Dealing With Uncertainty in Agriculture

By Joe Outlaw and Bart Fischer

We often are asked by the media about the size of and need for government assistance that is provided to U.S. farmers when something goes wrong (e.g., bad prices, yields or both). The first thing we do is highlight that the safety net provided for by Congress is designed to offset some – but not all – of the risks faced by farmers.  It might sound like semantics, but in the policy world…words matter.

The rest of the conversation generally involves talking about uncertainty in U.S. agriculture.  Rather than provide an exhaustive list here, let’s just focus on the three primary determinants of profitability: prices, yields and costs.

• U.S. farm prices are determined by world supply and demand for the crop, the price of its substitutes, and policy.  What type of policy?  First, U.S. producers must compete against producers that are heavily subsidized by the governments of our competitors around the world.  Second, the trade policies of those countries (such as tariffs or other non-tariff barriers to trade) impact prices received by U.S. producers as well. Third, monetary policy in the U.S. impacts interest rates that farmers have to pay to finance their crops, land and equipment and exchange rates that tend to make our exports relatively more expensive than our competitors.