Farming Magazine - July, 2011

COLUMNS

Opinion: Topiary and Public Opinion?

An agricultural forum for the progressive farmers of the Northeast.
By Martin Harris

If your humble scribe were (subjunctive contrary to fact) of conspiratorial mindset, he would view a recent series of articles in the national media as the beginnings of an attempt to shape public opinion (in agriculture, that's 98 percent consumer, 2 percent producer) with respect to the new commodity, mostly grain, price levels. We are being instructed to understand the new prices - over $7 per bushel for corn, over $8 per bushel for wheat, both more than twice recent decades historical levels - as "the new normal." The source of the message is, so far, unclear; as the hapless Captain Renault of "Casablanca" fame said, "all the usual suspects" should be considered.

The last time this grain-price spike - to unacceptable-to-consumers levels, actually producing grower profits at the farmgate - happened, the U.S. government acted in 1980 to embargo exports, ostensibly for Cold War reasons, but actually because, since 1972, grain prices, rising in response to higher export percentages, had begun to show up in retail food prices. As ag historian Bill Ganzel later wrote of the Carter embargo (you can read his full commentary on the livinghistoryfarm.org website), "Over the next few years, grain prices dropped by half."

This time, when the chart lines first began rising, your scribe assumed that, just like last time, Washington would "protect" its consumer-voter base from "undue price increases" (a Little Ag Adjustment Act of 1937 lingo, there) using the embargo device to create an instant price-depressing domestic surplus, just as Russia has already done. Wrong. Now, I'd guess that this time, with U.S. trade balances and national debt in far worse shape, the export embargo won't be repeated.

The fine art of shaping public opinion bears some comparison with the once hugely important art of topiary, the shaping of trees and bushes into different appearances: in both, the intent is to convince the viewer that he's seeing something other than his observation and experience are telling him. Thus, the trimming of trees into stacked geometric figures or bushes into leafy, but unreal, camels and bears isn't totally unlike the varied political spins given to government programs, spending and results. A visit to Vienna, once the heart of the Habsburg Empire, or to Versailles, once the heart of the French Bourbon dynasty, shows this art as it's still practiced where it was born and then transferred.

Part of the opinion-shaping message comes through the Federal Reserve, whose Vice Chairman Janet Yellen has just (April 12) officially advised us that "... the rise in global commodity prices should have only a fleeting impact on inflation." Unspoken: "It can therefore be left uncorrected." You already know that the fed sees its dollar value stabilization objective as 2 percent annual inflation, and you've already seen official Consumer Price Index charts showing overall (including food and energy) inflation at about 2.4 percent and core (excluding food and energy) at about 2.2 percent. Parenthetically, the 2001 to 2011 chart, on the Bureau of Labor Statistics website, is worth a look: it clearly shows the 2.5 percent decline in food prices during most of 2009, an economic fact that went unremarked by all the usual suspects in the perennially vocal consumer-food-price-complaint industry.

Another part comes through the Associated Press wire service, which sells news copy to hundreds of print publications across the U.S.; in a 36-column-inch article (that's large, by AP standards) it reports that "pushing grain prices up, possibly for years to come, are growing sources of consumption ..." Reporter Christopher Leonard then lists three: expanding Asian demand, domestic ethanol use and commodity speculators. And, indeed, China, a 15-million-ton corn exporter in '03, is now a 2-million-ton importer; ethanol now takes more than a third of U.S. corn production. And, the fed's Quantitative Easings 1 and 2 have made trillions in "borrowable" credit available to Wall Street commodity traders. Leonard mentions neither any federal incentives to increase domestic production (remember Ag Secretary Earl Butz and his 1974 "plant fence-row-to-fence-row" exhortation to growers?) nor any federal embargoes to keep the grain at home, but he does mention the usual urbanite worry that "... the biggest grain crop [this year] since 1944 won't likely be enough to halt food - price inflation." Note to readers: that's the supposedly already-in-place food-price inflation the fed denies.

A third part comes through such mainline industry economists as Paul Ashworth, chief U.S. economist at Capital Economics, who advised The Wall Street Journal (March 17 2011) that "... core inflation is going to stay fairly muted ..." even though, the Journal reports, "... wholesale food prices surged 3.9 percent - the biggest increase since 1974 - as harsh weather hit agricultural commodities and compounded existing supply problems." Not to worry: "... most of the increase in [retail] food prices came from fresh vegetables." Contrast that with the WSJ's headlines last October: "Harvest Shocker Rattles Wall Street" and the subhead "USDA Lowers Projections for Corn, Soybeans and Wheat: Rising Food Prices Feared."

