Agriculture in the Twenty-First Century *
by Neil E. Harl **
As with most sectors of the world economy, agriculture in the last years of the Twentieth Century has been a sector of great change. Closed markets are giving way to free trade, open democratic systems with decentralized decision making are gaining ascendancy over despotic regimes, technology is revolutionizing every facet of production and distribution and competition is assuring that consumers everywhere are elevated to a high pedestal faintly reminiscent of the kings of old. As the Twenty-First Century dawns, the world is poised on the edge of what could be the era of accomplishing the elusive goals of the ages--peace, prosperity and victory over hunger.
It is assumed that the governing policy goals for the food and agriculture sector will continue to Include--(1) availability of an abundant supply of food, at reasonable prices; (2) maintenance or enhancement of the productivity and environmental integrity of natural resources; and (3) a prosperous and productive economic climate for producers (including family farmers).
I. Structural Considerations
Structure of the Agricultural Sector
A major concern as we move into the Twenty-first Century is the structure of the agricultural sector. By structure, I mean to embrace considerations of size and scale as well as who is to manage, control and finance farming and agribusiness operations.
Role of competition. To a considerable extent, structure will be driven by economic considerations. This country has been committed for some time to the notion that if someone can develop ways to produce goods or services at a lower cost, barriers are unlikely to be erected to prevent that from happening. In large part, the consumer is king and generally rewards the best value with purchases. However, for the economic system to function properly, it is critical to have--
Farm size and structure. One facet of the structure is what is likely to happen with respect to size and control of farming operations. While it is believed that cropping operations will continue for some time to be dominated by family-owned and operated firms, the stage is set for a great deal of consolidation of farming operations over the next few decades. It appears likely that, absent implementation of countervailing policies, farm size will continue to increase, perhaps on an accelerated basis, for three reasons--(1) the pressure to spread machine costs over more acreage and to achieve economies in purchasing inputs and selling outputs; (2) the desire to achieve higher income levels; and (3) the present levels of concentration of land ownership in older hands.
It should be recognized that the competitive effect of a particular operation is essentially the same whether located in the same section or across the country. If the product involved is sold into a national commodity market, the competitive impact is similar wherever located. Indeed, to the extent the product involved is traded in an international market, the effect of low cost operations on the sector is the same wherever production occurs. This suggests that there are practical limits on the extent to which one state, acting alone, can deliberately influence the structure of the subsector. Long term a state can impose additional costs, direct or indirect, on a firm only to the extent that the state enjoys an overall competitive advantage over production in other states. Costs imposed beyond that point would be expected to cause new investment to be made elsewhere.
Although rarely used, another policy alternative for influencing structure would be to affect the cost curve for certain operations, perhaps those above a specified size or scale. This discussion has typically centered around (1) use of property tax increment financing incentives for large operations and (2) granting of property tax preferences of family farm operators and agricultural buildings up to a specified amount.
Cost curves could be raised for larger, more efficient firms to remove any perceived cost advantages by imposing a tax on facilities, use of inputs or outputs produced. Long-term, if done uniformly over the entire market, the result would be higher costs of the end products to consumers or lower profits or both. Justifications for such action may either include recovery of public costs associated with externalities of larger operations or structural preferences of the public.
Another approach would be to impose additional requirements on firms above a specified size or scale, perhaps relating to waste handling and disposal, which would impact the cost curve of firms. The result would be similar to a tax. It should be noted that, in both instances, the effect could be a competitive disadvantage for a state levying a tax or imposing additional requirements unless the measures were imposed uniformly over the production area comprising the market for the product.
A contrasting policy response is to provide a subsidy for smaller producers to assist in defraying costs of environmental compliance as is now available under the Environmental Quality Incentive Program (EQIP) authorized by the 1996 farm bill. Half of the funds allocated under the EQIP program must be directed to environmental problems of livestock production. Large operations with greater than 1000 animal units are not eligible for cost sharing under the program. Alternatively, providing subsidies to institutions that provide small farmers with access to critical factors of production, capital or markets represents an indirect response to achieving a similar end.
The Era of Contract Agriculture
The signs of increasing use of contracts are commonplace--especially on the production side of agriculture.1 Specialty grains, feeder livestock, even fruits and vegetables, are being produced under contract and have for some time. So what's the concern about the rising tide of contract agriculture? Basically, the concern is a tilt in market power with a possible shift in bargaining power as input suppliers and output processors (and first purchasers otherwise) gain greater economic power, undoubtedly at the expense of producers.2
Concentration in seed companies. Mergers, alliances and various other forms of arrangements are reducing the number of players in input supply, particularly in seeds, and increasing the level of concentration. Figure 1 shows the extent to which arrangements between and among the major firms in the seed area have come to permeate the input supply sector. While the level of mergers, alliances and consolidations is not a completely reliable indicator of competition, the fact that nearly $15 billion of such amalgamations has occurred over the past three years, some at price levels difficult to justify under present economic conditions, suggests that--(1) some are discounting revenue from a pot at the end of some unknown rainbow; (2) irrational behavior is being displayed; or (3) some acquiring firms are assuming that a greater share of the world's food bill can be claimed by seed suppliers.
But increasing levels of concentration among firms do not tell the entire story. The revolution in ownership of germ plasm, the feature of cells that determines the characteristics of offspring, also is moving rapidly toward concentration in a few hands. The high-profile alliance (and now merger) between DuPont and Pioneer Hi-Bred International, the Monsanto acquisition of DeKalb and the Monsanto acquisition of Delta and Pine Land Company (since terminated) are recent examples of how the ownership and control of genetic material in crops is falling into the hands of a few, economically powerful players. Increased concentration is also leading to control by a few firms over the major processes by which genetic manipulation occurs, thus enabling those controlling the technologies to block use by other firms.
