Obama Administration plans to freeze "non-security" discretionary spending for the next three years. I mention this because USDA is one target of the freeze. It is doubtful (1) that the freeze will have any impact on program payments, or (2) the freeze will even happen. The likely effect of any freeze will be on operations, agencies, and administered programs from USDA (that is, no raises or increases in funding for activities within USDA).

But, here is a little food for thought. Discretionary spending is indexed to inflation. If, as we are told, there is no or negative inflation (that is, after all, the reason for all the stimulus spending...to get the economy going again), then shouldn't discretionary spending effectively be frozen anyway?? Just a thought...

Update: Here is a chart produced by CBO. As you can tell, it is not just about the deficit. It is also about the massive, apparently permanent increase in government spending.

Legal Effects on Agricultural "Migration"

2010-01-13T11:41:00.000-08:00

This Wall Street Journal article highlights and increasing trend in American agriculture...exodus from California. In years past, California dramatically increased regulation of dairy farms (environmental and animal welfare). As a result, many dairy farms exited the state (although the most recent data available indicate that the remaining farms got larger). Now, with recently passed legislation on poultry production standards, there may be another exodus of farms to neighboring states. I am serving as a discussant on a paper session at a professional meeting in a few weeks on this topic, and one of the papers is on the like costs increases to California egg producers.

It is useful to think of the United States as one large free trade zone. Labor and capital (both physical and money) can all move relatively freely across state lines. Of course, there are issues of asset fixity and/or sunk investments, but over time businesses will migrate to states/cities that satisfy labor requirements, logistics, and tax/incentive requirements to maximize profits. Just like many firms depart the U.S. to avoid high regulatory costs, so to will firms move between states. Whether or not California citizen see the added food costs as worth the animal welfare gains is another matter, but it is clear that regulation affects competitiveness, which also affect firm location.

Decline of Europe Part Deux

2010-01-12T08:11:00.000-08:00

At the right is a quite interesting chart developed by MJ Perry at Michigan. This refers to the story below on Paul Krugman's defense of Europe. Here, Mr. Perry has broken out U.S. per capita income by state (along with averages for the U.S. and E.U.) for illustrative purposes.

As we can see, the beautiful state of Arkansas has a higher per capita GDP than the Gallic paradise of France. Mississippi, where I lived for almost 12 years, has a higher per capita GDP than the E.U. average...MISSISSIPPI!!! This, coupled with the material presented below is sufficient to debunk Professor Krugman's defense that Europe is on the same par with the U.S. in terms of either GDP growth, change in relative global GDP, and/or per capita income.

Does the E.U. have some wonderful places? Yes. Are the people of the E.U. wonderful people? Yes. Are they the economic engine in spite of their woefully anti-growth social policies that Paul Krugman would like the world to believe? Absolutely not.

The Decline of Europe

2010-01-11T09:06:00.000-08:00

In today's Paul Krugman blog, he refers to an essay by Jim Manzi in National Affairs. Basically, Manzi argues that the choice Europe made to be socially democratic (highly socialized) has led to an economic decline of Europe. Krugman attempts to refute Manzi's argument with his prototypical condescending commentary. He suggests that Mr. Manzi has misread the data. Mr. Manzi suggested that the data showed that Europe began the 1970s at around 40% of world GDP and ended 2009 with less than 30%, a rather dramatic decline. Mr. Krugman replied that Mr. Manzi was reading the wrong data because he included the old Soviet bloc. In fact, Mr. Manzi did read across numbers, using data from all of Europe (including the Soviet bloc) in the beginning, and ending with the EU-15 data (excluding the old Soviet bloc countries). But, that is where Mr. Krugman's correct analysis ends. Below is a chart from the data used in their exchange, but I have focused on the EU-27 (which includes all the new EU countries from the former Soviet bloc; focusing on the original EU countries would yield similar results, but just lower overall percentages). The chart is presented below.

Note that the EUs share of world GDP does not start out quite as high as 40%, but does end below 30%. Now that the data are consistent, we can focus on the original question...has the EU lost competitiveness with its social democratic policies?

One might be tempted to say that over time, the developing world is over-taking the developed countries by virtue of their more rapid growth. But, the graph reveals that the U.S. started out at about 25% of world GDP and ended at about 25% of world GDP. Europe, on the other had, had a substantial decline. To be sure, China and other developing countries gained in relative economic size, but it was at the expense of Europe, not the U.S.

This, of course, is not definitive proof that European social policy resulted in this decline, but it is clear evidence that a decline in competitiveness has occurred despite what Paul Krugman believes.

Devaluation

2010-01-11T07:16:00.000-08:00

This story shows a couple of key items. First, and most obvious, when you combine an idiot with a dictatorship, you get idiotic despotism. But, more subtly, it points out that Venezuela is not in good shape in terms of government finances.

Further, there is a nugget of a lesson here as well. Chavez believes (at least publicly states) that the devaluation will revive the domestic economy through increased demand for exports and domestic demand for domestic products (imported goods become more expensive). Were it not for the ever-present threat of nationalization, this strategy might work in the short-run (in the long-run, other currencies would adjust so that the cost-competitiveness would disappear).

A similar, although less pronounced, story can be told in the U.S. Monetary policy of the past had led to an over-valued dollar (especially relative to the Chinese Yuan). This made imports cheap and helped lead to ever-increasing amounts of outsourcing. Ultimately, the weakening of the dollar has been necessary, but will not necessarily lead to a resurgence of U.S. manufacturing. Investments are sticky and do not change instantly. Fiscal chaos has continued to put downward pressure on the dollar as well. Only time will tell where the dollar will eventually go, but most experts see more downward pressure than support. In the short run, this is good for U.S. agricultural exports, but the condition is not sustainable over the long run.