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					        Sparks Companies, Inc.

The Road to the 2002 Farm
Bill: Implications for Dairy

             J. B. Penn
              Presented to

        Cornell University
 Program on Dairy Markets & Policy
           Orlando, Florida
          November 27, 2000
        Presentation Overview

I. Policy/Political Situation Perspective

II. Political/Economic Disconnect - Real or Not?

III. The Dairy Sector: Is It Different?

IV. Summary Observations
I. Policy/Political Situation - A Perspective
               The Setting: Grain Production/Consumption
               1900
               1850

               1800
               1750
million tons




               1700
               1650
               1600

               1550
               1500

               1450
               1400
                      1987   1988   1989    1990    1991   1992   1993    1994   1995   1996


                                           Production       Consumption


• Consumption persistently outpaces production - 7 of 10 years
                           World Grain Stocks and
                                Stocks/Use
                  320                                                        24


                                                                             22
                  280
mil metric tons




                                                                                  S/U ratio (%)
                                                                             20
                  240
                                                                             18
                  200
                                                                             16

                  160
                                                                             14


                  120                                                        12
                        1990   1991   1992      1993   1994    1995   1996

                                       Stocks          S/U ratio
                               Cents Per Bushel




           100
                 150
                       200
                             250
                                   300
                                         350
                                               400
                                                     450
                                                           500
                                                                 550
  1/2/90
 5/22/90
10/10/90
  3/1/91
 7/22/91
 12/9/91
  5/1/92
 9/21/92
  2/9/93
 6/30/93
11/17/93
 4/11/94
 8/30/94
 1/19/95
  6/9/95
10/27/95
 3/19/96
                                                                       Nearby Corn Futures




  8/7/96
12/26/96
 5/16/97
 10/6/97
 2/26/98
 7/17/98
 12/4/98
 4/28/99
                                                                                             Supply Response - Market Performance - 1990s
                        Cents Per Bushel




           200
                 300
                       400
                              500
                                       600
                                             700
                                                   800
  1/2/90
 5/23/90
10/12/90
  3/6/91
 7/26/91
12/16/91
  5/7/92
 9/28/92
 2/18/93
 7/12/93
11/30/93
 4/22/94
 9/14/94
  2/3/95
 6/27/95
11/15/95
                                                         Nearby Wheat Futures




  4/9/96
 8/28/96
 1/20/97
 6/11/97
10/30/97
                                                                                Market Performance - 1990s




 3/25/98
 8/14/98
  1/6/99
 5/28/99
                        Cents Per Bushel




           400
                 500
                       600
                              700
                                       800
                                             900
                                                   1000
  1/2/90
 5/24/90
10/16/90
 3/11/91
  8/1/91
12/23/91
 5/19/92
 10/9/92
  3/4/93
 7/27/93
12/16/93
 5/12/94
 10/4/94
 2/27/95
 7/20/95
12/11/95
  5/3/96
                                                          Nearby Soybean Futures




 9/25/96
 2/18/97
 7/11/97
                                                                                   Market Performance - 1990s




 12/2/97
 4/28/98
 9/18/98
 2/11/99
  7/7/99
                           Cents Per Pound




                                         100
                                               110
                                                     120
                                                           130




           40
                50
                     60
                          70
                               80
                                    90
  1/2/90
 5/18/90
 10/5/90
 2/27/91
 7/16/91
11/29/91
 4/20/92
  9/3/92
 1/22/93
 6/10/93
10/26/93
 3/16/94
  8/3/94
12/20/94
  5/9/95
 9/26/95
                                                                 Nearby Cotton Futures




 2/14/96
  7/2/96
11/18/96
 4/10/97
                                                                                         Market Performance - 1990s




10/24/97
 3/18/98
  8/4/98
12/21/98
 5/11/99
                      World Wheat Production Vs. Trend
                   625,000


                   600,000


                   575,000
'000 metric tons




                   550,000


                   525,000


                   500,000


                   475,000


                   450,000
                             1986/87

                                       1987/88

                                                 1988/89

                                                           1989/90

                                                                        1990/91

                                                                                  1991/92

                                                                                            1992/93

                                                                                                      1993/94

                                                                                                                1994/95

                                                                                                                          1995/96

                                                                                                                                    1996/97

                                                                                                                                              1997/98

                                                                                                                                                        1998/99

                                                                                                                                                                  1999/00
                                                                     Production
                                                                     Production                        1986-99 Trend
                                                                                                      1986 to 1999 Trend
                       World Corn Production Vs. Trend
                   650,000


