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ESSAYS ON ISSUES

THE FEDERAL RESERVE BANK
OF CHICAGO

DECEMBER 2006
NUMBER 233b

Chicago Fed Letter
Globally competitive agriculture and the Midwest:
A conference summary
by David B. Oppedahl, business economist

On September 29, 2006, the Federal Reserve Bank of Chicago and the Chicago Council
on Global Affairs held a joint conference on the linkages between global competition in
agriculture and the Midwest. This conference brought together industry experts and academics
involved in agriculture to discuss the effects of globalization on the Midwest economy.

Materials presented at the
conference are available at
www.chicagofed.org/
news_and_conferences/
conferences_and_events/
2006_global_agriculture.cfm.

At the conference, titled “Globally Competitive Agriculture and the Midwest,”
participants examined the global playing
field for midwestern agriculture, explored the implications of globalization
for economic growth in the Midwest,
and discussed the influence of government policies on the global competitiveness of agriculture in the Midwest.
A common thread of the conference was
that world markets are crucial for Midwest
agricultural growth and that U.S. farm
policy needs to change with the times
in order to promote continued growth
for the Midwest.
Midwest agriculture in the global arena

In the first session, three presenters argued that global markets are important
for Midwest agriculture and will continue
to be so. David B. Oppedahl, Federal
Reserve Bank of Chicago, emphasized
that U.S. agriculture relies twice as much
on exports as does the overall economy,
with food and agricultural products making up 7.5% of total exports in 2005.
Moreover, the value of agricultural exports continues to set records, though imports have as well, significantly reducing
the surplus in agricultural trade. Economic activity generated by agricultural exports had grown to $152 billion in 2004,
creating 825,000 full-time jobs in the U.S.
The Midwest’s1 total share of agricultural

exports in FY2005 was 18%, with a much
larger share in categories such as corn
and soybeans. While Midwest agriculture
faces challenges in the global arena, the
comparative advantages of the Midwest
can propel agricultural exports to higher levels through a focus on consumers
around the world and innovations in
technology and marketing.
Michael D. Boehlje, Purdue University,
focused on the role of globalization in
the agricultural economy. Globalization
has resulted in larger markets for agricultural products from the Midwest, with
continuing expansion expected in the
years ahead. Product trade as a percentage of world gross domestic product
(GDP) has not changed a lot, but there
has been strong growth in the trade of
value-added products. In particular, research shows that higher per capita gross
national income correlates to a higher
share of animal protein in peoples’ diets;
the larger markets abroad generated by
globalization have boosted demand for
livestock, feed, and meat exports. Key
drivers of globalization include: the
movement toward more market-based
economies; the expanded geographic
reach of information technology, which
lowers the costs of informing and attracting customers; improved transportation
and logistics, especially through containerization; evolving marketing strategies

to reach new markets undergoing dietary transitions (particularly in Asia);
capital markets channeling investment
from Europe and North America to other parts of the world; growing technology markets that integrate indigenous
and global technologies; linkages and
integration between industrial and financial trade, which make agriculture
inseparable from the rest of trade; and
global sourcing and selling of goods and
services. In the face of these global trends,
there is a fundamental conflict between
trade and farm policies in the U.S., possibly resulting in retaliation for distorting
agricultural trade. Ultimately, the question arises of what impacts will result
from this conflict and how broadly they
will spread.
The next speaker, Kyle W. Stiegert,
University of Wisconsin–Madison,
looked at the implications of the expansion of supercenters in the global food
industry. Supercenters (a larger retailing
format for groceries) have grabbed market share in the U.S. grocery business,
and that format has begun to expand
overseas, too. Although the expansion
creates larger markets, it also results in
price pressures that can affect the efficiency of the food industry and agricultural profitability. Stiegert’s study2 of
supercenter price effects in the U.S. indicated no initial change in retail prices
from the entry of a supercenter, though
increasing concentration in grocery markets did eventually lead to higher prices.
Stiegert noted that higher concentration
stemming from the supercenter format
could increase retailers’ buying power,
ultimately promoting greater use of
contracts with food processors, more
contract farming, and increased farm

consolidation. Different economic environments, including distinct antitrust
frameworks, will likely foster different
outcomes for various nations.
Impacts of globalization on the
Midwest