This development is partly related to the changing role of the land grant universities, partly to the ability in recent years to manipulate germ plasm through genetic engineering, and partly to the consequences of the ability to obtain a monopoly-like position over unique life forms and over the process of genetic manipulation.
Figure 1. Concentration in the Seed Business
I. Astra Zeneca * (United Kingdom)3
II. Aventis SA * (France)
III. Dow Chemical Company *
IV. E.I. DuPont de Nemours & Co. *
V. Monsanto Company * 4
VI. Novartis AG * (Switzerland)5
VII. Other Companies +
*Life Science Companies; + Seed Companies; � Joint Ventures; # Cooperatives; ? Other Companies
Source: Pioneer Hi-Bred International, Inc. and the Center for International Agricultural Finance, ISU.
Effect of contracts. An important question is the effect concentration in the seed business and control by the few resulting firms over germ plasm will likely have on contract negotiations with producers. It depends on the options open to producers who don't like the terms of contracts offered to them. With numerous contract possibilities available from input suppliers, each offering inputs of roughly equal productivity and cost, the answer is perhaps "not much."
But if there are just a few options, with the next best offering a much less attractive set of inputs in terms of cost and productivity, such as when a variety of seed is developed with significant yield premium over otherwise competitive varieties, the answer is "take what you're offered." A greater proportion of the value of the yield premium is expected to be captured by the seed supplier under those conditions than has historically been the case. The outcome is likely to be a tilting in the terms of contracts in favor of the input supplier. The division of revenue from production would be expected to shift over time in favor of the party with the monopoly or near-monopoly position. Seed companies and other input suppliers can be expected to drive the best possible bargain which means, in the case of seed, capturing the greatest possible percentage of the value from any yield premium.
A good argument can be made that this perception of potential profits in the future is part of what is driving the intense push toward concentration in control over germ plasm now occurring.
Thus, a major issue is whether a shift in market power occurs between input suppliers and producers, whether that shift in market power is translated into enhanced bargaining power and whether the enhanced bargaining power is employed to siphon a greater proportion of the economic return generated by the sector into the hands of input suppliers.
Other shifts may follow. The negotiating power of seed firms could well have other impacts.
These seemingly innocent shifts would mean, however, that the economic position of the producer would be transformed from that of a risk-taking entrepreneur into a relatively riskless world of fixed compensation. Thus, a shift not only of compensation would occur in favor of the input supplier but also a shift of management functions in the same direction. The outcome would be reminiscent of the limited role played by growers under broiler contracts.
Barriers to entry. In general, one would expect high handed economic behavior by near monopolists to be met by entry of new competitors attracted by the generous terms of contracts in favor of the input suppliers. And that would likely occur if entry were possible. However, barriers to entry may be fairly high.
Position of Small Seed Firms
A major issue is whether smaller seed firms are likely to be able to acquire germ plasm and thus remain viable. Certainly the small firms have remained surprisingly healthy in recent decades as performance traits of the varieties and hybrids developed by the larger firms have tended to outdistance the performance of seed marketed by small firms.
But the era of transgenic hybrids produces both the incentive to maintain greater control over high performing germ plasm and the technology and resources to challenge those who manage to obtain the germ plasm in clandestine ways. The larger firms may acquire some smaller firms to complete their distribution network and licensing germ plasm for a fee may well occur. However, it is unlikely that the dominant firms will generate additional competition by licensing to smaller firms.
Indeed, with the smaller firms predictably unable to maintain access to higher performing germ plasm, the price of lower performing seed varieties and hybrids is expected to reflect the economic disadvantage inherent in the lower performing varieties. At some point, many if not most of the smaller seed firms that are unaligned with the dominant firms will be unable to survive economically.
Antitrust Surveillance
Another possible area of protection against a sharp tilt in the economic terms of contracts is vigilance by federal (or state) anti-trust agencies. Certainly the Federal Trade Commission and the U.S. Department of Justice should be sensitized to the potential for economic abuses down the road.
Further consolidation in any highly concentrated sector merits scrutiny under the Clayton Act rules that impose limits on mergers expected substantially to diminish competition. So-called horizontal mergers or mergers of competitors are the most likely to be challenged. Other areas of antitrust challenge involve production, including price fixing, agreements to divide markets and group economic boycotts. These are all per se offenses under federal antitrust law.
It's been well established for decades that firms with monopoly power over a product should not be able to "tie" other products to the transaction and extend the monopoly position.9 Such contracts are used to create "economic leverage" by using monopoly power in one market (the market for the tying good) to create monopoly power in a second market (the market for the tied good). Such arrangements, which involve tying products over which a firm does not have monopoly power (such as financing, insurance or risk management) to a product over which the firm does have monopoly power (such as a seed variety), are also illegal per se unless it can be demonstrated that the product in monopoly status wouldn't work as well with other firms' products. And, that is rarely the case.
