Agriculture: Return of the Surplus?

THE YEAR 1978 began with angry farmers driving their tractors into Washington to confront Congress, the secretary of agriculture, and the president with demands for action to bolster sagging prices of farm commodities. By the end of the year most prices were higher—up 15 to 20 percent for wheat, other grains, and soybeans—and the clamor for action was diminished, although not completely silenced. Despite the recovery, however, year-end farm prices still were well below the levels of 1973, 1974, and 1975.

The administration, in response to farmers' demands and its own perception of the problem, developed a program to put a floor under prices of principal crops and to encourage farmers to hold land out of production. The program had some mild success, although the support program probably was not wholly responsible for the rise in prices. Land planted to wheat in 1978 was down some five million acres from 1977, and corn acreage declined a little less than two million acres. Soybean acreage, not covered in the land-set-aside program, rose. For 1979 the Department of Agriculture expects additional reductions in wheat and corn acreage and a further increase in land planted to soybeans.

The decline in commodity prices from the peaks of 1974-75, and in acreage in 1978, was accompanied by an increase in stocks of grain (wheat, corn, sorghum, barley, oats, and rye) held by farmers and in government storage facilities. In fact, grain stocks in the United States have risen steadily since 1975, from 27.3 million metric tons that year to 72.2 million metric tons by late 1978--equal to nearly a half-year's domestic consumption.
Falling prices, rising stocks, and government programs to support prices and discourage production—these are the indicia of agricultural surplus. What happened to the concerns of only two or three years ago that the world was moving into a period of chronic food scarcity which would keep U.S. agriculture under permanent heavy pressure to produce? Were those concerns misplaced? Were the high prices and sharply diminished food stocks of 1973-75 only temporary aberrations? Will the problems of American agriculture once again be those of managing chronic surplus, as they were between the end of World War II and the early 1970s?

Nineteen seventy-eight gave no answers to these questions, but analysis of the conditions underlying the return to agricultural surplus provides some insights. Because the United States is such a major force in the world food economy, the analysis must begin at that level.

U.S. production in a global context. In the rest of the world the signs of agricultural surplus are much less evident than in the United States, quite apart from the several hundred million people in the developing countries who are underfed because their incomes are too low to buy sufficient food. World stocks of grain, including rice, increased almost 40 percent (about 51 million metric tons) from 1975 to 1978. Forty-five million metric tons of that increase, however, was in the United States. Moreover, from 1977 to 1978 grain stocks in the world as a whole declined 7 million metric tons, even though in the United States they rose 12 million metric tons. Clearly, the accumulation of grain stocks in the United States was not representative of experience in the rest of the world.

The growth of stocks and the sag in prices in the United States since 1975 did not primarily reflect exceptionally good production performance, either in the United States or in the rest of the world. The annual rate of increase in grain production in the United States was about the same from 1972 to 1978 as it was from the early 1960s to 1972. In the rest of the world, grain production grew at an annual rate of only 2.8 percent from 1972 to 1978 as compared with 3.2 percent annually in the decade prior to 1972. In the developing countries (including the People's Republic of China), however, production grew 3.4 percent annually from 1972 to 1978, somewhat faster than in the decade prior to 1972.

Production performance in the United States and the rest of the world thus suggests that the key to the behavior of grain prices and stocks in the United States in the last few years is to be found on the demand side of the market, not the supply side. In the United States grain consumption declined after 1973, reflecting a fall in the use of grains as feed for animals. While consumption has risen gradually in the last few years, in 1978 it still was below the earlier peak. In the rest of the world, consumption of grain rose at an average annual rate of only 2.6 percent from 1972 to 1978, compared with 3.3 percent in the decade prior to 1972.

If grain consumption in the United States had continued to increase at the rate set in the decade prior to 1972, consumption in 1976-78 would have averaged 200 million metric tons per year, about 20 percent higher than actual consumption. If consumption of grains in the rest of the world had continued to increase at the pre-1972 rate, then demand for U.S. grain exports in 1976-78 likely would have been higher than it was, even if the growth of foreign grain production had not slowed as much as it did. The combination of higher domestic and foreign demand probably would have prevented significant accumulation of grain stocks and the decline in grain prices in the United States.

This analysis suggests that recent U.S. experience does not demonstrate that earlier concerns about a chronic world food problem were misplaced. The decline in U.S. consumption of grain occurred primarily because of high grain prices in 1973-75 and the diminished profitability of livestock production. These conditions induced a sharp decline in the nation's inventory of livestock on farms and a consequent decline in the demand for grain for feed. The animal inventory is expected to fall further in 1979; but meat prices rose in 1978, and this is expected to continue in 1979. In time, this likely will lead to a rebuilding of the animal inventory and a consequent increase in demand for feed grains.

Even with the decline in the animal inventory, the low grain prices of recent years led to a gradual increase in demand for feed grains from the low level reached in 1974. This rise also is expected to continue into 1979, providing increasing strength to grain prices.

The decline in grain consumption in the United States in the last few years thus was largely a reflection of the cycle of animal production, complicated by the sharp run-up in grain prices in 1973-74. When the cycle again enters the expansion phase, as it almost surely will, U.S. demand for grain will rise with it.

Gains in developing countries. The slower growth since 1972 in consumption and production of grains outside the United States apparently was concentrated in the developed countries. This can be inferred from the fact that in the developing countries production of grains increased at a somewhat faster pace since 1972 than in the decade prior to 1972. Since the developing countries as a group are not net grain exporters, more rapid growth in production in those countries would have been associated with more rapid growth in consumption as well.

The improved performance of the developing countries since 1972 is highly encouraging. It does not indicate, however, that the world food problem is on the way to quick solution. Despite the better performance, hundreds of millions of people in those countries still are malnourished and lack the income to purchase more food. Moreover, food production in the developing countries as a whole was boosted significantly by good monsoons in India in 1977-78. Exclusive of India, production in these countries since 1972 probably grew no more rapidly than before 1972, and it may have slipped a bit. (The data are unclear on this.)

Over the long term, the developing countries will solve their food problem only by adopting more productive technologies. While this process is continuing, it still has far to go. A year or two of bad weather would probably reveal that in those countries food scarcity still is a harsh fact of life.

A series of poor harvests in the developing countries could result in a sharp increase in demand for U.S. exports of food, diminishing stocks, and an upward pressure on prices. Over the long term, progress by the developing countries in expanding food production could itself lead to rising demand for food exports from the United States, according to an analysis by John Mellor, director of the International Food Policy Research Institute. Paradoxical though it may seem, rising food production in the developing countries would stimulate the growth of income and hence the demand for food by an amount that could exceed the growth of food production for some considerable time.

Thus the progress the developing countries make in solving their food problem may result in rising demand for U.S. food exports. The gradual rebuilding of the livestock inventory eventually will contribute also to increased demand for grains. In addition, it can be anticipated that from time to time bad weather, in the United States or elsewhere, will disrupt the growth of world food production. When this happens, the strong underlying growth in demand likely will result in sharply rising food prices and rapidly diminishing stocks worldwide. The recent return of the surplus would then be seen as quite temporary, and we would be reminded once again that the world food problem still is far from solution.