                   600,000


                   550,000
'000 metric tons




                   500,000


                   450,000


                   400,000


                   350,000
                             1986/87

                                       1987/88

                                                 1988/89

                                                           1989/90

                                                                      1990/91

                                                                                1991/92

                                                                                          1992/93

                                                                                                    1993/94

                                                                                                              1994/95

                                                                                                                        1995/96

                                                                                                                                  1996/97

                                                                                                                                            1997/98

                                                                                                                                                      1998/99

                                                                                                                                                                1999/00
                                                                     Production
                                                                      Production               1986-99 Trend
                                                                                              1986 to 1999 Trend
                    World Soybean Production Vs. Trend
                   170,000

                   160,000

                   150,000

                   140,000
'000 metric tons




                   130,000

                   120,000

                   110,000

                   100,000

                    90,000

                    80,000
                             1986/87

                                       1987/88

                                                 1988/89

                                                           1989/90

                                                                     1990/91

                                                                               1991/92

                                                                                         1992/93

                                                                                                   1993/94

                                                                                                             1994/95

                                                                                                                       1995/96

                                                                                                                                 1996/97

                                                                                                                                           1997/98

                                                                                                                                                     1998/99

                                                                                                                                                               1999/00
                                                               Production                   1986 to 1999 Trend
        Wheat: Production Deviation
                From Trend

           (million metric tons)    Source (%)
           1993-95     1996-98     Area    Yield
World       -67.4        32.9       82      18
 USA         -2.9         -0.6
 ROW        64.5         33.5      91        9
        Corn: Production Deviation
                From Trend

          (million metric tons)    Source (%)
          1993-95     1996-98     Area    Yield
World      -56.9        39.3      36       64
 USA       -42.5        19.9      39       61
 ROW       -14.4        19.3      37       63
   Soybeans: Production Deviation
            From Trend

        (million metric tons)    Source (%)
        1993-95     1996-98     Area    Yield
World    -10.5        13.2      60       40
 USA      -8.5         7.1      107
 ROW      -2.0         6.1      19       81
 The Key Markets - US Agricultural Exports
                  1992        1996        1999        2000
                                    mil $
World             43,071      60,349      49,102      50,500
EU-15              7,491       9,003        6,960      5,900
North America      8,721      11,557      12,632      13,800
South America      1,344       2,567        3,618      2,850
Central America      586       1,005        1,209      1,250
FSU                2,243       1,745          816      1,400
Asia              17,454      27,784      20,447      19,900
E. Europe            317         417          190        200
ROW                4,915       6,271        3,230      5,200
                           Share of world total (%)
World              100.0        100.0        100.0     100.0
EU-15               17.4         14.9         14.2      11.7
North America       20.2         19.2         25.7      27.3
South America        3.1          4.3           7.4      5.6
Central America      1.4          1.7           2.5      2.5
FSU                  5.2          2.9           1.7      2.8
Asia                40.5         46.0         41.6      39.4
E. Europe            0.7          0.7           0.4      0.4
ROW                 11.4         10.4           6.6     10.3
                      World Grain Production/Consumption
                      1900



                      1800
million metric tons




                      1700



                      1600



                      1500



                      1400
                             1987   1988   1989   1990   1991   1992   1993   1994   1995   1996   1997   1998   1999f


                                                         Production           Consumption


                      • Production exceeded consumption (96-98) - close in „99
                      • Stocks rebuilding
                World Grain Stocks and Stocks/Use Ratio

               400                                                                                  25

               350
                                                                                                    20
               300

               250




                                                                                                         S/U ratio (%)
                                                                                                    15
million tons




               200

                                                                                                    10
               150

               100
                                                                                                    5
                50

                 0                                                                                  0
                     1990   1991   1992   1993     1994   1995   1996   1997   1998   1999   2000
                                                 Stocks            S/U ratio
      Policy/Political Situation - A
              Perspective
• Agriculture policy has become a partisan
  political pawn
• Traces to 1998 elections - Democrats‟ efforts to
  regain House (12 seat margin)
• Campaign continued in 1999, 2000
• Ad hoc subsidies
      1998        $5.97 b ($200m to dairy)
      1999        $9.3 b ($125m)
      2000        $7.1 b
                  $2.5 b ($442 m)
      Policy/Political Situation - A
              Perspective

• US agriculture supply response the result of:

   – Marketing loans (guaranteed prices)
   – Ad hoc subsidies
   – Farm structure today
II. Political/Economic Disconnect -
             Real or Not?

