Wednesday, February 21, 2018

This Is a Worst-Case Scenario?

April 2002

One way to understand how much trouble you may be in is to “bracket” the problem with best and worst-possible outcomes. These results can be too unlikely to warrant much attention, but at least you know that the probable answer is somewhere in between.

I wonder why we have not done this with farm policy. We have neither described what the ideal solution would look like, nor examined the end-of- the-world circumstances. Best case ideas are usually starkly impossible (high prices, low costs, low risks, light competition). Worst-cases are usually overwrought and hysterical.

One problem is the vague horror associated with the unthinkable possibility of deregulating agriculture. No government programs? At all? It could never work. But no evidence is given to buttress this conclusion.

For good reason, it turns out. Of all the possible choices for farm policy, applying the American system of free enterprise is the last considered. I recently asked an economist at FAPRI – world class ag forecasters – whether they had ever modeled a future with no programs. The answer: Nope, nobody has ever asked.

How odd. The same system that seems to work for the rest of our national economy and – with the exception of 8 subsidized and protected commodities – most of agriculture, has never been contemplated as a rational solution for the farm problem.

We just assume we know what would happen if there was no farm program, subsidies, tariffs, quotas, etc. Farmers would all go out of business, food would be scarce, rural economies would vanish, the country would plunge into depression, yadda, yadda.

Hardly. In the first place, ending the farm program would affect producers only in the proportion to which it currently enriches them. The large number of small farms who derive little income from the government would be unfazed. Many other commercial operations with deep pockets and owned land would have one brutal, but not fatal year.

As for those whose budgets would not come close to balancing, an interesting economic flux would develop, I believe. Assume half (100,000) of subsidized producers are instantly and enormously unprofitable. (I think this number is high, but stay with me). Landowners everywhere would be looking for new tenants, acres and machinery would be for sale. Survivors would need to expand by 100% simply to cover the acres.

Likely some acres would not get planted. Acres where crop insurance and subsidies comprise the highest proportion of income would be idled first. Bluntly put, artificial farm economies on marginal land would be devastated.

Farmers would suddenly have some leverage with owners. Cash rents would decline, share rents might even rebound. Land values would be all over the board, but likely lower everywhere. Bottom line: fixed costs would plummet.

And let’s not forget prices. If the market price for beans is $4.00 for example, how many acres will be planted in the US? Not as many with our supported price of $5.25, I’ll bet Prices would necessarily rise to ensure production to satisfy demand. Our customers will be placing their own bets. My guess is they will opt for covering their needs as soon and as cheaply as possible. If we really need corn and beans and sugar, customers will have to pay what farmers can grow them for. Uncle Sam won’t be sharing the tab. If growing these commodities has simply been make-work, we will discover that too.

How many farmers would disappear? Your guess is as good as mine. But certainly not all, and likely not most. As uncomfortable as this thought is, watching the same thing happen in slow motion isn’t much better. How many farmers should America have anyway? Are we all on tenure?

Would America go hungry? Absolutely not. America needs agricultural output and can easily afford it. Where it comes from doesn’t make much difference. Besides most all food crops – meat, vegetables, and fruits – are already deregulated.

Would rural America perish? It would be harsh in some areas, but not many. As noted in a recent Kellogg Foundation report ( the largest source of income in rural areas is the service sector and only 1/6 of rural residents are farmers.

Would any of the apocalyptic prophesies come to pass? I don’t know, and neither does any one else. We haven’t even bothered to ask. I think we all suspect the answer. Economic freedom – like democracy – looks horrifying until you compare it to the other choices.

Our worst-case scenario may be to keep doing what we are doing now.

Saturday, February 17, 2018

The new value of signing your work

January 2002

Recently the pork industry has followed a predictable pattern established in poultry (and somewhat in cattle) of consolidation and contract production. Pork, it seems, is a protein of a different color, though. Contract pork production has suddenly been revealed as a major threat to our way of life.

Hogs have always been the great chance for the hardworking individual farmer to pull himself up. Perhaps, it is the loss of this virtually guaranteed opportunity many now mourn. With ambition and effort, thousands of farmers have farrowed their way to better incomes, all the while oblivious to the market conditions that made this possible: consumer acceptance of variable meat quality and a fragmented distribution system.

Both factors are largely gone. I doubt if Wal-Mart and Albertson’s will be giving way to butcher shops soon. Moreover, I believe franchises will dominate the restaurant sector, which now claims most food dollars. The implication is that meat demand will be determined by fewer decisions, and center on large volumes of uniform products. 
The production response has been to deploy huge facilities with identical, specific genetics. Farmers have been able to participate in the trend via contractual agreements that supply them with the inputs they needed (genetics, expertise) and utilized their assets (labor, land, capital).

However, many see such alliances as usurpations of the Jeffersonian agrarian ideal – a concept as outdated as it is misinterpreted. Perversely, even while despising the change in markets, producers have seen pork demand climb as a result of attention to consumer preference.

Now it seems the same concerns have spilled over to grain production. “Indentured servitude”, is how one Minnesota professor put it. Farmers will “lose their freedom to manage”. Poor analogy, I suggest, since indentured servants were invariably drawn from the bottom of society, while contracting entities typically recruit from the top. Besides, if a producer can be duped into one-sided arrangement, how good of a manager is he in the first place?

Give me a break. I have been producing corn under contract for several years – entire crops, in fact. Jan and I have found the premiums make a big difference. Changing how we plant, cultivate, harvest, and document our crop is one way that we can compete. While we have given up the freedom to plant whatever bag was handy, spray whatever had a cute commercial, harvest any field with the combine set how we like it, and keep all our records in our heads, these are hardly liberties worth manning the barricades for.

