"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.
Conclusion
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.