News reports about the U.S. economic boom can be patronizing when you received $30 a hundredweight for your hogs at the same time. But that doesn’t mean the agricultural economy runs inversely to the general economy.
Alan Barkema, vice president and economist for the Federal Reserve Bank of Kansas City, says the current situation is driven by large supplies of agricultural commodities and soft world demand for those goods.
Chris Hurt, Purdue University ag economist, points to Asia’s economic troubles as an example. Between 1980 and 1997 the average Asian income was increasing about 10 percent annually. U.S. agriculture increased its production for export to Asia. When Asia’s economic expansion stopped, U.S. agriculture expansion could not decrease its production accordingly.
Nearly half of all U.S. exports were in agricultural goods in 1997 and 1998, when Asian incomes dropped along with a sharply falling currency. That made it difficult to export goods to Asia.
“With the excess capacity abroad it did help trim inflationary pressures domestically and was generally good for the consumer,” says Barkema.
One theory is that agriculture is an early indicator of what lies ahead for the general economy. Hurt believes this is not true and has been built up as some myth, due to some famous historic examples.
After World War I, U.S. agriculture was in a major recession and then in 1929 the stock market collapsed, propelling the country into the Great Depression. However, Hurt points to the fact that in 1929 agriculture represented 30 percent to 40 percent of the U.S. economy. Today, that number is closer to 2 percent. So agriculture now has a relatively low ability to affect the economy as a whole.
However, there are some similarities between the Dust Bowl Era and today. There was a massive stimulation of demand due to the war, when the United States was feeding the world. At the time, 30 million acres were put into production. Supplies were high, but low prices wouldn’t bring the land out of production as quickly as high prices added production.
That is similar to what happened in the 1990s with the Asian exports, particularly in the pork industry.
That doesn’t mean that the U.S. economy is headed for a crash.
Barkema believes business expansions will continue through 2000, although the trend may slow slightly. However, the picture is not so rosy for agriculture.
“It will take at least a year to clean up the huge supplies we have,” says Barkema. “Livestock could have a better year than the past few, as production numbers drop, demand remains brisk and grains remain cheap.”
The net farm income for 1999 was $48.1 billion, and that is expected to shrink to $40.4 billion in 2000, according to USDA’s Economic Research Service.
Still, just because the general economy and agricultural economy don’t have a definite relationship, economic indicators can affect farm prices. For example, if interest rates rise, that tends to slow investment spending, which would slow business expansion.
Another factor is unemployment. The current unemployment rate is 4.1 percent, which is very low. For the public, that means consumer spending is solid, which also means they will spend more on agricultural and other products.
The flip side of that coin is that the low unemployment rate has stretched the labor market, causing a shortage of laborers for jobs on your farms as well as for other ag-related businesses like packing plants.
The reasons for the U.S. economic boom are three-fold, according to Richard Vietor, department head of business, government and international economics at Harvard Business School.
First, in the early 1980s U.S. businesses began restructuring to make products more competitive.
Secondly, the Reagan administration passed a recovery tax act, which helped reduce inflation. Then, in 1998, the Clinton administration passed a deficit-reduction act.
Everything is not perfect, however, with the U.S. economy. The trade deficit is currently running about $340 billion annually.
In addition, Vietor points to the personal savings rate – currently at zero, which means all investments need to come from either businesses or foreign investors.
Investors were certainly a factor in agriculture’s recent past, particularly pork production. Now, investors are less likely to put capital into a pork operation, because of abundant production and low profit margins.
A series of specific events led to the current U.S. agricultural situation. While the U.S. economy’s strength helps and hinders U.S. agriculture, both sectors are likely to see some amount of adjustment in the next few years.