In a 1936 U.S. Supreme Court decision, IBM was prevented from requiring purchasers of its calculators to buy punch cards for data entry from IBM.10 Similarly, in United Shoe Machinery Corp. v. United States,11 a seller occupying a "dominant position" in the shoe machinery industry, without more, violated the Clayton Act 12 by contracts tying to the lease of its machines the purchase of other types of machinery and incidental supplies. In a 1947 U.S. Supreme Court decision,13 conditioning the leasing of patented machines for dispensing industrial salt on the lessee's purchase of the lessor's salt, the court said that it is "unreasonable, per se, to foreclose competitors from any substantial market" if the seller enjoys a monopolistic position in the market for the tying product or if a substantial volume of commerce in the "tied" product is restrained.14
In finding that the leases violated the Clayton Act, the court relied on International Salt's patents as establishing its market power in the tying products (the salt dispensing machines) and on the substantial dollar volume of business in the tied product which was foreclosed to competitors as establishing the requisite competitive effects. Once the minimum threshold conditions were met, the court held that a violation had occurred. As the court stated--
"We think the admitted facts left no genuine issue. Not only is price fixing unreasonable, per se, but also it is unreasonable, per se, to foreclose competitors from any substantial market. The volume of business affected by these contracts cannot be said to be insignificant or insubstantial and the tendency of the arrangement to accomplishment of monopoly seems obvious."15
The court rejected the defense that the tying arrangement was necessary for the effective functioning of the potential product (or product over which the firm had monopoly power). As the court stated, "[b]ut it is not pleaded, nor is it argued, that the machine is allergic to salt of equal quality produced by anyone except International."16
Some economists have criticized the antitrust treatment of tying contracts as not leading to economic leverage in all instances.17
If the objective is to maintain significant levels of competition in input supply, FTC and the Department of Justice should scrutinize all seed industry mergers carefully for anti-competitive consequences and all practices by seed companies in tying credit, insurance, risk management or other needed inputs to seed availability. One problem in relying on FTC or the Department of Justice is that both agencies seem to believe that the agriculture is the last bastion of perfect competition and is competitive by a comfortable margin. The problem is not one of diminished competition among producers but among those who supply inputs and process or handle products from the producing subsector.
GMO Controversy
The degree of consumer acceptance of genetically modified organisms (GMOs) will likely have a major impact on the speed with which consolidation and vertical integration in the seed business are translated into economic benefit for the major seed companies. Widespread consumer resistance could slow perceptibly the move toward consolidation and vertical integration.
Solutions
If sufficient public interest and political will are generated, three solutions seem to lie within the feasible set.
Antitrust oversight. First, aggressive antitrust oversight at the federal level (and among the states) is the traditional way for proposed mergers and alliances and other anti-competitive practices to be evaluated on the basis of potential anti-competitive effects. The objective should be to insure that all sectors and subsectors have equal, and low, economic power. Because of the importance of food and the policy significance of maintaining a healthy producing sector, it may be necessary for the Department of Justice to be funded specifically to maintain a substantially higher level of oversight over structural shifts in food and agriculture.
Collective action by farmers. One possible strategy for farmers is to forge alliances among producers (which is specifically allowed by federal law so long as it does not "unduly enhance" price).18 The push to achieve such countervailing power was the driving force behind the formation of labor unions a century ago. Historically, however, farmers have been unwilling to accept such a disciplined approach to achieving bargaining power.
Section 1 of the Capper-Volstead Act of 1922 19 provides protection from antitrust challenge for producers who seek to bargain collectively with seed companies and other input suppliers.20 A resolution,21 passed in 1917 by the National Board of Farm Organizations,22 provided that--
"Producers and consumers are bound together by economic laws which they did not make and which they cannot repeal. Between these two are powerful agencies whose only interest it is to take such toll as they may, as products are passing from producer to consumer. These agencies, by reason of their financial connections, exercise an influence far greater than is warranted by their numbers or the service they perform. We therefore urge upon Congress the necessity of such an amendment to the antitrust laws as will clearly permit farmers' organizations to make collective sales of the farm, ranch, and dairy products produced by their members. Such organizations, with liberty of action, can insist that the agencies engaged in processing and distribution sell such products at prices as low as may be consistent with the cost of production and distribution.
This was the beginning of the drive for legislation to address the perceived problems of agricultural cooperatives. The objectives of the proposed legislation were to remedy two problems encountered under Sec. 6 of the Clayton Act in 1914 (which provided a limited agricultural exemption to antitrust enforcement)--(1) the limitation of the protection in Section 6 of the Clayton Act against antitrust challenges to organizations "not having capital stock" and (2) the failure of Section 6 of the Clayton Act specifically to permit certain cooperative marketing activities.
The Capper-Volstead Act provides that "persons engaged in the production of agricultural products as farmers, planters, ranchmen, dairymen, nut or fruit growers, may act together in associations, corporate or otherwise, with or without capital stock, in collectively processing, preparing for market, handling, and marketing in interstate and foreign commerce, such products of persons so engaged."23 The Act goes on to allow "Associations [to] have marketing agencies in common; and such associations and their members may make the necessary contracts and agreements to effect such purposes."24
To come within the protection of the Capper-Volstead Act, an organization must--(1) be operated for the mutual benefit of its members; (2) either limit each member to one vote regardless of the amount of stock or membership capital the member owns or, if dividends are paid on the basis of members' stock or membership capital, the dividends must be limited to a maximum of eight per cent per annum; (3) not handle a greater amount of products from nonmembers than from members; and (4) not be operated for profit.25
The grant of immunity from antitrust challenge was further limited by a provision that if the Secretary of Agriculture finds that an association "monopolizes or restrains trade in interstate or foreign commerce to such an extent that the price of any agricultural product is unduly enhanced thereby he shall issue�an order�directing such association to cease and desist from monopolization and restraint of trade."26
The key question is whether producers will be willing to sacrifice independence of action in order to bargain collectively for access to seed and possibly, other inputs. The most likely avenue for such collective action is through cooperatives.
