Total acreages’ response to price is the ‘REAL’ supply
response issue.
I get the feeling communication doesn’t always take place when people talk about
how crop agriculture responds to lower prices, especially since the introduction
of “planting flexibility.” It seems common to abstractly think that farmers’
income problems are caused by low prices for a crop, say, cotton. Hence, the
reasoning goes, farmers could easily remedy the problem next planting season by
switching from the production of cotton to any one of several profitable crops.
As a result, with the lower production levels the cotton market will respond,
farmers will benefit from the “new” higher price crop, incomes will rise and all
will be well in farm country. And by the way, I have this bridge for sale that
connects San Francisco and Oakland…
Even though the “one crop price problem” seems to characterize the depth of
thinking of many that discuss crop supply response, what’s particularly odd is
that fixing aberrations of this sort has never been a problem with crop farmers.
They will change their mix of crops quicker than you can pull you hand out of a
fire.
What we need to take note of is that unless there is a change in the total
acreage devoted to crops this type of crop planting arbitrage only ensures that
equal financial pain is inflicted on the producers of all crops. And, freer
international trade may, in fact, speed up the rate of equalization of financial
pain. Spreading around pain may have its proponents but a solution to farm price
and income problems it is not.
There are others who think that planting flexibility means the flexibility to
plant nothing, that is leave the land idle. And, of course, it can mean that.
It’s just that farmers don’t react that way. Nor do their bankers tend to
encourage unilateral withdrawal of land from production. Basically, it just
doesn’t happen except under extreme, and therefore, unique circumstances apart
from areas that are chronically wet or are on sandy, highly-sloped knobs. Even
in the case in which a farmer is not covering out-of-pocket production costs, he
will borrow down his equity to stay in business or reluctantly turn the land
over to a more capitalized neighbor.
Leaving productive cropland idle is rare, but using the land for something other
than the production of crops is a possibility. Some land is taken out of
production each year for roads, dwellings, shopping malls, etc. Most of this
land conversion would take place irrespective of whether the price of farm
commodities are at today’s levels or twice those levels. Most of such converted
land is being pulled out of agriculture not pushed out of agriculture. Land can
also be converted from cropland to pasture or to some other less intensive
agricultural use, but this usually does not happen quickly. As farmers move from
the mixed farming patterns of the past to the fenceless half mile fields of
today, the switch to pasture land becomes less likely. In addition, the
confinement livestock producer has no need for pasture.
It’s the question of how quickly total cropland acreage changes in response to
the overall level of crop prices that is the “REAL” supply response issue.
Everything else tends to be window dressing. To get a ballpark estimate of the
price responsiveness of total cropland acreage, we statistically estimated how
much total harvested crop acreage changes following a one percent change in the
index of prices received by farmers for all crops.
Using regression to adjust for acreages in the Cropland Reserve Program and past
annual land diversion programs, we found that a one percent change in the index
of prices received by farmers results in a 0.15 percent change in total
harvested cropland acreages based on data since 1984. So with a 40 percent
change in the overall level of crop prices, for example, the estimated change in
total harvested acreage would be 6 percent. It is this relationship between
changes in overall crop prices and total cropland acreage that should be the
focus of discussion about supply response in agriculture. Yes total acreage does
change in the same direction as crop prices, but not by very much.
Daryll E. Ray holds the Blasingame Chair of Excellence in Agricultural
Policy, Institute of Agriculture, University of Tennessee, and is the Director
of the UT’s Agricultural Policy Analysis Center. (865) 974-7407; Fax: (865)
974-7298; dray@utk.edu;
http://www.agpolicy.org.