Such loaded language makes lively magazine text, but little sense. Agriculture has, in my opinion bred a producer population with real “commitment issues”, and this is a prime example. Yielding modest autonomy in exchange for equivalent constraints on the buyer’s part can benefit both parties. Yet critics sound like confirmed bachelors contemplating marriage.

It is easy to imagine we are Masters of our Domains, given our isolation. But in fact, we are more connected than ever before. Sending anonymous products to the marketplace is a strategy of minimum effort. A better hope for producers is to capitalize on personal strengths. Put more simply, advantages now accrue to those who will identify and stand behind their production – signing your work, as it were. By contracting, this is what I agree to do. Those who consider it boot-licking are largely those who fear to be judged by any precise standard, preferring anonymity and bulk to cover their mistakes. Contracting means the end of blending off poor quality products, for example.

Contracts also hide economic details from public scrutiny. This is good news, I believe. Keeping my business private gives me some small advantage by adding an element of surprise for my competition. Such discretion is one small step toward emphasizing personal responsibility instead of relying on herd treatment. It also means that negotiating skills and market judgment take on immense importance in addition to production skills. My business in the grain buyer’s office is the same as my business in my lawyer’s office: my business. This willingness to negotiate alone is often seen as a betrayal of solidarity by those who depend on inclusion as a substitute for initiative.

Above all, it is important to remember that virtually all grain producers now operate under a contract with the USDA. If contracts are the root of evil shouldn’t we start by attacking the most pervasive threat first?

Thursday, February 1, 2018

Stuff is cheap; people are expensive

March 2000

For me, few emotions can match harvesting a large crop. Big production numbers generate a deep satisfaction. I think this is because I am “stuff-biased”. My value system places physical materials at the very top. Moreover, all my life I have been taught that the most honorable way to wealth was to create tangible goods.

Most people trade labor for wealth. Whether by the hour or year, compensation depends on the quality and quantity of your effort. For such workers, America’s transition to a service-driven economy has been less disruptive. But it is confounding agriculture.

Adding to the difficulty is the surprising output boost that has occurred in most areas of production. From gold to sunflowers, predicted demand growth has not only been met, but exceeded by technology-driven productivity gains.

Stuff is pouring out of farms and factories around the world at unimaginable rates and low costs. Last Christmas I bought tree lights made in China at a cost of $1.99 for a string of 100. How is this possible? That’s what I tip a parking attendant! Computers that cost $2000 last January now can be had for $999.

Meanwhile, my tractor labor bill at the dealer features a rate of $45/hour. Tuition, movie tickets, and health insurance climb relentlessly. This is not simple deflation we are experiencing.

Employment has become the vehicle of choice for fulfilling our social contracts. From day-care to counseling; from pensions to out-placement, a job is more than trading labor for pay. It is an obligation of support by the employer that is increasing pervasive and expensive. Selling a product carries no such extra burden. One transaction type is growing in value (the job) and one is shrinking (the sale)

So we sit in agriculture, outraged that the piles of our production don’t bring us wealth. More worrisome, many of us are betting the farm on a return to a “stuff-based” wealth standard. Unfortunately, convincing the world that stuff is what is important will be a tough sell.

Maybe it is time for our accounting system to change. Human effort now adds much more than just muscle output. The technological level needed for our lives means that those who provide those benefits can command compensation – and get it. How badly do you want your TV to work, or the MRI scan to diagnose accurately, or the plane to land safely? Obviously, enough to pay well.

Consider too, the “throwaway” mentality of modern existence. Fixing appliances has become a questionable effort. The most important and costly input for cornflakes is not corn, but figuring out how to get the consumer to pick your flakes instead of your competitors’. Our indignation at these violations of our value system is sharply at odds with the rest of the world.

The astonishing wealth of the US allows lifestyles filled with what would have been deemed waste fifty years before. Those years were when my parents were forming my value system. Consequently, all the rules I was taught about what is valuable need some scrutiny. Saving broken machinery because “it’s a good piece of steel” doesn’t add much to my bottom line unless steel is relatively expensive. Spending time recovering and storing all manner of seemingly useful stuff makes sense only if your time is relatively valueless. I think unexploited time, not our inventory, could be our most valuable asset.

These facts have forced me to adopt a new principle that I use as a background for my business decisions: Stuff is cheap, people are expensive. I chant that to myself several times a week, like I used to mumble “don’t let them take the baseline” during basketball practice. My goal is to stop being surprised by the world’s new value system.

The hard part is overriding my longstanding economic prejudices. For instance, if I want to grow stuff for a living, I plan on doing it as cheaply as possible – instead of wishfully hoping for increasing prices. Secondly, any time I can decrease the amount of services I buy – fix my own computer, calculate my own taxes, do my own wiring – I can save serious bucks. Third, I am developing services I can sell or incorporate into my output.

Consequently, my life is changing. Marketing often takes precedence over production. Mastering new skills can be more important than saving inputs. In fact, several enjoyable jobs that used to yield big returns no longer do so – like tillage. At the same time, wading through information streams, grappling with confusing crop insurance programs, or tracking down dollar flows can yield “bankable” results.

This economic philosophy means education and the ability to keep learning may be our most necessary tool in the future. I look at time as well as acres as a predictor of income generation. Most difficult, I am changing my pack-rat lifestyle. Throwing away much of my hoard keeps me from seeing wealth where none actually exists.

My new goal: Become an expensive person who can prosper selling cheap “stuff”.