More germ plasm in the public domain. Another potential solution is for the public to increase its support for crop breeding by land-grant universities and other public agencies with transgenic hybrids and varieties made available to smaller seed companies. This would restore the land grant universities to the role played before the advent of genetic manipulation and the dramatic increase in private sector funding for new varieties and hybrids.
To a considerable extent, this possible outcome is dependent upon the perception in state legislatures and the Congress as to the public interest, long-term, in maintaining a greater degree of competition in seed supply. Legislative bodies are more likely to respond if convinced that dominance of seed supply by a few large firms, worldwide, could affect food costs by influencing the supply of food through contractual mechanisms.
Role of Institutions
Arguably what is likely to emerge over the next few years is a heightened awareness of the efficacy of institutions in limiting or constraining economic activity. To the extent that institutional intervention is successful, a major concern is how to keep institutions in adjustment with changing economic circumstances. Markets reflect changes day by day, minute by minute. Yet, institutions tend to remain in place, frequently producing economic rents for some, until sufficient momentum is generated to effect change. To a considerable degree, institutions limit (as well as facilitate) market operations but without the same self-adjusting features as markets.
Objective of Vertically Integrating the Sector?
The moves made by the major players, particularly the seed companies, could lead one to conclude that the objective is to vertically integrate the sector. Such an objective could be pursued for several reasons--(1) to gain and maintain greater control over patented products or products subject to intellectual property protection otherwise; (2) to apply economic pressure on producers to relinquish functions in favor of the integrator (such as risk management) or to merely provide an opportunity for risk to be off loaded onto the integrator; (3) to enhance profits of the integrating firm; or (4) to achieve greater market share on an assured basis.
Almost everywhere you turn, concerns are being voiced about structure of the agricultural sector. It may be the torrent of mergers and alliances in the seed business since 1996 (almost $15 billion in total), proposed merger of Cargill and Continental Grain, the announced merger of Smithfield Foods and Murphy Farms (and initially, Tyson's hog operations), the merger of Case-IH and New Holland or any one of a number of other high profile mergers and acquisitions.
The key question: what's wrong with mergers? It's occurring in every other sector--banking, entertainment, telecommunications and internet marketing, to mention a few areas with intense merger activity in recent months.
Are mergers a greater problem for agriculture? Or is agriculture over-reacting?
Bottom line concern. The greatest hazard for producers is the vulnerability in a world of high levels of concentration in input supply and output processing and high levels of vertical integration from the top down.
Example: let's assume concentration in hog slaughter continues to increase (the four largest firms now control about 60 percent of hog slaughter compared to about 80 percent for steer and heifer slaughter) and the hog slaughtering firms vertically integrate in the manner pioneered by Smithfield. Before dropping the Tyson merger, Smithfield would have controlled about 68 percent of hog slaughter. Let's say we're down to two huge firms and each is 90 percent integrated. A producer with a five year contract with one of the two major firms comes to the end of the contract. The new contract is considerably less attractive than the expiring contract. The producer is told--take it or leave it. If the closest competitive option is 500 miles away--and is also heavily integrated--the producer seeking another option for hogs is highly vulnerable. If the producer had made a heavy commitment to facilities, the vulnerability is greater yet. Clearly, a producer in that situation is likely to be squeezed.
Is this any different from vertical integration in the automobile industry, for example? The answer is yes. Producers are so numerous, even yet, that a vertically integrated packer can terminate one or even several with no concern about an adequate supply of hogs. That is not the case with most suppliers in other vertically integrated sectors of the economy.
What all of this adds up to is this--if farming is to be made up of independent entrepreneurs as producers, it is absolutely essential for producers to be assured of meaningful competitive options. To assure that outcome, it is necessary to--(1) limit concentration in input supply and output processing or handling and (2) limit the extent of vertical integration.
Conventional assessments of mergers. The approaches used by the Antitrust Division of the Department of Justice and by the Federal Trade Commission (FTC) focus on the probable impact on consumers. That has been the principal concern of the antitrust system. For agriculture, however, the concern is the impact on producers--assuring producers competitive options. Consumers may ultimately be affected but that is down the road. That's why a different approach is needed in the evaluation of agribusiness mergers if there is a shared vision of maintaining a sector of independent entrepreneurs as producers. Unless that vision is articulated by the Congress and the Administration, the chances of meaningful actions by the antitrust system are slight.
Problems with High Levels of Concentration
Even if not coupled with high levels of vertical integration, concentration in input supply and output processing and handling can be and often is anti competitive. Both economic theory and experience confirm that high levels of concentration can distort the sharing of economic returns in favor of the monopolists and near monopolists.
Since 1890, and the enactment of the Sherman Act, the Congress has been on record as concerned about high levels of concentration and since 1914 concerned about mergers that could substantially lessen competition.
Problems with Vertical Integration
Although vertically integrating a sector or subsector may produce economies--including reduced costs for acquisition of commodities--vertical integration by powerful integrators can have decidedly negative consequences. Among those negative outcomes is the demolition of open, transparent, competitive markets and replacement of those markets with negotiated prices. With a huge difference in bargaining power, as between the parties, the outcome is predictable. The party with the weaker market power tends to be the loser. Unless producers act collectively, producers tend to be the weaker party.
In Conclusion
To a disturbing degree, what is happening involves market power and the exploitation of that power. The key issue, at the moment, is what type of producing sector is in the long run best interests of consumers--and others.
