"New Rules for Producers in a New Era for Agriculture"

Remarks By

Commissioner Joseph B. Dial

Commodity Futures Trading Commission(1)

South Texas Farm and Ranch Show

October 2, 1997

The information I would like to share with you today comes from my 35 years of experience as a farmer, rancher, banker, and exporter of agricultural products -- and from a multitude of people who are actively involved in today's dynamic agribusiness and futures industries. I am fortunate in that I have been able to build up a network of contacts that seems to weave back and forth around the globe like the cow paths that crisscross the ranch lands of South Texas. For the most part I stay in touch with these folks through e-mail on the Internet -- the back yard gossip fence of today's electronic global village.

I recognize that for some people the title for my presentation, "New Rules for Producers in a New Era for Agriculture," may sound like I am going to explain a new set of government regulations you will have to follow in the future. Let me assure you I have absolutely no intention of doing that. On the contrary, in the next 20 minutes I will try to cover three fundamental issues for today's agricultural producers. First, a review of the changes I think are responsible for creating a new era for agriculture. Second, I will talk about how I believe these changes will revolutionize production agriculture in the 21st century. Third, I will show how these changes will result in new rules for producers. Finally, I will conclude with some suggestions about how you can follow these new rules and enhance the profitability of your agricultural enterprise.

Changes in Public Policy Usher in a New Era for Agriculture

On a beautiful cherry blossom spring day in early April 1996, the Federal Agricultural Improvement and Reform (FAIR) Act became law in the US. I think this legislation will have the same effect on public agricultural policy around the world that the collapse of the Berlin wall had on global public economic policy. Just as the fall of Communism encouraged both developed and developing nations to move toward a free market philosophy, so too has the fall of price supports and production controls pushed producers, in the U.S. and elsewhere, to make the transition to farming for the market and not the government. We have not seen agriculture rely this much on the market for almost 70 years.

Indeed, similar changes in farm policy, from government controls to a new market-based freedom to farm, are underway in many other countries. Three and one-half years ago I was invited by officials of the United Nations Conference on Trade and Development (UNCTAD) to serve on their Group of Experts. This advisory panel to the Committee on Commodities met in Geneva, Switzerland, for three days. We were asked to prepare a road map to the future that governments could use to facilitate farmers' use of private sector tools to manage their risks. Even back in 1993 there was an awareness that deficit reduction was a must, and that governments around the world would need to gradually move producers toward relying more and more on the market.

There are many specific examples of this process in action, from the New World, where Brazil is transitioning toward a reduction in farm subsidies, to the Old World, where the members of the European Union have initiated various adjustments to their Common Agricultural Policy (CAP). This window dressing of the CAP was discussed in part during a conference I chaired in London, in October of 1996, on Risk Management in European Agriculture.

Some of the other countries that are making major changes to their governments' farm policies, include Japan, Australia, New Zealand, Mexico, and Uganda. In April of this year, I gave the keynote lecture at a "Forum on Risk Management" in Japan. The next day, I met with government officials in Tokyo to discuss the role private sector risk management tools will have under a different Japanese farm policy. While I was in Sydney, in December of 1996, I visited with senior management of several of the largest agribusiness companies in Australia. There too, we discussed the adjustments their organizations are making as a result of changes in farm policy there and abroad.

When you combine these paradigm shifts in public farm policy with the GATT and NAFTA trade agreements, you change the dynamics of how the agricultural sector has operated during most of the 20th century.

Furthermore, as China moves its public policy more toward a free market philosophy, a realignment of global economic power is taking place. One of the results of this turn of events is an increase in the disposable income of millions of people in China. This translates to a growing consumer demand for better diets -- a trend that is compounded by more millions of wage earners in other Pacific Rim countries. All of this adds an unprecedented new economic dimension to the supply/demand equation for food and fiber.

The changes I have just outlined in the areas of public policy -- freedom to farm, liberalization of global trade, and increased reliance on market driven economies -- is a confluence of events with far reaching consequences. Thus, as we approach the next millennium I believe we are entering a new era for agriculture.

A Revolution in the Making

The profound changes in public policy I just described will bring about a revolution in production agriculture in the 21st century that I believe will be of a greater magnitude than the mechanization of farming in the 20th century. True enough, the replacement of draft animals with tractors and combines was monumental in its impact on agriculture.

