Economics

Modern Agriculture and the Impact of Trade

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Ted's office is nothing out of the ordinary. A hefty L-shaped desk bisects the small room. From time to time the telephone rings and Ted looks up from the numbers on his screen. A visitor comes by with paperwork to sign.

Ted isn't a Wall Street trader, attorney or factory manager. He's a farmer. With his family and eight employees he raises corn and soybeans on 10,000 acres in eastern Iowa. The window behind Ted's desk looks out on fields of number 2 yellow corn. There's a red barn, a small vegetable garden and orchard. There are also five semis, a trio of hundred-foot grain bins, and the latest John Deere equipment.

Agriculture is one of the world’s oldest professions, and it’s undergoing tremendous change. Corn yields have increased six-fold in just a couple generations; this year saw a record harvest in the American Midwest. GPS-enabled tractors plant, fertilize and harvest by the square centimeter. Unpredictable weather and fluctuating global supplies mean a farmer must be a risk manager in addition to agronomist, equipment operator, and soil scientist. 

Underlying these changes, for better or worse, is trade. For much of human history, trade and agriculture have been intertwined. Many of our first currencies were foodstuffs like peppercorns and cattle. An trade has driven structural changes in agriculture. One of the first futures exchanges developed in response to the local rice trade in 17th century Japan. With a futures market and the ability to, a farmer no longer has to sell his grain at harvest, when supply peaks and prices drop. This predictability allowed farmers to go from living year to year to building for the future. Trade determines who is farming, where, and how.

Three Ways That Trade is Transforming Agriculture 

In the last few decades, trade has changed agriculture in three big ways. First, it has shifted where crops are grown. Increasingly, production of crops is shifting to water-rich farming regions in North and especially South America. Even accounting for transportation costs, the overall cost aggregating crop production in regions more apt for growth is lower for the importer than growing it domestically would be. At the same time, consumer preferences have shifted, and the demand for specialty crops has exploded globally. 

The second change is consolidation. Two centuries ago, most food was consumed within miles of where it was produced, and a significant portion of the population farmed. Two generations ago, a third of the elementary school class in Iowa City came from farming families. When Ted's four-year-old grandson starts kindergarten, he'll likely be the only one. 

Most large commodity farms in the US are still run by families, but operations have split into two types. There are "hobby farms," non-economically viable operations of several hundred acres kept by families who earn the majority of their income elsewhere. And then there are the small number of large-scale operations that produce most of the US’s grain yield. 

Ted is one of the most progressive farmers of his generation, both financially and environmentally. He isn’t dependent on subsidies, and he’s scaled his business wisely. He routinely travels to countries like the Ukraine or Brazil to share best practices with other grain farmers. Yet many of his US peers may be unable to pass their farms on to the next generation because the economics no longer make sense.

The third change is transportation. Traders increasingly need to manage capacity at storage facilities as well as a network of shipping providers. A trader not only navigates between hundreds of producers, but must also navigate the vast array of shipping options for getting the crop to the buyer. Global markets have allowed farmers to amass capital and grow crops at scale, creating increasingly specialized and consolidated operations. And efficient ocean transit has ensured that crops are grown in the places where they are best suited, and yet are still affordable enough for consumers worldwide.

Despite the industry's increasingly global reach and the increasing size of farms, many farmers still think locally. When Ted is asked, "how does it feel to have your grain end up all over the world?" his answer is surprising. "To be honest I don't think too much about that. What gets me up in the morning is not 'how do I provide for millions in China or India?' but 'how do I provide for my family, my employees, and their families?'"

 

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