Presentation by Bob Stallman, President

American Farm Bureau Federation

Arkansas State University

Agribusiness Conference

February 16, 2005

American Agriculture: Do We Have a Vision?

Thank you for inviting me to speak to you today.

When Dr. Greenwalt asked me to give the luncheon talk, he said I could choose the topic. Now, that could be dangerous! And since I don’t get to do that very often, it took me a while to come up with the subject I want to address today.

But after pondering on the many worthwhile topics in today’s agriculture, I thought we could jump out and talk about tomorrow’s agriculture. The question I pose is this: Is American agriculture focused on a long-term vision for the future? OR, do we spend too much of our time and energy on just getting through the short-term?

Before we get started, let me make some disclaimers:

First disclaimer: Nothing I say today should be construed as a change in the policies or priorities of the American Farm Bureau Federation. If you have been keeping up with last week’s news on budget funding for the farm bill, you know that we are at the forefront of a congressional battle to maintain the structure and funding of the 2002 farm bill. And our other agriculture policies related to trade, taxation, regulation, etc. have been established for the year by our members at our annual meeting just last month. And as president of our organization, I will do everything possible to see that those policies are implemented.

Second disclaimer: I am a rice and cattle producer. I doubt that anyone in this room can come up with a reason or sound bite for maintaining our farm supports, reducing regulations, or leveling the trade playing field that I have not heard before….or frankly, that I have not personally stated. I know about farm reorganization, entities, high costs of production, low prices, uncooperative weather and lack of producer market power. The point being: I am one of you!

Having said all that, I believe we as producers have to ask ourselves some tough questions for the future…questions that may challenge our traditional views and encourage us to envision a new frontier.

We are undertaking that challenge within the American Farm Bureau. We have assembled a task force comprised of agricultural producers representing a broad range of commodities and production areas within the country.

They were given the assignment of assessing what American agriculture WILL look like in 2019, and then answering the question of “WHAT SHOULD American agriculture look like to be productive and profitable at that time?”

This project was conceived as a two year long effort. Currently, they are a little more that halfway through. Much of my presentation borrows from the deliberations they have had to date.

I am going to start out with some audience participation questions which have the added benefit of keeping almost everyone awake after a good lunch!

Think about this as free association. I am going to ask a couple of questions and I want you to give me your immediate gut level response.

Don’t look at the person sitting next to you. Don’t think about. Just give me a reaction.

ONE: Do you support spending for homeland security and defense to protect the United States from terrorists and to provide our young men and women in uniform with the equipment to keep them safe? Yes or No.

TWO: Do you support making the 2002 tax cuts permanent to keep from paying more taxes when those temporary cuts expire? Yes or No.

THREE: You may have heard of the Alternative Minimum Tax which was designed to tax rich people. Because of inflation, it has been increasingly applied to middle class taxpayers and increased the number of those who have to pay that tax. To stop that from happening, do you support reform of this unfair tax? Yes or No.

FOUR: Do you think the United States should NOT default on its debt? Yes or No.

OK. Thank you. Good responses. We will come back to these questions in a moment and tie them into the big picture regarding agriculture.

TRENDS

Farmer and Production Demographics

Most of you probably know the current USDA definition of a farm --- an operation with sales (or the capability of having sales) of agricultural products of at least $1,000 per year.

A common misperception is that the number of farms continues to dramatically decline. However, the 2002 Census of Agriculture shows the decline slowing to a crawl in the 1990’s with the number stabilizing at roughly 2.2 million operations. The USDA estimate for 2004 is a total of 2.1 plus million farms.

More enlightening is the breakout of farms within that total. You have heard of the demographic “collapse in the middle” where the number of small farms is increasing, the number of large farms is increasing, but those in the middle are declining. They either increase in size to become more efficient and viable or get smaller in terms of ag production in order to seek off farm income opportunities.

Averaged across all farms, in 2002, producers received over 90% of their family income OFF THE FARM. Somebody in the family had a job off the farm. Roughly 60% of this family income came from salary and wages. Now, in higher farm income years such as 2003 and 2004, that percentage will decline, but overall, farm operations are increasingly dependent on off farm income.

USDA reported average farm household income for 2004 was $71,102 and is forecast to increase to $73,059. And those numbers are higher than average US household income. That is good news in one sense, but bad in another. It makes it harder to defend our farm policies both to the public and to the Congress.

We could break out the statistics any number of ways, but listen to this: In 2002, just 389 farms accounted for 10% of total agricultural output in the US. Only 34,000 operations, including these 389, or 1.6% of total number of farms, accounted for 50% of the output. It takes the remaining 98.4% of farmers to produce the other half.