Some readily concede that an objective of vertical integration is one of the forces driving the push toward a contract-based agriculture. As one seed company CEO has stated, in responding to a question of how farmers could back away from the trend toward vertical integration--"Absolutely nothing, because these are property rights owned by the companies and so the farmer is going to become more and more at the mercy of the few who own intellectual properties. Again, it goes back to the shortsightedness of funding basic research in such a parsimonious fashion. The universities are becoming branches of whoever they can get a contract from."27 In a follow-up question of how farmers could participate in the upside associated with specialty crops, the CEO said--"In order for the American farmer to participate, we have to make sure that intellectual property goes back into the public domain. As long as our government is so shortsighted that they continue to de-fund basic research at the universities, the U.S. farmer has a huge problem facing him. Without government funding, companies are going to fund research and control it."28
Agricultural production may never be transformed as dramatically as indicated by the scenario outlined in this article. But, it�s well within the range of feasibility. Other scenarios could be posited including--(1) one where producers are left relatively unaffected as the shift occurs to a contract-based transaction system for the agricultural sector and (2) a scenario which producers may benefit from such a shift. The latter, it would seem, is relatively unlikely over the long-term.
In the meantime, the prudent course would suggest careful evaluation of mergers and alliances now occurring in rapid succession and careful consideration of the level of resources flowing into the development of transgenic hybrids and varieties in the public domain.
If economic abuses develop, producers may resort to collective action in acquiring germ plasm needed in their operations. Producer and producer groups have often resorted to lobbying for institutional limits or constraints on the market in an effort to achieve a more favorable (to them) sharing of the economic pie. The key questions are (1) what policy variables would need to be manipulated; (2) what impact that would have on consumers, on economic efficiency and competitiveness globally; and (3) the feasibility of such intervention politically?
II. The GMO Controversy
The announcement in mid-April that Archer-Daniels-Midland and A.E. Staley & Co. would not buy genetically modified corn that wasn't cleared for export to the European Union (EU) triggered all manner of concerns in the grain trade and by producers. The announcement led immediately to concerns about seed purchase decisions already made and to grain sales at or after harvest.
Basically, it's a contract issue. Contracts are the instruments of choice for dealing with uncertainty. It's a matter of contract language involved in seed purchase. And it's a matter of contract terms on sale. Ultimately, the outcome depends, however, on economic forces. Demand and supply conditions will ultimately dictate how the matter is resolved.
Scope of the Problem
In the Spring of 1999, the problem involved seven transgenic corn hybrids which hadn't been cleared by the EU for import. However, the problem has widened in recent months.
Announcements over the past few weeks have confirmed an old adage in open, market-oriented economies. The Consumer is King. Whatever the consumer wants the consumer will get. The big concern--no one knows for sure what the King wants. This is a ranking research need that needs to be addressed--yesterday.
Here are several of the more significant developments--
What does all of this add up to? The most probable scenario is labeling on a world-wide basis within a few years, including the U.S. Food processors are notably cautious when it comes to perceptions about food safety. Memories of serious missteps by manufacturers are fresh in the minds of many in management suites.
Economic Issues
The situation is likely to be governed by three key economic issues--
In all likelihood, consumer demand will be influenced by the relative cost of products containing GMO ingredients and those labeled as not containing GMO. Indeed, it may take a few years of Adjusting--by consumers and by producers--before a stable, predictable relationship is established.
Hazards of Contamination
There's been a great deal of discussion about the possibilities of contamination of non-GMO crops with GMO varieties. Certainly, opportunities for contamination exist in planter boxes, combines, augers, elevators, wagons, bins, trucks and at the elevator.
But one source of contamination that hasn't received as much attention is pollen drift in corn.
Example: Farmer A decides in early 2000 to plant all GMO in the coming crop season. Of his four close neighbors, two chose to plant only non-GMO corn varieties. All farm across the fence from A. The distance is short enough to assure that several rows of non-GMO crop will be contaminated with GMO germ plasm, perhaps up to a quarter of a mile.
Could that lead to liability for A? Could the non-GMO producers bring an action for contamination of their crops?
Thus far, there's no precedent. But similar problem situations have been litigated--
All of this suggests that litigation likely lies ahead--if both GMO and non-GMO production takes place for crops, like corn, where pollen can and does drift.
Right now, it seems prudent to check with neighbors to see what's planned for 2000 and the planting patterns for GMO and non-GMO varieties.
Guidance for Producers
What does this mean for producers? Here's our take on the situation--
Here's what they can realistically do--
Here's what producers should be careful not to do--
There's another worry--the Uniform Commercial Code imposes implied warranties or promises in some situations. An implied warranty of fitness is imposed on the producer as seller if the seller has reason to know any particular purpose for which the goods are required if the buyer is relying on the seller's skill and judgment in providing the goods. This could very well be invoked against a producer if the conditions are met. You can disclaim or nullify an implied warranty of fitness but it takes a conspicuous, written provision in a contract.
An implied warranty of merchantability is imposed on merchants. Nearly half of the states treat farmers as merchants. One feature of this warranty is that the goods must be fit for the ordinary purposes for which they are to be used. Implied warranties of merchantability can be disclaimed or nullified by the producer as seller if done orally or in writing in language that mentions merchantability.
So What Does This All Mean?
Check immediately with likely purchasers. What are they requiring? Some may not yet know. Once the answer to that question is known, check carefully the language in any statement you're asked to sign. Use caution in responding orally.
