Creating Winners

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Creating Winners

• Out of Chaos
• 20 September 2005

Gary Blumenthal World Perspectives, Inc.
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The Agenda

• Rationale for Farm Bill Change
• Rumors and Scuttlebutt
• Review of Issues by NASDA committees
• U.S. Winner Advantages

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Rationale for Change
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Rationale for Change

• Farmer Views
• Unfair competition from EU, Brazil and Argentina.
• Unfair trade policies with our products blocked
  (largest trade deficit yet WTO rules against).
• Rising land values blamed on farm bill
  (deadweight loss 30-35).
• Not enough rural development for comfort and
  younger people.

Confluence of Factors Driving U.S. Farm Policy

• Adverse Effects
• Budget Constraints
• Trade Negotiations
• Trade Disputes
• Farm Bill Justification

-0.6 FY 2006-2007
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Rumors and Scuttlebutt
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Timing

• Extend 2007 farm bill (due to Doha)
• 1995 became 1996 farm bill
• 2003 became the 2002 farm bill

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Political Environment

• Bush Administration
• Six questions
• Hints of submitting a farm bill proposal (first?)
• farm programs should not drive markets Chuck
  Conner
• Lame Duck in 2007

• Other Factors
• Iowa primaries
• Commodity prices
• Doha Negotiations
• Long-term planning at best

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Alternative Concepts

• Buyout (dairy buyout, tobacco, peanuts)
• Must be financially attractive
• Accepted by producers
• But avoiding future restoration by Congress?
• Risk Management
• EU investigating
• Shift to private (ie. Social Security)
• Devolution
• EU CAP Reform
• Depends on ones legislature!

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First do no harm

• The current farm policy approach is not
  sustainable, but any replacement must be doubly
  persuasive as to its wisdom and benefit.

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Farm and Ranch Financial Viability
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Basic Numbers

• 7 of farms receive 50 of subsidies 60 of
  farms receive no subsidies at all (no evidence
  they are less profitable).
• 400 farms 10 of production
• 35,000 farms (1.6) produce 50
• 2 million farms produce 50

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Past Efforts

• The number of U.S. farms has fallen by 2/3s in
  past 40 years.
• Japan has 4x support farms lost at 2x rate
• EU has 2x support farms lost at 50 faster.
• 225 billion spent over 13 years to slow the loss
  (63,000 farmers or 3.1 million/extra farmer).

Excess labor is a misallocation of resource.
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Farm Size and Viability

• Farmers in Bhutan and Bangladesh manage one-half
  acre of land apiece little differently than the
  first farmer 10,000 years ago.
• Lots of farmers so we must be competitive.
• Blairo Maggi 200,000 ha. in Brazil.
• Japan has focused support on small farms but now
  ponders favoring larger, younger operators.

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Support Farm Income

• Income higher under decoupling, especially with
  volatility.
• Land values higher with countercyclical payments.
• Market share has declined.

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U.S. Farmer Attitudes

• Government subsidies have actually stifled
  incentives for entrepreneurship among grain
  farmers by relieving financial pressure for them
  to adapt.
• Those who prosper in this future agriculture must
  be willing to challenge their traditional comfort
  zone
• Create competitive advantages rather than protect
  old onesbut this will be much more difficult
  if policymakers continue to emphasize income
  subsidies instead of strategic investments.

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Financial Principles

• Commodity Price Declines (perpetual -2 annual
  declines in real commodity prices)
• Value Chain Integration (reduces volatility
  risks)
• Waste and Preservation (labor is cheap land and
  tech is valuable)

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Global Problem

• Blame America (UNCTAD Meeting)
• Top growth areas for developing countries
• Information technology
• Textiles and clothing
• Renewable energy products

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Risk Management

• Price insurance (put options)
• Cash accounting and income averaging
• Crop Insurance
• (OMB assessment Results Not Demonstrated)
• Weather-based derivatives
• AFBF/ASA joint research

--Only a minority of farmers use market-based
tools. --Some IL FB Board members skip buying
crop insurance.
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Rural Community and Economic Development
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Conflicting Dynamics

• Commodity programs are weak rural development
  policy (rural population declines fastest in
  counties with largest farmers (Oxfam)
• Off-farm income makes small farms viable
• Rural development brings off-farm jobs.
• Minnesota's JOBZ program.
• Rural development and off-farm jobs elevate the
  land values that hurts farm viability.