• Perception abounds that agriculture sector is
  in recession or depression
  – Popular press
  – Politicians
• Economic indicators show continued
  expansion
  – Acreage/output increases
  – Land prices/rents move higher
                                            bil. dollars




                              0
                                  10
                                       20
                                               30
                                                           40
                                                                50
                                                                     60
                       1990


                       1991


                       1992


                       1993




Farm Receipts
                       1994


                       1995


                       1996
                                                                          Farm Income




                       1997
Government Payments

                       1998


                       1999


                      2000e
   Balance Sheet Remains Solid
                                                   Ann. % change
                    1997    1998    1999    2000f 1998-99 1999-00
Assets
 Real Estate        808.2   841.8   866.2   887.0     2.9      2.4
 Non Real Estate    243.1   242.8   248.5   243.9     2.3     -1.9
Total Farm Assets 1,051.3 1,084.6 1,114.7 1,130.9     2.8      1.5

Liabilities
 Real Estate         85.4    89.6    94.2     95.5    5.1      1.4
 Non Real Estate     80.1    83.1    82.2     81.0   -1.1     -1.5
Total Farm Debt     165.5   172.7   176.4    176.5    2.1      0.1
Equity              885.8   911.9   938.3    954.4    2.9      1.7
Debt-Equity Ratio    18.7    18.9    18.8     18.5   -0.7     -1.6
Debt-Asset Ratio     15.7    15.9    15.8     15.6   -0.6     -1.4
Political/Economic Disconnect - Real
               or Not?

• The explanation - highly significant to next
  farm bill deliberations

• Much of the explanation lies in the structure
  of today‟s farm sector
                    157,000
               “Commercial” Farms
                 Sales over $250,000
            8% of All Farms – 72% of Sales
                Avg. Sales = $906,817
            Avg. Net Worth = $1.4 Million
              Non-Farm Income = 26%

                         189,417
                    “Transition” Farms
                 Sales $100,000 to $250,000
               10% of All Farms – 15% of Sales
                   Avg. Sales = $159,137
                Avg. Net Worth = $0.7 Million
                  Non-Farm Income = 57%

                        1.57 Million
                     “Non-Farm” Farms
                      Sales under $100,000
                 82% of All Farms – 13% of Sales
                      Avg. Sales = $15,800
                  Avg. Net Worth = $0.3 Million
                    Non-Farm Income = 99%


Source: 1997 Census of Agriculture and ERS, USDA
            Commercial Farms
• Commercial farm segment (70%)
  – Large/more market power - can negotiate price
  – More technologically advanced - require more
    highly technical/specialized services
  – More likely to by-pass local distribution system
    for products - if services available, or will provide
    themselves
  – Fragment coop membership base - unable to meet
    of small number of large members - But, if not,
    big members leave, jeopardizing coop
    sustainability
             Transition Farms
• Mid-size (transition) farms (14%)
  – Needs different than commercial farms
  – Likely under more stress
  – Struggling to achieve size economies essential to
    survival - or will be consolidated
             Non-Farm Farms
• Non-farm farms (16%)
  – Different economic base - not farm connected
  – Different product requirements, uses
            Commercial Farms
   Commercial farms (vs. average vs. small)

• Greatly improved productivity during 1990s

  – Unit costs           Significantly lower
  – Price differential   Significantly higher
  – Margins              Much wider
     Corn: Reported Cash Price vs. Price
             Realized by Farmer
                         1996     1997     1998     1999   2000(f)
                                         $/bu
Cash Price               2.71     2.43      1.94    1.90     1.75
Fair Act Payment         0.28     0.27      0.27    0.27     0.25
Supplemental                                0.27    0.27     0.27
Marketing Loan                              0.10    0.21     0.26
Total Realized Price     2.99     2.70      2.58    2.65     2.53

