Staying Competitive in the Global Market

As one of the world's largest traders of food and farm products, the United States has generated an agricultural trade surplus every year since 1960. Over 40 percent of the total farm output was exported in 1980, reflecting the "internationalization" of U.S. agriculture. Currently, about 20 percent of the farm volume is exported, accounting for almost 25 percent of farm cash receipts.

Yet, in the 1980's, U.S. agriculture has experienced its most significant period of adjustment since the 1930's. The stagnation of the world grain market in the early 1980's led to a sharp buildup of world and U.S. stocks and to lower prices. Domestic fruit and vegetable producers also faced stronger competition from low-cost, imported products, while nationally important crops such as wheat, corn, and soybeans experienced more competition from subsidized production and exports in the European Community and parts of South America. At the same time, U.S. farm and macroeconomic policies were in conflict, resulting in a stronger dollar pushing loan rates above declining world prices.

In contrast, the volume of world grain and oilseed trade had doubled during the 1970's, with the United States capturing three-fourths of the increase. In anticipation of continued growth in world demand and high prices, U.S. farmers increased production rapidly by farming land that had been idled during the land diversion programs of the 1960's, as well as by increasing yields with more inputs and by using labor and capital more fully. Farmers also borrowed heavily during the 1970's for investments to further increase capacity. Most observers expected international trade to carry U.S. agriculture full force into the 21st century.

However, recent declines in export volume and world market share, growing surpluses, and surging food imports have caused much concern about the future of U.S. agriculture. Some would suggest that the farm sector has become less competitive, and that producers are no longer able to secure a profitable share of the world market. Therefore, major adjustments have occurred which have affected not only the farm, but agribusiness and rural communities as well. This adjustment process is expected to continue.

International Competition

International competition means competition between producers and marketers in the United States and producers and marketers in other countries. But international competition takes place in an extremely dynamic framework. Production capacity, infrastructure, currency exchange rates, export/import restrictions, credit policies, shipping rates and regulations, international policies, and many other factors affect a country's economic position relative to that of competitors.

To be competitive in world commerce, a nation has to secure and hold a profitable share of a specific market in spite of the efforts of other nations to secure that same market. Production costs, infrastructure, and government policy are critical factors affecting international competition.

Production costs are one of the major factors in a country's ability to compete internationally. These costs are affected by the prices of inputs such as seed, fertilizer, land, labor, capital, and technology, as well as by the natural conditions under which crops are grown. As agricultural productivity increases, input costs per unit decline.

The level of variable (cash) production costs indicates short-run competitiveness. The higher a country's variable costs are relative to those of competitors, the more likely that country will be to reduce output if prices decline. For example, in 1986, average variable costs for soybeans were $3.90 per bushel in the southeastern United States. Comparable costs in Argentina and Brazil were $2.50 per bushel and $3.18 per bushel, respectively (table 1).

As prices declined in the United States, returns above variable costs for southeastern soybeans fell, causing acreage in many States to decline by almost half. When acreage declined, costs per bushel also declined because the better land remained in production. Therefore, remaining production became more cost competitive. Returns to Argentinian and Brazilian soybean production increased in response to higher prices resulting in greater output.

The situation for double-cropped soybeans and wheat is quite different. Costs for double-cropped soybeans in the Southeast have been estimated at $3.05 per bushel. This results from lower fertilizer, chemical, and machinery expenses and compares favorably with $2.37 per bushel in Argentina and $3.05 per bushel in Brazil.

However, international competition is much more complicated than cost comparisons. Being the lowest cost producer does not always ensure competitiveness in today's market. Infrastructure including transportation, communications, electricity, roads, and storage facilities is critical in determining the cost at which a country can produce and deliver a crop to the international marketplace. Costs of moving U.S. soybeans to export have been estimated to be about $.67 per bushel, while those in Brazil were $.51 higher, at $1.18 per bushel. Adding ocean freight to that results in total landed costs of $4.89 in the Southeast, $4.81 in Brazil, and $3.99 in Argentina.

A country's competitiveness will also be influenced by government intervention in production or trade. For example, a country may be a high-cost exporter, not because of any deficiencies in agricultural production methods or in conditions of soil or climate, but because its currency is overvalued, or because domestic support prices are high relative to world prices, or because competitive exports are directly or indirectly taxed. U.S. agricultural policies have placed soybeans at a competitive disadvantage to corn, primarily because the deficiency payment for corn has resulted in a soybean/corn price ratio favorable to corn production. As land in the United States shifted from soybeans to corn, competitors in foreign countries responded by increasing planted soybean area.

There are many reasons why countries adopt policies which affect the crops grown and exported. For example, the uncertainties of the export market may prompt a country whose resources are well suited to producing export crops to promote instead the production of basic foods for domestic consumption. Countries with large external debt sometimes turn to agriculture as a source of export earnings to service their debt while importing the capital goods needed for economic growth. Argentina, for instance, has traditionally taxed exports of agricultural crops to finance industrial development.

A nation's ability to develop and adopt new technology also has a marked influence on competitiveness. The United States made tremendous progress in this area relative to other nations up until recent years. It now appears that the technology gap has narrowed, with the United States the loser. In 1980-84, foreign firms received 52 percent of all patents in biotechnology granted in this country, and U.S. firms received 42 percent. Most of the corporations receiving these patents are multinational, and thus quickly disseminate information about important technological changes. These companies respond to profit signals in the United States and other countries. With these other nations undertaking acreage and production expansion programs, it is natural for technology to flow to them. However, U.S. agriculture still leads most other countries in information technology and computer applications.

U.S. Market Share

Domestic policies of the early 1980's, designed to support farm incomes, kept U.S. export prices from adjusting to the 1981-82 world recession and the rising dollar. The United States thus became a "residual supplier," or supplier of last resort, for grains, resulting in a loss of international competitiveness and market share. Declining export volumes, rising Government stocks, and record high deficiency payments during the 1982-85 crop years led to provisions in the Food Security Act of 1985 for loan rate reductions. In addition, there were mandatory marketing loans for upland cotton and rice, generic certificates, and expanded export promotion programs.

The 1985 legislation lowered U.S. market prices, restored competitiveness to U.S. commodities, and had varying impacts on governments and farmers throughout the world. For importing countries, lower prices save scarce foreign exchange. At the farm level, however, these low prices are causing financial stress. Lower prices reduce incentives for farmers and governments to invest in crop production. Food imports of many developing nations have declined as farmers, who typically represent 70-80 percent of the workforce, experience lower incomes.