Remember, even non-GMO crop likely isn't completely free of GMO germ plasm. But the GMO level may be at an acceptably low level. A key problem--no one has set tolerances. Without tolerances, no one knows for sure where the line will be drawn.
But it will be difficult to pin liability on anyone unless there is testing at every point of commingling of the crop. And that's not in the cards for the 1999 harvest. Indeed, it will be some time before reliable testing is in place.
Sooner or later, the buck will stop with producers. But that's unlikely to be the case in 1999.
For next year's crop, producers should be sure they have firm commitments from financially responsible purchasers before lining up GMO seed.
Winners and Losers
Without a doubt, the big seed companies gambled and rank among the losers.
Technology nearly always benefits consumers. But in this case, many consumers are giving transgenics the cold shoulder. The benefits from this generation of GMOs aren't obvious. And if there's the slightest doubt--in terms of food safety or the environmental impact--consumers tend to say thanks but no thanks.
What about producers? This brand of technology is mostly output increasing or cost decreasing or both. That means early adopters would benefit from a successful introduction but all producers lose in the long run as the technology boosts output with price and profitability dropping disproportionately, in the face of inelastic demand for many products. With bungled introduction, the early adopters lose--but producers generally will be better off in the long-term. That's the case even if the effect is cost-decreasing. Cost decreasing technologies have a built-in profit incentive to boost output at the margin. And that ultimately means lower prices and profits.
Finally, what's the likely impact on structure of the agricultural sector? Disappointing acceptance rates by consumers will slow the trend toward vertical integration of the crop sector--and could derail much of the momentum.
III. Thoughts on Farm Policy
Concerns About the 1996 Legislation
The 1996 farm bill represented a significant departure from federal farm legislation since 1933. While the transition away from government programs will likely produce a more rational system of resource allocation, several important implications of the shift deserve mention.
More fundamentally, the question is whether the Congress will allow the use of price to reduce supply. In October of 1998, Congress passed an economic assistance package totaling $5.975 billion to insulate partially U.S. farmers from the effects of low prices. Legislation providing an even larger assistance package is expected in 1999. These amounts are in addition to AMTA payments, LDP payments, disaster assistance and marketing loan costs. The total outlay was more than $15 billion in 1998 and could excess $22 billion in 1999. A major question facing Congress is what U.S. farm policy will be for 2000 and beyond.
While some sectors of U.S. agriculture have enjoyed favorable prices until quite recently, low prices have returned. The result of an increase in supply is a disproportionate drop in price--and in profitability. That means consumers are in a very favorable position, assured of an ample supply of food and fiber at a relatively low cost, long-term. But, it means also that producers periodically endure periods of low prices.
The agricultural sector, in terms of policy, is characterized by two important features:
--First, the number of producers is so great that no single producer can influence price with their output decisions and so they may not cut back on production until price drops below variable costs or they are able to shift to a more profitable alternative crop. This feature makes it difficult for the sector to reduce supply without government assistance.
--Second, although we have become very clever in developing more effective chemicals, better seed varieties, larger and more efficient equipment and improved management, our cleverness still hasn't given us much influence with weather. Year-over-year, weather is the big factor influencing supply of the major crops in this country. Given the enormous capacity to produce, a series of years with favorable weather puts pressure on price. It was to be expected that farm commodity prices will be more volatile than during the era of farm programs. This is important to consumers as well as producers.
Under the farm programs from 1933 to 1996, government farm programs attempted to help balance demand and supply by idling land. Depending upon the year, the amount of idled land ranged from none to 70 to 80 million acres. The land was idled in checkerboard fashion, some of the very best land was idled and some of the poorest. This was not economically rational but it spread the burden of adjustment over the entire country and it did not squeeze producers economically as adjustments were made in the productive base.
Under the 1996 legislation, production decisions are left to the market. And the market doesn't adjust production in the same way as government programs. The market squeezes out the thinner soils and steeper slopes, the higher per-unit cost of production areas. With no land idled, production increases, crop prices fall, and land values come under pressure until there is less profitability for crop production on the least productive land than for the next most profitable use for that land. The least productive land then transitions out of intertilled crops to a less intensive use, to another crop or to grazing land. Depending upon the area, some might transition to wasteland. At least, the increase in supply of grazing land would assure that the less productive grazing land would decline in value.
Rather than having 70 to 80 million acres of farm land out of production on a checkerboard-pattern, there could be close to that many acres which would transition to a lower-valued use unless exports are maintained at high levels. However, the more productive land would not be among those acres moving to a lower-valued use. The transition would tend to be concentrated in areas with highly erodible, lower productivity land that has thinner soils and lower rainfall.
This movement of land to a less intensive use spells economic pain for producers everywhere. Adjustment pain is felt not just by those at the periphery of the core producing areas, but by producers everywhere. Beyond that, those geared up to sell inputs to or purchase outputs from a crop-based agriculture also would have to adjust. Indeed, the transition for farmers is expected to be shielded in part by the Conservation Reserve Program. Little or no adjustment assistance is expected for those who dry, store or ship grain or oilseeds or who sell seed, fertilizer, chemicals and equipment for a row crop-based agriculture as the area transitions to grazing.
Figure 2.
After a period of adjustment, the economic returns to labor and capital (unlike returns to land) will likely return to an equilibrium level.
Figure 3 illustrates the fact that, for each major crop, there will be a "core" area of production and a "swing zone" at the periphery.
