Introduction

The U.S. agricultural pro-duction and food distribution industry is currently in the midst of major structural changes. To assist in understanding the implications of these changes and the future of the industry, faculty in the School of Agriculture at Purdue University in collaboration with industry representatives under-took a study to assess the future of the food production, processing, and distribution system. The results of this analysis are reported in detail in Food System 21: Gearing Up for the New Millennium—winner of a Gold Award for editing from the Agricultural Communicators in Education. Congratulations to Laura Hoelshcer, PhD, Editor, Agricultural Communications Service, for this accomplishment.

In this issue will provide a summary of a key chapter of that book, the grains and oil seeds sector. This summary presents the “Key Questions & Responses” section, of this chapter which provides a synopsis of the most important issues discussed in that chapter of the book.

You may or may not agree with our analysis. We encourage you to read the complete analysis in Food System 21: Gearing Up for the New Millennium.

 

Grains and Oil Seeds Sector

• Are there any forces that will slow the growth in farm size?

No. Most of the forces are encouraging growth. The cost reductions from economies of size continue to be a driving force. Further increases in farm size can be expected with existing technologies.

Information technologies will allow some managers’ span of control to be more easily extended. Using this technology will require improved data analysis skills. These skills will be developed by farmers with the assistance of education programs offered by both the public and private sectors. Developing and utilizing these skills will provide new methods of lowering production costs. Production technologies will continue to increase in complexity, and linkages to sellers of inputs and purchasers of products will become more information intensive. Those farms large enough to allow for specialized management will be able to evaluate and respond more quickly to changes.

There will be an increasing number of regulations designed to reduce the environmental impacts of pro-duction agriculture. As new regulations are developed, larger farms will be better able to develop methods of complying that have the smallest impact on costs. This will be even more important as farms internalize more of these costs.

• Will small and medium-sized commercial grain farms survive?

Established small and moderate-sized commercial farms that possess a land base with little or no debt, can utilize used machinery, and continue to achieve market access, will be able to survive for several years as an independent operation. There will continue to be a large number of small lifestyle farms where off-farm income will be critical to survival. Small and medium-sized farms will be at an increasing disadvantage in purchasing inputs, selling products, and obtaining new technologies. They will also be at a disadvantage in managing the large amounts of complex information needed to operate a farm.

Some small and medium-sized commercial farms will develop and thrive in niche markets, but they will be exceptions. Those that are successful in developing and filling a niche market will need to develop special merchandising skills. They will need to closely monitor changes in their customers’ preferences. It will be important for producers in niche markets to monitor potential competitors. Niche markets are small and can be easily swamped by an influx of producers.

• Will more variable farm prices lead to new policies to reduce price risk?

With the changes in U.S. commodity price support policies and the elimination of publicly held stocks, some anticipate that the prices for grains and oil seeds will be more variable. While it is likely that the private sector will carry some increased stocks, private companies will not carry these stocks for as long as the government or in the quantity that the government was willing to carry. While the stability of U.S. prices is influenced by domestic pol-icy, it is also influenced by the actions of other countries. If countries important to world trade attempt to isolate their domestic markets from the variations of the world market, these policies could lead to more variation in U.S. prices.

While there are several unknowns, the variability of domes-tic agricultural commodity prices is not expected to increase substantially. Price variability is not expected to be the major issue leading to the return of commodity pro-grams of the past. Rather, it is expected that a public-private partnership will evolve in which new risk management tools will be developed. Through the provision of risk management tools, such as revenue insurance and other new products, private companies will provide farmers various methods for insuring risk. The federal government may provide some assistance in providing reduced rates for these new products, but will not be directly involved.

There will be periods of excess supply and low prices. Without government programs in place to remove these excess supplies, prices could be expected to drop more than they otherwise would. Acreage adjustments to low prices are more likely to occur in the fringes of the Midwest. These adjustments are expected to occur fairly quickly. There will also be periods of short supply. Without government stocks to dampen price increases, prices are expected to increase more than they otherwise would. But, again adjustments are expected to be quick.

However, agricultural policy issues will need to be revisited in 2002 when the current authorization expires. Events at that time will have a major impact on the changes that may be made in agriculture policy.

• How will the management requirements change?

There will be more pressure for better general management of human resources, finances, and relationships (relationships with input suppliers, output purchasers, and the general public). Since managers of larger farms will depend less on direct observation of situations to identify problems, data analysis and interpretation will become important skills. The trend toward more com-plex and information-intensive pro-duction practices will require better information management skills. Successful farmers will need to become better general managers. Efficient production will still be critical, but it will be possible to obtain these skills from service providers and consultants.

• What changes in the owner-ship of land and farm businesses will occur?

The capital requirements of commercial farms will continue to grow. One method of reducing the amount of equity required is to lease assets rather than purchase them. This has been a popular method of gaining control of land. As farm size grows, this will become more common in machinery. Leases will allow operators to place limited capital in items that provide a greater rate of return than can be achieved from machinery and land investments. This will be part of a larger trend towards the separation of ownership, production labor, and management.

 

• How will increased environ-mental regulations affect production?

Efforts will continue to reduce off-site environmental impacts of production agriculture. Erosion control will continue to be an important effort to improve surface water qual-ity. This effort’s watershed focus may affect individual property rights. There will be more variation in what an individual farmer will need to do in order to comply with regulations. The establishment of filter strips and other buffer zones will be important. These differences will be reflected in land values. There will be a greater difference between land with low and high erosion potential.

While public policy, through vehicles such as the Farm Bill, will pro-vide some money to support the implementation of desired practices, more of the cost of complying will be borne by producers. Some of these costs will be for specific changes needed to meet the requirements. Others will be in the form of new features on machinery. The cost of compliance will be more difficult for smaller units which have a smaller volume of output over which to spread the costs.

• What will be the return from farming?

The small percentage of farm operators (20-25%) who develop the interpersonal skills, financial management skills, merchandising skills, data analysis skills, and production skills to be above average operators in the years ahead will receive returns that are competitive with those in other industries if demand remains strong. But there will continue to be a large number of farm operators that receive a return lower than could be received elsewhere. If demand weakens, land and labor resources will be devalued to reestablish competitive returns.

While small and moderate-sized independent operations with a high equity position will have strong staying power, they will not have access to the discounts and premiums avail-able to larger producers. Off-farm income will be critical to the survival of these farms.

• Is now the time to buy land?

If you’re an investor, the answer is probably no. The market price of land has recently increased rapidly in response to an increased farm price for grains and oil seeds. Some have attributed this to concerns about possible worldwide food shortages. These concerns are likely overstated. If you’re an investor, this is likely a good time to evaluate the profitability of alternative investments. While land likely will not increase as much in the near future as in the recent past, it may still be a reasonable storage of value. The land investment also provides a method for diversifying the investment portfolio.

If you are a farmer, if you have the money, and if it is a purchase that fits into the future direction of the business, you will probably bid aggressively to buy the land even if it is not a good investment at the current prices. But remember that land is an illiquid asset that is difficult to sell when expected profitability declines. When making a land purchase it will be important to have the financial strength to withstand periods of low crop prices and/or declining land values.