Tides of Prosperity, Past and Present

Stepping back to compare the agricultural boom of the 1970s to the current period brings new perspective to the discussions swirling around food, fuel and the environment.
By Chris Hanson | September 23, 2013

After the ebbing of the tide of agricultural prosperity in the 1970s, the rural economy has again prospered in recent years. The current period of farm prosperity has many characteristics that are both similar to and distinct from the last period of prosperity, says Carl Zulauf, economics professor at Ohio State University. 

In a series of analyses titled, “Comparing Current and 1970 Farm Prosperity,” published in the FarmDocDaily e-newsletter, Zulauf outlines what makes the early 21st century a successful era for U.S. agriculture by comparing it to the 1970s period of prosperity. Facets of the current period include rising crop prices, relatively stable ratios of farm real estate to net cash income, gradually increasing farm expenses, growing food demand in China and a balancing act between crop production and environmental services. 

Paul Bertels, vice president of production and utilization for National Corn Growers Association, agrees that the U.S. is currently in an agriculture prosperity period. “If you look at overall wealth growth in the ag community, it has really gone up over the last three to five years.” 

Multiple Market Drivers
Similar to the 1970s period of prosperity, Zulauf says that in 2012 crop prices increased by roughly 200 percent, which he attributes to China’s growing demand for U.S. soybeans, the increase of crop-derived biofuel production and poor crop growing conditions. 

China’s contribution to the current era of prosperity is often overlooked. Zulauf points out China’s consumption has grown steadily the past 33 years. China’s calorie consumption was 68 percent of the top 10 countries with the highest per capita income in 1980, whereas it was 87 percent in 2009. Furthermore, China’s per capita vegetable oil intake increased from 25 percent in 1980 to 52 percent in 2009. Zulauf credits this growing demand as one of the key influences behind the current prosperity period and rising crop prices; however, he notes China’s demand for food may grow at a slower pace in the future, thus pushing prices lower.

 “What a lot of people overlook, particularly what’s been driving soybeans, is just about every year we’ve set a record for exporting soybeans to China, which has been keeping soybean prices up,” Bertels concurs. “If you have $7 corn and $11 beans, you would plant so much more corn, but the Chinese have been out here buying soybeans, keeping that price up, and you kind of hit .equilibrium of sorts in corn vs. soybean acreage.” 

Biofuel production, which was not a factor in the '70s, is another major driver of the current farm prosperity period. Zulauf explains that having two drivers may be the reason for the current period’s longer, increasing crop pricing trend, compared to the 1970s. He notes ethanol’s share of the total U.S. corn harvest reached 5 percent in 2001, increasing to 29 percent in 2012, despite the worst drought in decades. 

Comparing the two drivers, Zulauf says China’s soybean demand began growing during the mid-'90s, whereas corn ethanol demand started increasing in the early 2000s. In 2005, just before the start of the current period of prosperity, China’s soybean imports were equal to 31 million U.S. acres, whereas ethanol’s demand was only 8 million acres of corn. Then between 2005 and 2012, ethanol’s demand for corn increased to 27 million acres and China’s demand for soybean doubled to nearly 62 million acres. 


Tri-polar Dynamics
The dynamic between food, fuel and environmental services in the 1970s compared to the current period of farming prosperity is notable. In the '70s, there was a significant increase in acres planted in the U.S. for various crops, such as corn, soybeans and wheat, which has not happened in the current era, Zulaf says.  “There’s been an increase, but it’s much, much smaller in magnitude. In the '70s, we released all this excess capacity that we had from the set-aside programs, and furthermore, farmers added a significant number of new acres either by converting wooded land or pastures, et cetera. We did not see that this time.”

Although Conservation Reserve Program acres are decreasing, Zulauf says he has not seen woodland and pasture conversions in his area. “One of the explanations for that is the wetland reserve program and the sodbuster provisions that were put into place in the 1985 Farm Bill,” he says. “And so, if you step back and think about what’s going on in a broader policy perspective, U.S. society has said, ‘We value these programs and we continue to value them, even though prices are high.’”   

CRP began as a way to reduce grain supplies, Bertels says. “The thought was if we pay farmers a reasonable rent on marginally productive land, that land will come out of production and we’ll be able to control supply more efficiently.” Since the implementation of the program, Bertels says it has evolved into more of an environmental service concept. The recent improvements to the program that target areas with the highest environmental benefits, such as allowing farmers to continuously register areas alongside streambeds is an example, he says. With current funding issues, Bertels expects some land now in CRP will likely become ineligible in the future, while keeping the most environmentally beneficial land in CRP. He adds that the acres coming out of CRP production have mostly been for wheat production. 

While it is fairly common to speak of a food vs. fuel dilemma, Zulauf says a discussion about the food, fuel and environment is a much richer and broader discussion. “We could have decided to release all the acres in CRP, to set aside the sodbuster provision, to have set aside the wetland conversion provisions, and we chose not to do that.” 

When Will the Tide Recede? 
Projections of $4 and $5 corn prices in response to bumper corn crops might affect the current prosperity period. Although he is normally asked about $4 corn, Zulauf says it would be an “easy answer” to say it would signal the end of the current period of prosperity. History and economics dictate that it would be a situation of wait and see how demand responds. “If we see $4 corn and we see a very sharp demand increase because of that, we have a very different situation than if we see $4 corn and we don’t see much of an expansion in demand,” he explains. 

Other factors such as weather patterns, growing exports and farming expansion can also affect the current prosperity period, Zulauf says. “I think the honest answer is it depends critically on what happens next year. If we have two or three years of really good production and sort of mediocre demand expansion, we are in a different world than where we are now.” 

Bertels says political uncertainty, such as the Farm Bill situation, might also hinder the current prosperity period. With reduced Farm Bill payments and crop insurance support, some farmers may look towards banks for production loans, which could result in being denied, or higher interest rates to cover the risk. “That can quickly cause a lot of problems in the farming community,” he says. With agriculture a capital intensive industry, the potential for higher interest rates creates uncertainty. Crop insurance has really become the farm program, particularly for corn and soybean producers, he adds. “Threats to that can become really detrimental to production agriculture.” 

Success in the efforts to repeal the renewable fuel standard (RFS) would also cause the prosperity tide to roll back. If the RFS is repealed, Bertels believes the petroleum industry would continue blending for a while, until the economics were no longer favorable. “Just remember what commodity prices were like in 1999 through 2004,” he says. “You had corn routinely run at about $2 a bushel, soybeans were running $4.50 to $5 a bushel. Wheat was running about $3 a bushel. So imagine if you kill one of these huge demand drivers for grain. There’s no guarantee that another demand will step up to take its place and you’ll see corn retreat well below $4.” 


Author: Chris Hanson
Staff Writer, Ethanol Producer Magazine
chanson@bbiinternational.com
701-738-4970