Government Spending/Budget

As the US population grows older, more money will be needed for Social Security, Medicaid, and Medicare. In addition to these higher costs associated with growing older, it appears that we will have larger deficits far into the future, which means we will also spend more taxpayer dollars in interest costs.

Spending on the rest of government, such as transportation, housing, education, defense, and yes, agriculture, is expected to be flat…no growth…a fixed money pot, however you want to say it.

Now back to the questions you answered earlier. Let’s see what your responses are going to cost.

Expected Additions to Deficit, $ Billions: 2005 2005-14

Defense/Homeland Increase -18 -802

Make Tax Cuts Permanent -56 -1,866

AMT Repair -7 -548

Additional Debt Service -6 - 473

Total Resulting Deficit -418 -4,754

Farm Bureau will be an active participant in the budget debate, but this information should make us think about the likelihood of finding large amounts of additional taxpayer money to increase or even maintain agricultural spending!

Globalization

To some, globalization is a four-letter word…only with more letters. The reality is that globalization simply means the whole world is more connected than ever before. The trends associated with the democratization of information, finance and government are unlikely to reverse.

Information flows at the speed of light. The internet ensures that new breakthroughs in agricultural technology are known around the world as soon as they are published. Market and production information is constantly updated…by the hour, if not the minute.

At the touch of an electronic button, money flows around the world seeking opportunities for better returns. Democracy is wider spread than at any previous time in human history, making it easier for the collective will to be expressed in governments and in the marketplace.

In 1970, world trade in goods and services was less than $500 billion. Today, that trade accounts for almost $10 TRILLION. Agriculture accounts for 7% of that trade with US agriculture exports about 1% of the total if we round the number up.

But those US exports are important to us in terms of size. If you convert into their acreage equivalent the amount of corn, soybeans, wheat and other bulk commodities – including cotton and rice - leaving the country and then take the meat shipments and convert the feed needed to raise those animals into an acreage equivalent, you get a big number -- 75 million acres – or the land equivalent to the area harvested in Illinois, Iowa, Kentucky, Missouri, Tennessee, and yes, Arkansas combined. And this calculation even leaves out the pasture area needed to raise the cattle!

Another trade trend related to the federal budget is less funding…less funding for our efforts to negotiate and enforce trade agreements…less funding for personnel to monitor trade compliance and gather foreign market and production information…less funding just at the time of greater need if we are to compete in international markets.

Globalization does bring on the challenges of competition. The ag press is churning out articles about crop expansion in Brazil and competition from Argentina. US farmers are visiting these countries with some even making land purchases and investments.

More competition will come from the areas of the former Soviet Union, such as Ukraine, as producers improve infrastructure to take advantage of new market opportunities that did not exist under authoritarian rule.

And then there is China. I just came from a conference in New Orleans where Dr. Bill Jenkins, who heads up the LSU system, spoke about leadership and the future. During his remarks, he said that the next great global conflict will be between China and the United States, but the conflict will be economic as opposed to military. Not a shot will be fired! I was in China last March, visiting three different areas, and the rate of growth and modernization was incredible.

As just one example of major forces at work in China, consider this: As recently as 1990, there were only 29 refrigerators per 100 households in China. By 2001, that number had exploded to 82 refrigerators per 100 households.

Think about that one number and what it implies about China’s infrastructure, about the reliability of electricity, and about the change in their economic wealth. Not to mention how consumer food purchasing and the entire marketing chain will change in a country of more than a billion people.

Technology/Research

The trend for public funding of agriculture research in the US is not so remarkable. Public funding for agricultural research has been flat and even declined in real terms. That does not bode well for remaining competitive in the face of globalization.

At the same time, commodity check off programs for promotion and research are under constitutional attack. While we hope for positive legal rulings, not having these programs for producers would further limit our ability to work cooperatively in solving agricultural problems.

Some large producers, primarily in high value crops, are funding their own, specific, targeted research. It remains to be seen whether or not that will become a broader trend.

Notwithstanding the research challenges, the degree to which agriculture is embracing available new technologies is incredible. The internet, GPS, auto-steering, biotechnology, and….well the list could go on….have all contributed to the increases in productivity that have allowed us to produce more with fewer people and at lower cost. If the history of technology is a guide, this is one trend which will undoubtedly continue.

Rural Development

Recall what I said earlier about the dependence of producers on off-farm income. There are basically two different challenges for rural life.

The first challenge is creating rural jobs to provide opportunities for off farm income in those agriculture dependent counties which are losing population.

The second challenge is almost the opposite problem ---dealing with urban sprawl and the neighbors who neither understand nor like the sights, sounds, and smells of modern agriculture.

Land Prices/Rental Rates

A secondary effect of urban encroachment has been that farmers who have sold their land at development prices have used tax savings opportunities, such as 1031 exchanges, to seek farm land in the more rural areas, thus bidding up the land prices and rental rates for producers in rural areas.