In the second session, three presenters
discussed the impacts of globalization
on Midwest agricultural industries. John
Hinners, U.S. Meat Export Federation,
dealt with issues related to the relatively
faster growth in red meat trade compared
with flatter gains in U.S. meat consumption. Spurred by growth in world population and income in recent decades, red
meat trade has increased dramatically,
even after accounting for disrupted beef
exports in late 2003. (Pork exports partly
filled the void, rising to 15% of U.S. production.) Moreover, a focus on global
consumers requires branding and traceability to maximize premiums for producers. Also, a greater reliance on export
markets has heightened the importance
of issues related to disease, biosecurity,
technology, and transportation. Another
important benefit of meat exports is price
premiums from parts (like tongues) of
the animal not favored for consumption
in the U.S. Not only do livestock producers gain from exports, but soybean and
feed grain producers benefit as well from
higher prices based on the extra demand
to fulfill exports of meat. In order to
maintain its competitiveness, the U.S.
red meat industry must focus on its
advantages—i.e., quality, cost, consistency, diversity, flexibility, and production capacity. Global competition requires
producers to have an export-oriented
mindset and to embrace trade-enhancing
policies, including traceability in global
meat supply chains.

Release of Chicago Council on Global Affairs report
The conference also included the Chicago release of the report of the Agriculture Task
Force sponsored by the Chicago Council on Global Affairs, titled Modernizing America’s
Food and Farm Policy: Vision for a New Direction . The co-chairs of the task force were
Catherine Bertini, former executive director, World Food Program, The United Nations;
August Schumacher Jr., former Undersecretary of Agriculture for Farm and Foreign
Agricultural Services, U.S. Department of Agriculture; and Robert L. Thompson, Gardner
Chair in Agricultural Policy, University of Illinois at Urbana–Champaign. The Chicago
Council’s task force focused on U.S. agriculture policy and ways to promote the competitiveness of U.S. agriculture for the 21st century. For more information on the task force and
the complete report, see: www.thechicagocouncil.org/taskforce_details.php?taskforce_id=1.

Paul W. Gallagher, Iowa State University,
shared his research on global aspects of
the ethanol industry, especially important
for the Midwest as production of ethanol
from corn booms in the region. The ethanol demand curve for the U.S. has two
parts—ethanol as a fuel additive and
ethanol as a gasoline substitute, with both
parts incorporating subsidies for ethanol.
When oil prices increase, both parts of
the demand curve shift higher. When
ethanol supply expands enough to meet
the demand for ethanol as a fuel additive,
then the price of ethanol in the U.S. will
drop and be set on the portion of the
curve where ethanol competes with
gasoline—probably when biomass becomes an economical feedstock. If oil
prices remain high enough, the ethanol
industry will continue to expand cornbased production and develop biomassbased capacity, providing profits and
multiplier impacts at the local level in
the Midwest. Although ethanol imports
become more attractive as well, the domestic market has protection via an import tariff of $0.57 per gallon and a tariff
quota. Sugar is the primary feedstock for
ethanol on the global market, so sugar
prices play a key role in determining the
cost of importing ethanol. Analysis of material, energy, and operating costs of ethanol production from corn versus sugar
showed no statistically significant difference in production costs. So, under a
free trade scenario, ethanol flows would
follow cycles based on feedstock prices
and exchange rates. Yet, government
intervention in ethanol markets can be
supported due to consumption externalities and infant industry protection for
biomass, especially if world oil prices
return to relatively lower levels.
Matt Hancock, Food and Candy Institute,
explored another Midwest industry affected by sugar prices. The candy industry
has a cluster of firms near Chicago. Sugar accounts for 10% of the materials
used in the production of nonchocolate
confectionery, so lower sugar prices would
benefit candy manufacturers. However,
sugar costs are less than several other
nonlabor costs for candy manufacturers.
Moreover, labor costs are the largest component of production costs for candy.
So, lower wages elsewhere in the world