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Bio-Industry Development
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Market or Policy Driven?

• Prospective new Farm Bill title
• Research under-funded
• Ethanol drives up the cost of livestock
  production.

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Global Trade and Competitiveness
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Market and Policy Drivers

• Both competition and opportunities have magnified
• Race to the bottom?
• Nearly every market loss is to Brazil FAS
• Domestic policies focused on maintenance of the
  status quo
• No unilateral disarmament

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Enhancing Markets and Marketing Opportunities
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Markets are Calling

• We pour billions of dollars into corn and wheat
  where markets are flat but export sales of seeds
  and tree nuts are booming.
• Product Value Shifts (affluence begets
  specialized demand)
• Low-Lin soybeans 170,000 acres this year, 1
  million next (Asia customers call)

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Marketing Principles

• Build the supply side of the business for the
  long-term
• Business Guru Peter Drucker
• Value is driven by marketing and distribution
  (farm value is 20 and declining)

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Specialization Example
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Farm Bill Titles

• Current Title
• Commodity Programs
• Conservation
• Farm Credit
• Agricultural Trde and Aid
• Nutrition Programs
• Research
• Forestry

• Market Based
• Consumer knowledge and demand
• Innovation
• Quality
• Traceability
• Investment and integration
• Nutragenomics

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Imports in lieu of Production

• Fruits and Vegetables
• Canola
• Pulses
• Oats
• Feeder cattle and pigs

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Sustaining Agricultural Resources
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Sustaining Commodity Money!

• Disaster payments deducted from conservation, not
  commodity programs
• Environmental Conservation Security not funded
• Conservation (OMB assessment Results Not
  Demonstrated)
• Green groups prevalent but commodity groups
  prevail cannot funnel all money into
  conservation.
• Large Farms the enemy of sustainability? Data
  indicates that small are exempt (CAFO) liability
  is correlated to environmental investment (UK
  study EPA megatrends).

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Biosecurity
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Daunting Risks and Costs

• CARVER Assessments
• USA unique in the cost burden

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Food Safety and Security Nutrition, Food
Assistance and Obesity
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Ensure Healthful Food Supply

• Obesity 1 health issue
• Five a Day FV is now 9-13 per day.
• Pump primed for carbs, fats and protein
• U.S. FV production is flat
• Imports up 50 in four years.
• Poor cant afford to eat healthy but cotton
  production up 35 in two years overhang in world
  markets market price half the loan rate.
• Health-based production scenario
• -700,000 acres of sugarbeets
• -1.2 mil. Acres of cane
• -25 hamburger

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Concluding Thoughts
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• There are important calculations on how to
  structure and win in the environment of the
  21st century agriculture.
• Proactive choices prevail over defaulting to
  passiveness Steven Covey
• Unless your proposals are compelling, the status
  quo prevails.

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U.S. Winner Advantages

• Capital/Resource Base
• Technology
• Management Capacity

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Capital/Resources

• Capital
• 11 Trillion GDP 38,000 per capita
• Water
• Land
• Low value commodities drive capital away

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Technology Development and Utilization

• Rabobank Study Labor Machinery -- U.S. is
  25-45 less expensive than Brazil and Argentina
  respectively technologies eclipse labor.
• RR Soybeans 900 expansion
• Biotechnology Kyoto Univ. researchers soybean
  that fights male baldness.

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Management Capacity

• More highly educated farmers
• Entrepreneurship
• Readily transferable skills? Culture

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