Aggressive Marketing*    0.30     0.30      0.30    0.30     0.30

Grand Total              3.29     3.00      2.88    2.95     2.83

 * Typical price advantage realized by farmers using aggressive
 marketing strategies.
Political/Economic Disconnect - Real
               or Not?
• Calls into question “one size fits all” approach
• Makes “unintended consequences” more a
  factor
• Yet:
  – Little attention given to fundamental questions:
    Programs for what? For whom?
• Rather:
  – Discussion and proposals are on mechanics and
    labels - how to transfer subsidies to farm sector -
    what to call them
        III. The Dairy Sector

• Important food product
• Enormous in size
  – $20.3 billion sales 2000
  – compared with $18.3 for corn
• National in scope
  – Milk in every state -- even Alaska
• Rapid productivity growth
  – milk/cow up 1.9% per year in 1990s
  – among most rapid in agriculture
          Dairy Policies Complex
• Government intervenes eight ways
  1.   Price supports for manufactured milk
  2.   Market orders with minimum fluid milk prices
  3.   Northeast Dairy Compact, a “super market order”
  4.   Import limits for cheese under the WTO
  5.   Export subsidies under the DEIP program
  6.   Checkoff program for market development/research
  7.   California, special state program
  8.   Ad hoc payments for dairy producers
                 The Dairy Sector
• Policies/economics of last two decades
  – Rapidly stimulated growth of large dairies
       • Led to sharp industry splits
          – Traditional producers in Upper Midwest, Northeast
          – New, large producers in California, West
  –   Constrained export market growth, in spite of subsidies
  –   Intervened heavily 1978-86 at huge cost
  –   Cut back effective support levels after 1986
  –   Shifted interventions away from direct purchases
  –   Modest trade policy progress in NAFTA, Uruguay Round
  –   Mapped dairy reforms in 1996 FAIR Act
  Key Result: Industry Consolidation
• Entire value chain consolidating quickly
   – Milk Producers
      • 1994
         – 39% of milk produced on farms with 200+ cows
         – 149,000 dairy farms nationally
         – Largest size category reported was 200+
      • 1999
         – 51% of milk produced on farms with 200+ cows
         – 111,000 dairy farms nationally
         – Largest size category reported was 2000+
      • Average size of operation increased 29% from „94 - „99 to
        82 cows/herd
      • Demographically, the age distribution of dairy farmers is
        drifting older - and regional differences
      Regional Proportion of Milk Cows
                  Re giona l Proportion of M ilk C ow s

40%



35%

                                              O th e r
30%
                                    Up p e r M id we s t

25%

                                       East
20%

                                       W est
15%


10%




                                                                          2000 f
      1980




                                       1990
             82



                    84



                         86



                               88




                                                     92



                                                           94



                                                                96



                                                                     98
Today: 1996 Reforms on Hold

• Consolidated market orders (33 to 11)
  – But, Congress nullified the USDA minimum
    price reforms it had mandated
  – And, it extended life of manufactured milk
    price supports
  – And, it extended Northeast Dairy Compact
• Where do we go from here?
      International Competition
               Intense
• Canada - Supply controlled industry
  – Continually pushing policies to export
• EU - Enormous interventions,
  – Continued high internal supports
  – Import barriers
  – Large subsidized exports
• New Zealand
  – World‟s most efficient producer
  – Minimal government intervention
    US Dairy Policies - Highly
        Interventionist
• Huge impact on industry
  – PSE
     • OECD says policies provide 57% of revenue in 1999
     • Only sugar greater intervention (68%)
     • Average PSE for US is 24%
  – CSE
     • OECD estimates at - 48%
     • -78% for sugar
     • US average CSE is -2%
          The Dairy Sector
• Little different from farm sector generally
• Wide disparity in size/cost/profitability
• Domestic programs - foreign market
  competitiveness at odds
• Again - raises fundamental questions about
  objective and beneficiaries
  – Programs for what?
  – For whom?
   IV. Summary Observations
• Agriculture policy a political pawn - likely
  will continue - no “natural opponents”
• Introducing analytical information much
  more difficult
• Need more attention to basic questions
• Do we need a dairy policy?
  – For what purpose?
  – To serve whom?
        Sparks Companies, Inc.

The Road to the 2002 Farm
Bill: Implications for Dairy

             J. B. Penn
              Presented to

        Cornell University
 Program on Dairy Markets & Policy
           Orlando, Florida
          November 27, 2000

				
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