1

US Corporate Agribusiness and Farms:A Comparative Analysis of

Agricultural Policy

Larry D. Sanders & James NovakPrepared for

“Domestic and Trade Impacts of US Domestic Policy:

Opportunities and Challenges”Trade ConferenceWashington, D.C.

November 15-16, 2007

2

Claims of Economists & Politicians & A simple Question

ATrade is good; protection is bad; trade agreements that reduce protection are good.@

“For whom?”

3

How has the mix of US domestic and trade policy affected Farmers and Agribusiness?

Long term generally positive for sector

More volatility in both agriculture and agribusiness

Distributional inequity and concentration continue

Consumers have benefited w/price and diversity

Federal budget has worsened

Ag trade surplus has narrowed

General trade deficit has worsened

0

20000

40000

60000

80000

100000

120000

IMPORTS EXPORTS

US Agricultural Trade Balance, 1991-2007f ; 2012 projection ($mil/FY; agricultural product only)

NAFTA

WTO

FAIR96

FSRIA02

$114 b.

$107 b.

4

100

150

200

250

300

350

91 92 93 94 95 96 97 98 99 0 1 2 3 4 520

0620

07f

IMPORTS EXPORT

Index of US Agricultural Trade Balance, 1991-2007f (1991=100; FY; agricultural product only)*

NAFTA

WTO

FAIR96

FSRIA02

5

US Wheat price & exports, 1991-2006

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

200

400

600

800

1000

1200

1400

1600

wheat price ($bu)

wheat exports (mil. Bu.)

Line 3

Linear (wheat price ($bu))

Linear (wheat exports (mil. Bu.))

NAFTA

WTO

FAIR 96

FSRIA 02

$Mil. Bu.

6

US Corn price & exports, 1992-2006

0

0.5

1

1.5

2

2.5

3

3.5

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

500

1000

1500

2000

2500

corn price ($/bu; farm)

corn exports

Linear (corn price ($/bu; farm))

Linear (corn exports)

NAFTA

WTO

FAIR 96

FSRIA 02

Mil. Bu.

$

7

US Cotton price & exports, 1992-2006

0

10

20

30

40

50

60

70

80

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

0

2

4

6

8

10

12

14

16

18

20

cotton price (cents/lb; farm)

cotton exports (mil.bales)

Linear (cotton price (cents/lb; farm))

Linear (cotton exports (mil.bales))

NAFTA

WTO

FAIR 96

F

S

R

I

A

0

2

Mil. BalesCents

8

Predictions & Reality: Agriculture

Early/mid-1990s— Sets stage for market-oriented policy– Market improving

1996 Farm Act— A triumph of the free market?– Planned for market to continue up and govt to be

reduced Late 1990s— Reality check

– Prices down, markets down, govt support up

9

Predictions & Reality: Agriculture

2002 Farm Act– Increased government support

Reality in 2007– Government support & market up

2007 (?) farm bill proposals– Generally continues government support to farmers

w/little reform

10

How will the next farm bill (2007 or later?) likely affect Agriculture, Agribusiness & future trade talks?

House & Senate versions– Generally status quo w/commodity provisions– Options for revenue programs provide similar or even large

support levels (varies by commodity and region)– Modestly increased funding for conservation– Generally ignores WTO reform & cases

Agricultural impact– Similar to 2002 act: NFI continues hi/up; govt support steady;

exports likely up…largely due to supply and demand. Agribusiness impact

– Financial indicators positive, with returns tightening Future trade talks

– Little interest until new President and Congress; then may be limited

11

Net Farm Income & Direct Government Payments

($bil., 1991-2007f); 2012 projection of NFI

0

20

40

60

80

100

120

140

1991

1993

1995

1997

1999

2001

2003

2005

2007

f

2009

2011

net farm income

govt payments

NFI-G

F

A

I

R

9

6

$ BillionF

S

R

I

A

0

2

87.1

13.6

73.5

NAFTA

WTO

127

12

Index of Net Farm Income and Government Payments, 1991-2007f (1991=100)