In recent columns, I've quoted various ag experts predicting (hoping/expecting?) that growers will increase acreage and output so that prices get back where they belong, below cost-of-production (my phrase, not theirs), but those predictions aren't showing up much any more; the "new normal" is. The actual phrase "new normal" is now in widespread use, but with no claims of authorship. And, of course, with profitable production prices the old normal - all the usual suspects complaining about federal farm subsidies - has returned to print.

Here's a recent quote from a large multipaper ad (full-page, probable cost $250,000) published in November 2010 by the Cato Institute, a right-leaning Washington think tank: "Far from 'saving the family farm' federal agricultural subsidies are environmentally destructive corporate welfare, with more than 70 percent of aid going to the largest 10 percent of agribusinesses. Zeroing out farm welfare will save $25 billion annually." A day later my three-question inquiry went out to Cato. So far, no reply. Most growers (most, but not all - think dairy - subsidies have gone to grains) would agree: with profitable farmgate prices, they don't need or want subsidies. Cato doesn't address the original design intent, the incentive-not-to-quit aspect of subsidies, and how a few billion in subsidies "saves" urban consumer/voters 28 times that amount when passed through to their food budgets. Here's the math exercise: when farmgate prices were last at parity for a multiyear period (the post-World War II years) consumers spent 25 percent of income on food. Farmgate prices were profitable, debt was minor, and quits weren't a problem. Today, median household income is at $50,000, and food spending is at 10 percent, or $5,000. If it were still at 25 percent, that would be $12,000. Difference, $7,000. Multiplied by 100 million households, that's an annual $700 billion in income not spent on food. The return on $25 billion of production-stimulating subsidies is 2,800 percent. Not bad for a program aimed at diverting discretionary spending to other sectors of the economy, everything from cars to taxes. Very probably, there are other causes (like the extraordinary long-term gains in ag producer productivity) for the decline in percent of income spent on food, but, for a quick take on the role of subsidies, the above math exercise is at least a starting point. Enthusiasm for ending farm commodity subsidies now extends to both the Capitol and the White House. The administration's list of spending cuts, published on April 12, includes "... $360 billion over 12 years ..." or $30 billion a year, somewhat more than the recent average closer to $25 billion. The House budget sets the cut at $300 billion over 10 years. Same number. It's a vote winner with urbanites, whose advocacy groups manage to complain about rising food prices even when they're falling (2009) and that they're "skyrocketing" (a favorite news channel talking head verb) when they're rising at the fed-desired 2 percent rate (2010). In my own most recent shopping foray, I found bread, cheese and chicken at slightly lower prices, milk and catfish at slightly higher prices, but then your humble scribe isn't a highly skilled national-price-survey purchaser.

Two points militate in favor of the "new normal" in grain prices being accepted by consumer/voters as the message senders intend: one is the political/superficial attractiveness of ending farm subsidies, a practical reality when farmgate prices are high enough that producers won't quit and thereby create real price-boosting shortages. The other is that, agribusiness protests to the contrary notwithstanding, the actual commodity cost built into the typical retail food item is quite low (in a just-under-16-ounce $4 box of Wheaties, there's a nickel's worth of wheat built into the recent farmgate price rise from, say $5 to $8, for example) so that even if it were passed along to consumers in full (but not with the usual markup) it wouldn't generate buyer sticker-shock. A third point might not be persuasive, at first, but so inevitable that it will eventually force urbanite acceptance: Global growth in population and wealth, coupled with massive deficit money creation in most western countries, means that global bidding with cheaper currencies for grain will intensify, irrespective of whether American farmers add a few million acres (or not) of cropland. The "new normal" for grain prices, then, means that a $7 corn bushel will really be worth the same old $3 to $4 or so in inflation-adjusted purchasing power. Unlike 1940 to 1971, when those who argued the bushel-of-wheat-worth-a-barrel-of-oil thesis were mathematically correct, today's price divergence now makes that ratio seem highly improbable, but their time may come again. Will this "new normal" policy message sell, or is it just trompe l'oeil political topiary? History tells us that the Bourbons imported not only a new fashion of landscape sculpture/art from Vienna, but a Habsburg Princess to be a French Queen as well, and her food policy message to the Parisian urban-consumer public, "Let them eat cake," was not well-received. You might say that her political career and stature were cut short as a result of her ill-advised advisory.

The author is an architect and former farmer.