The changing structure of world agriculture

Press, 29 January 1988, Page 12

The changing structure of world agriculture

Agriculture is an unstable, almost volatile industry, believes Professor TIM WALLACE, an American Fulbright Scholar, who recently spent a year at the Agribusiness and Economics Research Unit at Lincoln College. The following article on changes in agriculture in New Zealand and the United States is based on a letter to a Christchurch farm accountant, Mr Pita Alexander, written by Professor Wallace shortly after his return to the University of California, Berkeley.

If we can agree that most farmers are "responders” and “price takers,” and if we look at just business cycles, we can see that bad economic times in a country are mostly farm-led (farm equities are often the hardest hit in a recession and one of the last to recover), and farm-fed (through low commodity prices). One of the prime motivations for government farm support programmes, therefore, has been a desire to stabilise farm incomes. Sure, a lot of people are concerned about its level, but mostly reference is made to the volatility of farm incomes as an undesirable aspect of agriculture. Certainty and the ability to plan are preferred to uncertainty. There may have been long periods of fairly stable farm income in New Zealand, particularly when its polices were set to enhance and protect agriculture. Yet once agriculture begins to enter a freer market (as New Zealand has done), price fluctuations and, therefore, income fluctuations are bound to follow. Annual crops provide the best examples of cycling: when commodity prices are high it’s because supplies are generally low. Producers then get enthusiastic and plant more, thereby swamping the market so the price falls. People then switch to other higher priced commodities and the generic cycle repeats itself. It’s the old “cobweb theorem,” and a goal of many policies is to break the short-supply (high price), over-response (low price) cycle. Other evidence that agriculture is not all that stable an industry is its changing structure. New Zealand is experiencing growth in its small farms and large ones, with a decline in mid-sized units. This bi-modal evolution simply reflects grower reaction to a host of change forces. What is stable about agriculture is its total output (generally upward and onward). In faCtf’that

facet of agriculture is so constant an increasing number of people are beginning to take it for granted — a serious mistake. Let’s move to other points of change. For example, a farmer’s attitude toward his wife and family. I heard a lot in New Zealand which made me think that men’s attitudes about their loved ones had been broadened in spite of themselves. Part of the reason is that rural women in New Zealand and the United States are now simply exerting the power they have always really had to acquire equal treatment and consideration. Some men are thrown by this, particularly those who truly thought they had considered their wives as equals — but had to admit that when “push comes to shove” and hard decisions had to be made, especially those dealing with on-farm expenditures compared to house appliance purchases, home remodeling, off-farm investments, vacations, education, or insurance, the man’s voice was usually louder than his mate’s. Another change was occurring in the attitude and understanding of farmers regarding foreign trade. It seems that many farmers think they are experienced world agricultural traders. In New, Zealand, they based this on the nation’s long history of trade with England. However, since England joined the Common Market things have changed. For example, the meat and butter contracts have declined and preference is not so evident anymore.

In the United States, people are beginning to see that even if a lot of a country’s farm product moves in international markets it does not necessarily mean that the country’s farmers are experienced traders. Most of our farmers are abysmal in terms of understanding the intricacies of international trade or acting in an entrepreneurial sense with an international focus. I think more farmers are now thinking about international agtrade in terms of “how can I access that market,” and “how do markets in Hong Kong differ from Taiwan, from Europe, from America, from the mid-East?” We know, too, that United States farmers who have grown crops free of government programmes are usually better versed in trade matters than those who grow grain, sugar, rice, cotton, or dairy products. Those commodities have depended so much on a large internal market, or on government export programme aid, that growers simply have opted out of much thinking about international trade. There has not been a need to do otherwise. Instead, they have turned much of their market thinking and strategy formulation over to industry trade staffs or consultants. While many of these people, in turn, have done fine work, it is not the same thing as the actual growers rising up to their full potential of understanding and managerial creativity. Is it different in New Zealand? Not much, I’ll bet. jjf- farmers have oper-

ated under secure government contracts with other nations why should they spend time and energy probing a certain “success?” Another area of change is asset control versus ownership. This could involve both farm and nonfarm assets. It certainly gets into estate planning, wills, and that kind of long-term thing. What is involved essentially is looking at the trade-offs between owning a chunk of capital (maybe farm land or equipment) as compared to leasing its use rights. In both our countries, for example, most of the farmers who have been caught in the recent farm finiancial crisis have had two common characteristics: — (1) They were not good record keepers so did not really know where they stood financially — and, therefore, did not have much of an idea how to cope when the debt reality finally penetrated. (2) They had purchased land fairly recently, literally banking on its appreciation coupled with continued high commodity prices to allow them to manage its pay-off. These people usually did not consider the possibility of renting that additional ground, which most could have done had they asked. As a result they limited their profit (and management) options. The smartest managers in the United States sold down their stocks of land in 1980-81, renting it back with an option to buy provision. These managers did several things — they assessed the risk of sittin on a relatively large amount of capital which had a significantly greater return in non-farm ventures; they had reviewed their farming operations and decided to continue farming; and they could see profitable investments if they liquidated their capital stock yet retained its use rights. As a result, they have come out of the current agricultural financial mess in better financial shape than they were , at the peak A' >