0

50

100

150

200

250

300

350

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

f

net farm income govt payments NFI-G

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Net Farm Income & Government Payments: Trends1990s-present

1991-95 96-02 03-07

NFI 43.5 46.9 73.8

Dir. G. 9.2 14.8 16.7

NFI-G 34.3 32.2 57.1(G/NFI)% 21 32 22

Range (G/NFI)%

16-30 13-48 15-32

Average ($bil/yr)

Note: Estimates suggest about 2/3 of Government payments go to support top 10% of producers. Further, top 10-15% of producers produce about 80% of gross sales. Further, government payments tend to be capitalized into land rents. Research studies indicate that, for every $1 of crop subsidy tied to cropland, the cash rent increases by about $1.

14

Predictions & Reality: Agribusiness

Early/mid-1990s— Sets stage for market-oriented policy– Indicators generally up – ROA, ROE steady to lower

1996 Farm Act— A triumph of the free market– Agribusiness hopes for expanded markets, lower prices, less G

Late 1990s— Reality check– Earnings down; volatility increasing– Profits mixed; ROA, ROE generally lower– Exports generally down (contrary to hope)– Government support had greatly increased (contrary to plan;

32% average)– The market contribution to net farm income had declined

(contrary to hope)

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Predictions & Reality: Agribusiness

2002 Farm Act– Re-commitment to increased gov’t protection

Reality in 2007– Globalized markets/concentration– Volatility increases…politics, energy costs, competition, etc., – Financial indicators generally up but stagnating– WTO negotiations stagnant…however bilateral/regional agreements

progressing.– Increased WTO claims against US, w/US losing

2007 (?) farm bill proposals– Agribusiness continues to promote “free-er” market w/less govt support,

less taxes and intervention for US and WTO– Congress generally ignores WTO cases– Little support from Admin, less from Congress for WTO reform

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Food Industry Financial Indicators, selected crops, 1991-2008*: Earnings/share (cents/share)

-200

-100

0

100

200

300

400

500

ADMConagraKellogg Pilgrim's PrideTyson's Foods

Cents/shareNAFTA

WTO

FAIR

FSRIA

17

-400

-200

0

200

400

600

800

1000

1200

1991 1993 1995 1997 1999 2001 2003 2005 2007

ADMConagraKellogg Pilgrim's PrideTyson's Foods

Index of Food Industry Financial Indicators, selected crops, 1991-2008*: Earnings/share (1991=100)

Pilgrim’s Pride buyout of Goldkist

Tyson’s buyout of IBP. ADM buys Minn Corn

Conagra eats Holly Farms later dumps seafood and cheese

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Food Industry Financial Indicators, selected crops, 1997-2008: Return on Assets (% after tax)

05

101520253035404550

ADMConagraKelloggPilgrim's PrideTyson's FoodsNFI ROA

$mil FSRIA02

19

0

20

40

60

80

100

120

140

160

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

*

2008

*

ADMConagraKelloggPilgrim's PrideTyson's FoodsNFI ROA

Index of Food Industry Financial Indicators, selected crops, 1997-2008*: Return on Assets (1991=100)

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Some Tentative Conclusions Since NAFTA, WTO, FAIR96 & FSRIA02: Is this what we expected?

1. Trade has improved, with both imports & exports up.

2. Net Farm Income has improved.

3. Distributional inequality increased.

4. Selected major agribusinesses have done relatively well.

5. Concentration has continued, perhaps accelerating.

6. Rent-seeking by agriculture and agribusiness has increased & been successful.

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Summary of US Agricultural Exports & Net Farm Income, 1991-2007fy

Trade & trade agreements are an integral part of the farm profit picture.

However, farm bill subsidies are too.

Farm interests will continue to rent-seek for trade and subsidy opportunities.

Agribusiness will too. It’s part of gaming the

system.

0102030405060708090

100

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

f

0100002000030000400005000060000700008000090000

net farm income ($bil) exports ($mil)

NAFTA

WTO

FAIR96

FSRIA02