A New Agricultural Policy for a New World Market

By Barkema, Alan; Drabenstott, Mark | Economic Review - Federal Reserve Bank of Kansas City, Second Quarter 1994 | Go to article overview

A New Agricultural Policy for a New World Market


Barkema, Alan, Drabenstott, Mark, Economic Review - Federal Reserve Bank of Kansas City


A new farm bill will be enacted in 1995, and the debate over it has already begun. With farm bills being renewed just once every five years, the 1995 bill provides a propitious opportunity to re-evaluate the current bill in light of fundamental changes to the marketplace since the adoption of the 1990 bill. One of the most important changes since then has been in the world food market. Selling successfully in world markets is vital to U.S. agriculture because it produces far more food than domestic consumers require. Thus, while the upcoming farm bill will spawn debate on many issues, few will be more important than reconciling U.S. agricultural policy with a new world food market.

Recent developments in the world food market reflect basic changes in two key market features. The market for finished food products is much stronger than for bulk commodities. This trend has held down the growth in U.S. agricultural exports because bulk commodities still account for most of our foreign sales. The food market has also been growing more rapidly in Asia and North America than in Europe. This trend has prompted U.S. exporters to shift their sales away from a traditional dependence on Europe, a shift that appears well under way.

If these trends persist, will current farm policy be in step with the world food market of the future? This article's examination of the factors likely to shape the world market concludes that agricultural policy must be overhauled if U.S. agriculture is to excel in tomorrow's marketplace. The first section of the article reviews recent fundamental changes in the market for U.S. agricultural exports. The second section explores the future direction of the world food market. The final section discusses policy changes that may be needed for U.S. agriculture to take full advantage of the new opportunities emerging in the global food market.

RECENT TRENDS IN U.S. AGRICULTURAL EXPORTS

U.S. agricultural exports began to recover in 1986 after plummeting in the early and mid-1980s. The recovery period provides a useful gauge of the basic changes occurring in the world food market (Chart 1). (Chart 1 omitted) Two key trends underlie the recovery. The first trend relates to what products the United States is selling. Traditionally, bulk commodities have dominated, but sales of consumer products are now growing more rapidly. The second trend relates to where the United States is selling. The United States is shifting its sales away from Europe to the Pacific Rim and North America.(1)

TRENDS IN PRODUCT SALES

Historically, the United States has primarily been an exporter of bulk farm commodities. The nation's vast cropland, favorable climate, and well-developed infrastructure helped the United States take advantage of the 1970s boom in farm commodity trade. Recent trends, however, suggest that the United States must continue to adjust its products to a world market where finished food products are in greater demand.

Measured in real terms, world food trade has increased nearly a third over the past two decades. All of the growth has been in consumer and related products (Chart 2).(2) (Chart 2 omitted) Bulk commodity trade grew substantially through the 1970s but fell sharply in the 1980s and now stands below its pre-boom level.

Despite the prominence of consumer products in the world marketplace, bulk commodities continue to dominate U.S. exports. While consumer products account for 45 percent of world agricultural trade, they make up less than a third of U.S. agricultural exports. U.S. exports of bulk commodities have fallen from a two-thirds share of all U.S. agricultural exports in the early 1970s, but they are still much more important than consumer products. In the world market, by contrast, bulk commodities account for less than a third of all agricultural trade.

Growth of U.S. exports since the mid-1980s has been much stronger for consumer products than for bulk commodities. …

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