become a major factor in relocation decisions for candy manufacturers. Illinois
maintains a competitive edge with a
skilled, highly productive work force,
combined with an efficient base of local
suppliers (63% of supplies can be purchased in the state). Reducing sugar
prices by altering agricultural policy
would help an industry under pressure
from tight margins, as a 20% drop in
sugar prices would increase profits by 1%
as a share of candy sales. Thus, higher
sugar prices in the U.S. stemming from
agricultural policy may induce candy
makers to shift production elsewhere,
but cost increases in other inputs might
more than offset cost reductions due
to lower sugar prices.
The future of Midwest agriculture
amid global growth

In the third session, two presenters assessed the implications of global growth
for the future of Midwest agriculture from
different approaches. David Freshwater,
University of Kentucky, considered the
historical context and changing nature
of rural America before laying out some
directions for future policies. Before the
20th century, U.S. development policy
was agricultural policy because farmers
were a majority of the population, major
infrastructure improvements aided agriculture, and agriculture was export
oriented and globally competitive. Farm
export shares increased until the 1930s.
In the Great Depression, low farm income
and low exports led to new farm policy,
which still guides the debate into the 21st
century. However, rural America has
changed dramatically. Today most rural
Americans are not farmers. Farming and
rural America’s shares of both population and GDP have continued to decline.
Though trade is still important for rural
America, the terms of trade have been
hurt by globalization. In addition, an
increasing percentage of foreign migrants, particularly Hispanics, has affected rural communities, especially
through employment in agriculture and
related processing. Even given these
changes, farm household incomes and
wealth have outpaced U.S. averages, with
most of the income coming from nonfarm sources (except for the largest 7%
of farms). So, most farm families have

diversified risk without the aid of government programs. Over the years, farm
policy has lost its link to a majority of
farmers, since most farmers now produce
unsupported products and a smaller
number get most of the commodity payments. For landowners that get commodity payments, production decisions
become distorted due to a lesser market orientation, driving up costs for all
producers and complicating trade negotiations for all of agriculture. Rural communities must be competitive in order
to survive, but rural America has become
a bargaining chip in trade negotiations.
Thus, according to Freshwater, farm
policy should center on farm income
stabilization, environmental factors, and
urban amenities. In this way, farm policy
can meet the needs of all farm families,
not just a subset, while maintaining globally competitive agricultural production.
Next, Patrick Westhoff, University of
Missouri and Food and Agricultural
Policy Research Institute (FAPRI), discussed FAPRI’s agricultural outlook and
whether biofuel developments have created a “new world” for farmers. Westhoff
pointed out that corn used for ethanol
production has grown dramatically in recent years, closing the gap on corn used
for export. FAPRI forecasted that corn
used for ethanol, growing 116%, would
be twice the size of corn used for export
in five years. In the FAPRI projections,
during this period, corn acreage rises
almost 10%, while soybean acreage drops
4.5% and wheat acreage falls 1.3%. The
resulting increase in corn production
would be 12.5%. The impact on livestock
feeding in the U.S. would involve a 2.1%
decline in corn usage and a 1.8% increase
in soybean meal feeding, topped by an
81% jump in co-products of ethanol production. Greater corn demand would
boost prices for feed grains, with ethanol
co-products holding down corn price increases and pushing down soybean meal
prices due to substitution. FAPRI projected improvement in net income to corn
farmers during the next five years, though
higher production costs would diminish
the gains from crop receipts. The implications for the livestock sector vary by
species and distance from ethanol plants.
Feeders using primarily grain, especially

for hogs and cattle far from ethanol
plants, would face higher costs. Feeders
using mostly soybean meal or ethanol
co-products should benefit, at least in
relative terms. Cattle and hog prices
would remain below the relatively strong
recent levels. So, foreign buyers may get
squeezed out of U.S. grain markets, although they may find better deals in meat
and soybean products. Biodiesel growth
could alter the projections for soybean
products. Higher energy prices have hurt
the farm sector in the short run, though
they have provided new opportunities
for biofuels in the longer term by linking grain, vegetable oil, and energy markets over time. There is the potential
for fundamental changes, providing
Midwest agriculture with another engine
for growth besides exports.
What agricultural policies best promote
Midwest growth via global markets?