However, even with these new tools, producers the world over were still farming for the government and not the market. That arrangement oftentimes created various inefficiencies in farming, which in turn limited the financial rewards for those producers who sought to maximize their operational efficiencies. I believe recent changes in US farm policy have altered that pattern of cause and effect. As a result, I think a revolution in production agriculture will occur in the 21st century.

Let me explain what I mean with the following examples: in the past, government- imposed production controls caused farmers to make decisions that were focused on protecting their "base acres." The effect of such government intervention was that many growers did not optimize their profit opportunities by responding to market demand, nor could they take advantage of proven soil improvement practices. Instead, they chose to hold onto their "base acres" in return for the government managing a portion of their price risks through deficiency payments and their yield risks through ad hoc disaster checks.

As you know, the FAIR Act has eliminated production controls and you now have the freedom to change your crop rotation using existing generic commodities. Or you can plant value-added biotechnological (BT) seeds that may have an even greater profit potential. As I will explain later on, that change in the farm program is the first step in revolutionizing the business models for production agriculture over the next five to ten years.

As I just noted, production controls, deficiency payments and ad hoc disaster checks were all tied together under the old program. Under the FAIR Act, you now have the freedom to farm as you choose, but that freedom comes with a price tag. Within a few years the government will stop trying to manage your price risks. Thus, your last transition payment will come in the year 2002. In addition, there is always the possibility that at some time in the future Congress will require USDA to reduce its subsidy of crop insurance premiums. This elimination of the government financial safety net is the second step toward revolutionizing production agriculture in the 21st century.

The third step in the revolutionary process is changes in government farm policy in many other countries. For example, in the mid 1980s, New Zealand terminated all government supports for farmers in one year -- bang, it was over! As you would expect, most of the agriculture community went ballistic and claimed their industry would be dead in a few years. Today, they have a more efficient and financially stronger agricultural economy than before. As I mentioned a moment ago, Australia, Brazil, Mexico and others are gradually removing production controls and financial support for producers in their respective countries. What this means is that farmers in those countries will become more and more efficient and thus more competitive in the world market.

Add to this trend of growing competition, the liberalization of global trade by agreements such as NAFTA and GATT, and the growing demand for better diets, which I noted earlier, and you are writing a new chapter in the manifesto for the coming revolution in production agriculture.

So there you have my scenario for how changes in public policy are revolutionizing production agriculture. Now let me turn to how these changes will result in new rules for producers in a new era for agriculture.

New Rules for Producers

Rule No. 1: Today's farmer will have to become tomorrow's business specialist in production agriculture.

Reason: The government is no longer going to make your marketing decisions for you, nor will it continue to manage your yield and price risks.

Rule No. 2: The computer with all its technological power will become the farmer's most important tool -- even more important than the tractor!

Reason: The computer is the gateway to knowledge and knowledge gives you a financial advantage.

Rule No. 3: In order to capture premium prices for "value added" BT feed or food grains, you will have to develop a unique "added value" to your particular operation.

Reason: Global competition among millions of farmers will mean slim profit margins for those producers who only raise generic agricultural commodities using standard practices.

I'm sure there are other rules you and I could come up with, but these basics are all I can cover in my allotted time. So let me now move to the final part of my presentation -- some suggestions about how you can follow these new rules and enhance the profitability of your agricultural enterprise.

How to Play by the Rules and be a Winner

Rule No. 1: Today's farmer will have to become tomorrow's business specialist in production agriculture

The simple answer to how you can enhance your skills as a business specialist in production agriculture is -- spend more time and money on continuing education in business matters. You and your spouse are the most important asset your agricultural enterprise has. More important than your land, buildings, or equipment. Many of the world's most successful corporations spend tremendous sums of money on continuing education for their employees. These businesses realize that, notwithstanding their billions in assets, without educated and well-trained people they would be just another mediocre company. The same principle applies to your farm or ranch operation.

In my mind, continuing education takes two forms. First, structured, instructional type programs that are available in classroom settings or distance learning arrangements. These might include video and/or audio tapes with workbooks, interactive computer courses, conferences, seminars, and demonstrations. The second category is not generally accepted as formal continuing education. Nonetheless, I believe it is critical to the business management decisions you make. This type of education comes from a continuous flow of information you need in order to stay abreast of events that affect your business. The Internet is one of the best sources of both formal continuing education programs and the daily flow of information of economic importance to you. In any event, there is an abundance of public and private sector educational programs available and many of them are free. Ask your county agent about the Master Marketer Program. It is one of the best courses available on marketing and how to manage price and yield risks. To his credit, Victoria County agent Joe Janak sponsored one of the first Extension Service marketing clubs in the state, some seven or eight years ago. I know, I attended it.