That zone of thinner soils and steeper slopes at the periphery of major crop producing areas becomes a swing factor in production. In times of good prices, it swings back into intensive production; when prices fall, it�s squeezed out again. This is the reason now why the most intensive resistance to the 1996 farm bill is in those swing areas where the next best use represents an economic jolt for producers and others involved. And it means another dimension of instability for those areas.
Figure 3.
Figure 4.
So, while the market is doing its job, the squeeze is felt even by those on the best, most productive, soils as the production of the major crops shrinks into a more compact area with 100 percent of the best land in production.
These land use shifts aren't likely to be one-time events. As exports rise (or fall), domestic demand rises (or falls) and changes in supply from technology and weather occur, the zone of swing acreage at the periphery of the core areas will see shifts in land use occur.
All of this is rational, economically, but it adds enormous uncertainty for producers; those who supply inputs; and those who store, ship, dry or process outputs.
Export Trends
The 1996 farm bill was enacted in a time of optimism in U.S. agriculture. As can be seen in Figure 4, agricultural exports peaked in 1995 and 1996 above $60 billion. Exports have declined since and could go lower with agricultural exports totaling about $49 billion in 1998-99.
As can be seen from Figure 4, U.S. agricultural exports declined about 40 percent from 1981 to 1986. During that time, corn, soybeans and wheat piled up in storage, in barges on the Mississippi river and up and down main street. Government payments shot above $25 billion in the worst of these years. While I am not predicting a 40 percent decline in agricultural exports this time, and I do not believe such a reduction is likely, exports could well go lower than at present.
What impact did the Asian crisis have on world food demand and on U.S. farm exports? For the better income countries, where credit isn�t a major problem, commodity demand for food purposes declined only modestly. But for low income areas--especially where credit is a problem--the impact was much greater.
As the slide in Asian economies has bottomed out, it appears that food demand in that area changed only modestly. So far, increases in demand elsewhere in the world have offset some--but not all--of the decline in Asia.
Optimism In Export Projections
Exports have fallen short of projections for several reasons.
After all, land values are price determined, not price determining. Land has value as expected profitability is capitalized into the value of land. Some areas of the world can realistically expect significant declines in land values as trade barriers are demolished.
IMF Funding
In my view, it is critically important, not only for farm exports but also for economic stability worldwide, for the International Monetary Fund (IMF) to be funded adequately. IMF-led efforts to stabilize the Asian economies and bring about structural reforms will pay off in generous dividends, long-term.
Without IMF intervention, worldwide agricultural exports will decline significantly and the effects of the Asian crisis generally would have had a much greater impact on the U.S. economy.
Fine Tuning "Freedom to Farm"
In testimony in the U.S. Senate on September 15, 1998, I focused on what circumstances would turn crop prices around. Four possibilities were identified--(1) dramatically improved domestic demand (which is highly unlikely); (2) bad weather (which is not something we can count on); (3) better export levels (which, at the moment don't seem to be in the cards); or (4) the operation of the market as low prices eventually squeeze out higher cost producers--probably at the periphery of the major producing regions--with those producers shifting their land to another use, possibly grazing. A fifth possibility--a change in federal farm policy--has received more attention recently.
The action by the Congress in October sent a fairly clear signal that the economic pain inherent in the fourth possibility is unacceptable, politically. The $5.975 package signed into law on October 21, 1998, coupled with the advance of the Spring, 1999, payment into the fall of 1998, along with the regular AMTA payment for 1998 and the cost of LDP and marketing loans boosted the subsidy level to more than $15 billion. The $8.7 billion cash infusion in late 1999 assures that the 1999 payments will exceed $22 billion. That is reminiscent of the subsidy levels of the mid-1980s. And even at that, farm income levels in the Midwest were down for 1998 and 1999.
The troubling scenario is that with no pick up in exports (indeed further weakening appears to be the most likely possibility) and average or better weather in 1999, we could be in worse shape a year from now than we are at present.
That's why it seems prudent to begin to ponder some "fine tuning" options on a contingency Basis--if crop prices aren't boosted by bad weather or a pick up in exports. Here's a short list of five items to think about.
I am not unmindful of the budgetary costs of an expanded loan and commodity storage program; however, the social costs of doing nothing could be very significant.
Another alternative would be to allow farmers to bid land out of production on an annual basis with the reward of a higher loan rate on the rest of the farmer's production.29
What about the argument that idling land spurs production in other countries? First, low prices are affecting producers everywhere. Modest efforts to ease downside pressures are unlikely to have an impact in other countries. Second, it seems imprudent to bankrupt a third of our farmers in an effort to demonstrate that U.S. farmers are not the low cost producers. Finally, the time has come to begin moving toward a global food and agriculture policy with the U.S. using the leverage of financial assistance through various aid programs including the World Bank to secure commitments that major exporting countries will take comparable steps whenever reduction in supply is necessary.
It is pointed out that virtually every corporation in the world adjusts inventories by occasionally laying off employees and idling production capacity. From 1938 through 1995, the agricultural sector did the same with the Secretary of Agriculture playing a surrogate role to reduce output by idling productive capacity. That possibility was swept away in 1996; U.S. agriculture was disarmed and lost a tool now being used by Deere, Firestone, New Holland and dozens of other U.S. companies.
It is important to note that any programs to ease the downside adjustment pressures (LDPs, marketing loans, AMTA payments, additional Congressional appropriations--as in 1998--or any other effort) frustrates the market and prevents the market from doing its thing--squeezing out land and causing the land to shift to a less intensive use.