The agricultural policy issues stemming
from globalization and the challenges
for Midwest growth were the focus of
the last session. Gary R. Blumenthal,
World Perspectives Inc., addressed the
limitations of using farm policy as a means
to achieve a competitive agricultural
sector. First, he pointed out the faulty
premises of farm policy. Support for

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farmers has only slowed their numerical
decline; the number of farms has continued to fall during the past 40 years.
Furthermore, farm income would get
better support by decoupling crop decisions from government payments due
to the benefit of volatility in market prices;
plus, there would be less harm to global
competitiveness from government payments capitalized into farmland values.
Current farm policy has not ensured a
healthful food supply, as evidenced by
obesity remaining a major health issue
here. U.S. fruit and vegetable production has been flat, whereas imports have
risen 50% in a four-year period, contributing to healthier eating habits. The
goals of rural development and green
space stewardship have also contributed
to reduced competitiveness by reducing
commercial crop production. The foremost trade driver is capacity, helped by
trade agreements establishing rules.
Under rules-based trade, reductions in
government policies generate increased
competition. The Midwest has fundamental competitive advantages to exploit in world markets. The capital and
resources (especially land and water) of
the Midwest undergird these competitive
advantages, especially when combined
with available technologies and management capacity. After all, farmers today
are highly educated and entrepreneurial, and they have readily transferable
skills. Government subsidies have stifled
entrepreneurial incentives for many

farmers, but the creation of competitive
advantages in the future will require challenging comfort zones and making strategic investments. Farm policy can foster
job growth in food processing and other
agricultural industries—traditional
strengths of the Midwest. Blumenthal has
observed forces for change in farm policy
that give him hope the next farm bill will
improve U.S. agricultural competitiveness.
Robert L. Thompson, University of
Illinois at Urbana–Champaign, laid out
ways global markets can lead to rural
growth and how trade policy can assist
this process. Expanding world trade allows exports to grow, and the only large
potential for growth is found in lowincome countries with projected gains
in population and income. Globalization
produces increased integration of economies, creates new opportunities, and
exposes previously isolated markets to
competition. Agricultural competitiveness for commodities (the lowest-cost
supplier wins) differs from that for differentiated products (sold based on quality,
design, or innovation), though public
research funding can enhance both. The
success of U.S. agriculture in boosting
output by 2.6 times in five decades, while
using fewer inputs, positions the U.S. to
expand future exports. Given this high
productivity, the U.S. exports over onequarter of its production of many agricultural commodities. However, the inability
of low-income countries to export the

products where they have competitive
advantages slows poverty reduction
and dampens world agricultural trade,
making a more open trading environment vital to global growth. Negotiations
can create a more level playing field for
trade, but the U.S. can benefit from
changing farm policy even without a
trade agreement, since farm programs
have not met their stated objectives.
Moreover, the U.S. already is at risk for
trade litigation over farm programs.
Moving subsidies to non-trade-distorting
mechanisms is the key change needed
to pry open greater market access for
U.S. and Midwest agriculture.
Thompson’s remarks were in line with a
shared theme of the conference: Namely,
global trade is vital for Midwest growth,
and U.S. farm policy must catch up to
the realities of globalization in order to
foster expanded exports. So, the best
farm policy is a strong rural development
policy, which allows Midwest agriculture
to become even more competitive in
the global economy.
1

The Seventh Federal Reserve District
comprises all of Iowa and most of Illinois,
Indiana, Michigan, and Wisconsin; in this
particular presentation, Oppedahl defined
the Midwest as the entirety of these five
states.

2

Kyle W. Stiegert and Todd Sharkey, 2007,
“Food pricing, competition, and the emerging supercenter format,” Agribusiness, Vol. 23,
No. 3, Summer, forthcoming.