Rule No. 2: The computer with all its technological power will become the farmer's most important tool -- even more important than the tractor!

Having someone in your operation that possesses an intermediate or higher degree of proficiency with a computer is a must for the successful business specialist in production agriculture. That means you, a family member, or an employee must be able to use a computer to store, organize and analyze all the data that is pertinent to your operation.

You cannot maintain a useful marketing program, including a risk management plan, on the back of an envelope in the glove compartment of your pickup. Developing a balance sheet, P&L statement, cash flow work papers and your income tax return is hard to do if all the records are in shoe boxes in a closet.

Without the computer you can't access the world's largest storehouse of information and thus knowledge -- the Internet. Can you farm without the Internet? Sure. All other things being equal, can you go head-to-head with the farmer who uses the Internet to achieve an information advantage over you? I doubt it. Can you maximize your profit opportunities without the Internet? Not under the new rules for producers in a new era for agriculture.

Rule No. 3: In order to capture premium prices for "value added" BT feed or food grains, you will have to develop a unique "added value" to your particular operation.

"Added value" means your operation can attain a quality control threshold for specialty products that few other farmers can match. As a result, you and the limited number of other producers like you can command a premium price based on the "value added" components of your BT feed or food grains.

Here's an example of what I'm talking about. According to an article in Pro Farmer, Clarkson Grain Company in Cerro Gordo, Illinois, is getting premium prices, from $0.30 to as much as $12.00 per bushel over the market, for specialty soybeans and corn produced by qualified farmers. The producers who are enjoying these premiums have "added value" operations that can maintain rigid cultural and handling practices necessary to guarantee quality and uniformity. This allows them to capture the "value added" components of what they produce. By the way, all of Clarkson Grain's 1997 production is already sold and part of it is being used in a new Japanese snack food.

Remember I said earlier in this presentation that the elimination of production controls was the first step in revolutionizing the business models for production agriculture. This is one example of what I am talking about. How many farmers received up to a $12.00 per bushel premium for the number two yellow corn they produced just to protect their "base acres?" It is obvious that "freedom to farm," combined with the enhanced profit potential of BT seeds, is destined to change what farmers plant in the future. In fact, some pundits are estimating that by the year 2001, 50 percent of the corn and soybeans produced in the US will be "value added" transgenic feed and food grains.


The new rules for producers that I have suggested may seem for some people to be a tough hill to climb. Granted they do present a number of challenges. However, I believe many of you in this room, and others like you across the country, have already decided you want to be a winner in the new era for agriculture. And you are already playing by the new rules. For example, your attendance at this conference is evidence you recognize the importance of continuing education. Just yesterday, I spoke to an Extension Service Market Master class in Wharton -- another example of producers learning how to become better marketers and risk managers.

Looking further afield, this year more farmers in Iowa and Nebraska bought Crop Revenue Coverage policies than ever before. Again, clear evidence that producers are playing by the new rules and establishing their own financial safety net. In addition, the Mississippi, Illinois, and Iowa state Farm Bureaus, just to mention a few I am familiar with, are actively offering continuing education programs that will enhance their members' general business, marketing and risk management skills.

On a national level, USDA is currently gearing up its nationwide Risk Management Education Program, as authorized by the FAIR Act. I am honored to be one of three members of the steering committee that is directing this effort.

Looking to our second rule -- according to a recent USDA study, 68 percent of the farmers in Utah have access to a computer and 29 percent of those producers are surfing the Internet. Nationwide, nearly 4 out of every 10 farmers have access to computers, although only 20 percent currently use those computers in their operations. On balance, however, I think the trend is definitely in the direction of greater computer use by more farmers -- playing by new Rule Number Two.

A moment ago I gave you one specific example of how farmers in Illinois are employing our third rule. I am familiar with a number of other, similar new age business models, although I don't have time to cover them here. The bottom line is -- there is also a very encouraging trend on Rule Number Three.

Finally, and most importantly, as an experienced producer with an intuitive talent for raising crops and taking care of livestock and poultry, you are already more than halfway toward the goal of managing a profitable successful agricultural enterprise in the new era for agriculture.

1. *Please note: the views expressed herein are those of the author and do not necessarily reflect those of the Commodity Futures Trading Commission or its staff.