Farm Horizons, February 1997

Grain supply risk increased with less diversification

By John Winzenburg

Minnesota Extension Service

High-tech agriculture has brought with it high risk for most farmers. But the uncertainties of ag production now carry implications beyond the farm field, said University of Minnesota economist, Philip Raup.

According to Raup, increasing dependency on three main crops and higher yield variability have resulted in more risky grain supplies for the United States and the world.

"We're living on a narrower margin from year to year," said Raup. Raup believes that grain growers have violated major rules of thumb in terms of diversification over the last several decades.

Farmers are now putting more productive land into fewer crops. In the 1950s, Minnesota farmers had 40 percent of their total acreage in corn, soybeans and wheat. That figure has since risen to 75 percent.

At the same time, the state has witnessed a dramatic shift upward in the yield variability levels of these three crops. For example, in three instances over the last two decades, Minnesota corn production has dropped by around half when measured in three-year periods. Raup said that this is unprecedented in modern agriculture, and that these trends hold true throughout the United States.

The consequences are far-reaching. For individual farmers, greater variability makes it more difficult to decide on which crops to plant. It also means that they must set aside more of their income flow to cover the risk of a particularly bad harvest.

"It's as if you had a land tax increase," observed Raup.

This variability can affect the domestic economy, as well. For example, bankers assume a constant risk when making their ag lending decisions. However, given the greater variability of the last two decades, Raup believes that their reserves to cover prospective risks are inadequate.

Likewise, U.S. coarse grain reserves have hit their lowest level ever. By the end of last year, stocks were down to between six and seven weeks. This is the amount of time that it would take the grain just to get through the supply pipeline.

Raup said that if reserves are not maintained at higher levels, food production could be affected. This, in turn, would have an impact on domestic food prices and, ultimately, inflation.

"Domestic food prices have generally held down inflation over the last three decades," said Raup, "but that could change."

Ultimately, international markets could suffer. The United States is the dominant coarse grain supplier to the world. As such, fluctuations in U.S. production could significantly affect global markets.

For example, were a prolonged drought to hit a large section of the North American grain belt, Raup believes that the lack of alternative crops combined with low reserves would wreak greater havoc today than in the 1930s.

"Just-in-time production is risky when you're trying to feed the world," he said.

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