With bad weather in South America, China, South Africa and Europe, we could see $3 corn and $8 soybeans in a year. On the other hand, we could be scraping by with $1.60 corn and $4.30 soybeans. We simply do not know which scenario will prevail. There is no light at the end of the tunnel.
The prudent approach would be to begin some contingency planning--just in case. After all, any fine tuning will require several months of deliberations in Congress. We can't very well wait until we're in the tank with no assistance forthcoming to begin thinking about options.
Proceeding under the assumption that Congress will provide a cash infusion is fraught with hazards. Sooner or later, the U.S. economy will slump and funds will not be as available as in 1998 and 1999. Moreover, large cash infusions are viewed by some as welfare and are likely to become targets for criticism.
IV. Conclusion
In conclusion, it seems appropriate to ask, "what does the human family expect of its agricultural sector?" I believe the human family expects that movement toward four distinct outcomes will characterize the coming decades--
Within less than a decade, the world should experience the greatest period of economic growth in the history of the planet. All four of the major production and trading blocs should be enjoying robust growth and rising per capita incomes. That should assure increasing demand worldwide for foodstuffs and a period of greater prosperity for agriculture. However, as noted earlier, those gains will, in the long-run, be reflected in increased land values rather than in better returns to labor and capital other than land.
The dimensions of the transition for world agriculture beyond the 1990s assure a more rational allocation of the world�s resources. However, the transition will be economically painful for some and will certainly lead to challenges as producers, processors and consumers adjust to a world of greater price volatility. In the U.S., whether consumers will be tolerant of price increases in times of reduced supplies remains to be seen. Certainly producers will be able to count on less in the way of a safety net during periods of low prices. It is not yet clear whether that is acceptable, politically. Indeed, some significant changes in the 1996 farm bill are almost a certainty.
U.S. agriculture has been a genuine success story. As the winds of deregulation pick up momentum, it is important for the Congress and Parliaments around the world to monitor the consequences for signs that the sector is being propelled in directions that are unacceptable. Certainly consumers will raise their voices if food supplies are inadequate or food costs are perceived as being too high.
* Presented at the 2000 Crops Production Conference and Expo, Lubbock Civic Center, Lubbock, Texas, February 23, 2000.
** Charles F. Curtiss Distinguished Professor in Agriculture and Professor of Economics, Iowa State University, Ames, Iowa; Member of the Iowa Bar.
1 See, e.g., Harl and Lawrence, "Long-term Marketing Contracts with Packers�A Journey Through the Downside," Iowa Pork Producer, Sept., 1998, pp. 5-7.
2 See generally Harl, "Contract Agriculture: Will It Tip the Balance?" 10 Leopold Letter No. 4 (1998); Harl, "Agriculture in the Twenty-First Century," http://www.econ.iastate.edu/faculty/harl/papers.
3 An announcement in December, 1999, was made indicating that all components other than Garst Seed Co. were to be spun off into a new entity, Syngenta, along with Novartis units.
4 An announcement was made in December, 1999, that a merger with Delta & Pine Land will not be consummated; remaining units to be separately structured (in merger with Pharmacia and Upjohn) with an IPO as to a portion of ownership.
5 In a December, 1999, announcement units of Novartis are to be spun off into Syngenta, a new entity, with some units from AstraZeneca.
6 Diamond v. Chakrabarty, 447 U.S. 303 (1980) (bacterium having unique genetic characteristics is patentable subject matter under the general patent statute).
7 Pub. L. No. 91-577, 84 Stat. 1542 (1970), 7 U.S.C. �� 2321-2581. See generally 12 Harl, Agricultural Law Ch. 110 (1999).
8 7 U.S.C. �� 2541(a), 2483.
9 See generally Neale, The Antitrust Laws of the United States of America Ch. XI (2d ed. 1970).
10 International Business Machines Corp. v. United States, 298 U.S. 131 (1936).
11 258 U.S. 451 (1922).
12 Clayton Act, � 3.
13 International Salt Co. v. United States, 322 U.S. 392 (1947).
14 Id.
15 International Salt Co. v. United States, 332 U.S. 392, 396 (1947).
16 Id. at 398.
17 See Warren, Antitrust in Theory and Practice, 192-202 (1974).
18 Capper-Volstead Act, 7 U.S.C. �� 291, 292. See generally 14 Harl, Agricultural Law � 137.04 (1999).
19 7 U.S.C. �� 291, 292.
20 See generally 14 Harl, Agricultural Law � 137.04 (1999).
21 Capper-Volstead Impact on Cooperative Structure, Info. 97, Farmer Cooperative Service, U.S. Department of Agriculture, p. 4.
22 The group was comprised of the National Cooperative Milk Producers Federation, the National Grange, the National Farmers Union and other farm organizations.
23 7 U.S.C. � 291. See Green v. Associated Milk Producers, Inc., 692 F.2d 1153 (8th Cir. 1982) (transportation of milk is handling activity protected by Capper-Volstead Act; employees of dairy cooperative acting within scope of their authority could not be guilty of conspiracy with cooperative because employees and cooperative are part of same entity; cooperative members and cooperative are considered one entity and incapable of conspiring with each other).
24 7 U.S.C. � 291.
25 Id.
26 7 U.S.C. � 292.
27 Jerry Caulder, CEO, Mycogen Corp., in Farm Futures, April/May, 1999, p. 25.
28 Jerry Caulder, CEO, Mycogen Corp., in Farm Futures, April/May, 1999, p. 24.
29 I am indebted to Craig Blindert, Salem, South Dakota, and Phil Cyre, Hazel, South Dakota, for these observations.