Farm supports have continued to be capitalized into land prices and rental rates. While other factors have contributed to rising land prices, program benefits have continued to accrue to land owners….and will in the future.

Societal Expectations/Disconnect

With each successive generation, citizens are further removed from having direct knowledge of modern production agriculture. Without that understanding, they have even less incentive to care enough to be politically sympathetic to farmers. In fact, that lack of knowledge leaves them susceptible to misinformation provided by those who are philosophically opposed to modern agriculture.

Not understanding the costs and scale of production agriculture, much less the structure and rationale for farm programs, also makes it difficult for citizens to understand the size of support payments – and their real importance to many of those full-time farming families in the middle. Yet there is plenty of information readily available over the internet to fuel the arguments of those opposing farm program spending.

While we have a multi-message approach in regard to selling the importance of America’s public investment in agriculture, we have not yet determined a really effective way to reverse the trend of growing skepticism about crop support payments.

Another societal expectation regards the environment. As affluence increases, societies have shown a greater desire to have a pristine, healthy environment. The trend toward more regulation….and more financial incentives to achieve conservation and environmental goals will continue as incomes increase.

Concentration

An ongoing topic of concern in agriculture is the extent to which increasing concentration in the agribusiness sector is affecting producers. This trend shows no signs of reversing and given similar trends in other industry sectors will probably continue.

Concentration at the producer level is also occurring but not to the extent as the rest of the food chain. Producer cooperatives established to build ethanol plants are an example of individuals coming together to capture more of the value-added dollar.

CHALLENGES & QUESTIONS

I believe the central theme of the challenges facing us as agriculture producers is that of competition.

We are competing for increasingly scarce taxpayer dollars.

We are competing against foreign producers…and sometimes each other…for markets.

We are competing for favorable judicial rulings, in both domestic and international bodies.

We are competing with each other for land resources.

We are competing for the sympathies and understanding of our society.

The question remains: How do we agree on and achieve a vision for the long-term viability of American Agriculture in the face of this competition?

From this point on, I will be posing questions for us to think about…tough questions for the future…questions that may challenge our traditional views and encourage us to envision a new frontier. It will be up to you to find your own answers…and your own path for the future.

How can we be competitive for the long-term with land costs inflated by program payments?

Because of the effects on land costs, do our farm policies favor older producers over younger producers? Do they favor landowners over tenants?

Should we support tax policies that encourage the transfer of farm land to the next generation? Or discourage tax-free exchanges?

Should we increase farm bill funding for research, even at the expense of crop supports?

Should we focus on funding conservation if that makes it more likely to retain public support for agriculture?

Should we focus more on rural development to create jobs if the trend is more dependency on off-farm income?

Should we support development of better financial risk management tools for producers?

Should we support additional funding for foreign market development? For Foreign Agriculture Service personnel? For USTR?

Should we provide greater incentives for producers to form marketing, processing, and other agribusiness entities to create greater market power?

How do we balance the differing impacts of policies on young versus older, more established farmers?

Do farm programs discourage producers from responding to the market as quickly as they should in today’s rapidly changing global environment?

How do we explain to the general public that a few commodities are deserving of direct taxpayer support while the majority of US agricultural production is not?

I suppose this list of questions could go on for a long time, but I think you get the idea. If we are going to be successful for the long term, we need to be asking…and answering…more questions than I think we have in the past.

CONCLUSION

There are a lot of good farmers in this room. But, to create that long term vision for success will require being more than a good farmer. You will need to be an internationalist, a financial risk management specialist, a consumer marketing expert, an information analyst, and who knows what else to be successful for the future.

There are three schools of thought to which farmers may subscribe:

Ostrich School at Deep Sands University: These farmers think Stallman and others are full of it. They think – if we just ignore what is happening, everything will work out. Somebody else will take care of all these little issues and life will go on as before requiring no changes on our part.

Chicken Little School at Dismal Swamp Institute: These guys look at the world and say: Woe is me! Woe is me! We are all going to go broke. There is nothing we can do. The world is unfair.

Eagle School at the University of New Frontiers: These farmers see the world as it is, not as they would like it to be. To paraphrase my Marine friends, they “adapt, improvise, and overcome.” They not only adjust to the trends that are occurring, they anticipate the trends for the future, and prepare appropriately. They are positioned to soar.

I guess it is probably obvious which group I think has the greatest likelihood of success.  By anticipating the trends for the future, we do have the opportunity as an industry to create our own vision.

And afterward, we must communicate that vision in a manner that transcends our societal boundaries and builds a base of understanding and support with all Americans. It won’t be easy, but I have confidence America’s producers are up to the task.

Thanks for having me.

I look forward to your questions.