The Future of Agriculture: Powerful trends affecting the U.S. food and agricultural system

The Future of Agriculture:Powerful trends affecting the

U.S. food and agricultural system

Trend #1: Real prices for agricultural commodities will

continue to go down.

Trend #2: Technology treadmill will continue to drive

real prices down.

Real vs. Nominal Prices

Nominal price is a good’s money price

Real price is measure of value, scarcity & purchasing power

From year-to-year, producers respond to nominal prices• But in the long run, real prices are more important!

Real & Nominal Prices of Wheat1913-2002 (2002=100)

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

1913 1923 1933 1943 1953 1963 1973 1983 1993

Year

$/b

us

he

l Real

Nominal

Why have real prices decreased?Supply has grown faster than demand

– Changes in inputs– Increased productivity

• More & Better

The effect of technology?– More output– Lower per unit production costs

The Technological Treadmill– Has changed the structure of U.S. agriculture

Real & Nominal Prices of Upland Cotton 1913-2002 (2002=100)

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

1913 1923 1933 1943 1953 1963 1973 1983 1993

Year

$/lb

.

Real

Nominal

Real & Nominal Prices of Tomatoes1950-2002 (2002=100)

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

1950 1960 1970 1980 1990 2000

Year

$/cw

t.

Real

Nominal

Real & Nominal Prices of Hogs 1913-2002 (2002=100)

0.00

50.00

100.00

150.00

200.00

250.00

1913 1923 1933 1943 1953 1963 1973 1983 1993

Year

$/c

wt.

Real

Nominal

Growth in U.S. Agricultural Productivity 1948-1999 (1948 = 100)

90110130150170190210230250270

1948 1958 1968 1978 1988 1998

Year

To

tal

Facto

r P

rod

ucti

vit

y

Responses to Decreasing Real Prices and the Technology Treadmill …

Migration out of agriculture (1950s-1960s)

Get bigger (increase scale)– Buy or rent the neighbors’ farms– Adopt new technologies (industrialization)

Obtain off-farm employment– off-farm income > farm income

Get the government involved

Improved marketing strategies

Trend #3: Food demand in the U.S. will not grow

significantly in the future.

Trend #4: The farm share of the retail food dollar will

decline.

As a result of being a wealthy nation…

The population is affluent and well fed– Actually over-fed

U.S. market is saturated – Slow population growth– Aging population

Food demand is income and price inelastic

People buy more processed food, marketing services, and restaurant meals

Share of Income Spent On Food 1929-2001

0

5

10

15

20

25

30

1929 1939 1949 1959 1969 1979 1989 1999

Year

Per

cen

tFarm Value Share of Retail Price

1954-2001

0

10

20

30

40

1954 1964 1974 1984 1994

Year

Per

cen

t

Facts About U.S. Food Demand…Growing less than 1% per year

Restaurant food = 50% of total expenditures

A $70,000 annual income household spends– About 9% of after tax income on food products– less than 2% of income on raw ag commodity

U.S. agriculture is facing the “Full Stomach Dilemma”– The natural evolution of an affluent society

Trend #5: The importance of international trade to the U.S. food and agricultural system

will increase.

Trend #6: U.S. consumers will eat more imported food.

Trade & U.S. agricultureExports are 20-30% of total U.S. farm income

Only growth point for U.S. ag = exports• To lower and middle-income countries• Trade is a two-way street

Not all commodities benefit from open markets

Trade increases competition

Trade is based on comparative advantage• And U.S. doesn’t have it for some ag products

Trade and U.S. agriculture

Consumers benefit from access to imported foods

Accelerates the Technological TreadmillFurther pressure on production costs &

real prices

Trade is a two-way street!

Trend #7: The structure of U.S. agriculture will continue to become more “dualistic”.

What is the dual-farm structure?18% of farms produce 90% of output

– Farms with annual sales > $100,000

82% of farms produce 10% of output

50% of farms have sales < $10,000

75% of farms have sales <$50,000– But have avg. household income of

$62,925– And have farm income of $-3,786

What created the dual-farm structure?

The Technology Treadmill– Decreasing per unit returns led survivors to

increase their scale of operation

Rural residence or lifestyle farms– Need off-farm jobs to achieve livable income

What is the future structure of U.S. agriculture?

Numbers of small farms are growing– Implications for rural communities– Off-farm job availability– Need for infrastructure & education

Numbers of very large farms are growing

The disappearing “middle”

Trend #8: Environmental and other effects of agriculture will

become more important to society.

With increasing affluence… Society’s desire to consume more food

– Food quantity has low marginal value

Desire for other goods & services – Includes “environmental amenities”

• Air & water quality, ag open space, conservation, wildlife habitat

– Food quality characteristics have high marginal value

• How, where, and who produced it

In this “post-productivist” era:Food availability is no longer a concern

– Both a benefit and a curse of affluence!

People no longer believe in production at any cost

A “production at any cost” farm sector will not prevail

Public still has residual good feelings about agriculture

Agriculture is viewed as providing benefits other than food and fiber output

Trend #9: Agricultural multifunctionality will be highly valued in some regions of the

country.

Multifunctionality…• Agriculture has

– Food function– Non-food functions

• Non-food functions– Agricultural open space– Wildlife habitat, water development– Economic diversity & jobs– Cultural or social heritage– Tourism – Carbon sequestration

Farms vary in their food and non-food functions…

Differences in technology Differences in scale Environmental impacts Landscape amenities

Relationship to the dual-farm structure?

How will multifunctionality be dealt with ?

U.S. trade policy position• Subsidies & protectionism cannot be used to preserve

multifunctional agriculture

Targeting subsidies hasn’t worked & won’t work• Even though it’s politically popular

Preservation of agriculture will be a local issue• And a function of rural lifestyle decisions & off-farm job

availability

Trend #10: The farm sector will continue to evolve and

adjust.

Possible adjustments …Migration out of agriculture ?

Get bigger (increase scale) ?• Buy or rent the neighbors’ farms• Adopt new technologies

Increased off-farm employment ?• off-farm income > farm income

Improved marketing strategies ?• Affluent consumers want more than just “food”

More government involvement ?

How, where & who produced it…1. Family farm (structure of agriculture)2. Reduced transportation3. Artisan vs. industrial (heirlooms)

4. Linkages between producers & consumers5. Organic, natural, sustainable6. Genetically modified organisms

7. Agricultural field & food processing labor conditions8. Animal welfare9. Community Food Security

10. Locally produced (local economy)11. Pathogen or contamination risks

In an affluent, post-industrial society…

• Dual structure of production• Dual structure of consumption

• Many consumers are disillusioned with the current industrial food & ag system

• Opportunities for creative producers & marketers

Contact Information

Rhonda Skaggs, Ph.D.Professor, Agricultural Experiment StationDept. of Ag Economics & Ag BusinessBox 30003 MSC 3169New Mexico State UniversityLas Cruces, NM 88003Tel: 505-646-1344 or 505-646-2401Fax: 505-646-3808Email: rskaggs@nmsu.edu