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The Blessing and Curse of Productivity

Lee Schulz (lschulz@iastate.edu) and Chad Hart (chart@iastate.edu)

Can you have too much of a good thing? In the case of agricultural products, the answer from a market perspective is yes. Over the past six years, the United States has produced a series of bumper crops, greatly expanded pork production, and seen a significant rebound in beef production. But those production gains have come at the cost of lower prices and incomes. Arguably the largest challenge in agricultural markets today is finding enough demand growth to keep pace with production increases.

For corn, the strong production run began with the recovery from the drought of 2012. The last six corn crops (2013–2018) are the largest the United States has ever produced. Planted acreage reductions have been offset by yield increases. In each of the last two years, the national average yield has reached a new record (soon to be broken by this year’s crop, based on current projections). This string of large corn crops has overwhelmed corn usage during the period, resulting in a significant expansion of corn stocks and a roughly 50 percent drop in corn prices.

For soybeans, the production march is a combination of higher planted area and higher yields. Farmers across the nation have shifted roughly 25 million acres to soybeans from other crops since 2007. The growth in soybean area has mainly centered in the Great Plains, where soybeans have replaced wheat on the landscape. At the same time, newer soybean varieties have been introduced that are more adaptable to cooler and drier conditions. This has translated into higher national yields, despite the move into what was traditionally lower yielding areas of the country. While soybean acreage peaked in 2017, a projected record national yield in 2018 has boosted soybean production above 4.5 billion bushels for the first time. It has been an incredible expansion in a short amount of time. Parallel to corn, the soybean production run has coincided with a recent build-up of ending stocks and prices approximately half of what they were five years ago.

US beef production is the one area where we cannot talk about record production, but it is close. After a drought devastated the Southern Plains in 2011 and 2012 and feed costs reached record highs, the US cattle herd shrank significantly, reaching a low in 2014. However, brighter prospects, lower cost feed, and higher prices provided incentives for cattle ranchers to regrow their herds. The repopulation, combined with heavier weights on a per animal basis, have led to a quick rebound in beef production. While cattle numbers have returned to levels last seen in 2010, beef production has risen to nearly 27 billion pounds. Record beef production occurred in 2002, with 27.2 billion pounds of beef entering the market. Based on current USDA projections, that record will be broken in 2019.

Meanwhile, the pork industry is mirroring the soybean industry, with record production in each of the past four years. As with beef, higher feed costs limited expansion opportunities between 2007 and 2014. But once feed prices dropped, the herd expansion began, along with a push toward higher animal weights. Since 2014, pork production has increased 15 percent, a rapid scale-up for the industry. This expansion has been accompanied by growth in packing capacity, with five new packing plants entering processing over the past three years.

It has been an amazing run of agricultural productivity. Since 2015, corn production is up 9 percent, soybeans 19 percent, beef 13 percent, and pork 8 percent. Over the past 12 years, soybean production has swelled by 75 percent, while pork has grown by 20 percent. In aggregate, there is substantially more agricultural production available to the marketplace than a decade ago. While it is great to brag about record yields and high production, those statistics do not necessarily translate into record profits or returns in agriculture. As production rose, farm incomes fell. Farmers and ranchers had more to sell, but found that it took a much lower price to stimulate enough usage to clear the bin and empty the freezer. This is the curse of high productivity, as prices can often move more quickly downward than supplies increase. That is exactly what US farmers and ranchers have experienced since 2013—net farm income fell even faster than production rose.

While trade has been given the blame for much of the price swoons this year, high production has been a constant source of downward price pressure for the last several years, and that pressure continues today. The 2018 corn and soybean crops are massive. Meat production in 2019 should establish new beef and pork records. The productivity beat goes on.

However, the trade disputes will likely change the production pattern going forward, especially for soybeans. Exports and production tend to move together, more product being produced means more product available for international markets. Much of the surge in soybean and pork production has been associated with strong international demand. China was a leading figure in that strong demand. The tariff implementation over the past year has curtailed agricultural shipments to China. This has little direct impact for the corn and beef markets as China purchased very little of those products, but has larger impacts for pork and soybeans. Those export shifts have slowed the projected growth in the pork sector and have farmers considering shifting acreage away from soybeans next spring.

When prices are high, farmers and ranchers expand production, which eventually lowers prices. When prices are low, farmers and ranchers reduce production, which eventually allows prices to rise. This has not worked so well over the past few years. While prices and incomes have retreated, production has remained strong.

Figure 1
Figure 1. US corn production, 2007–2018
Source: USDA-NASS and USDA-WAOB
Figure 2
Figure 2. US soybean production, 2007–2018
Source: USDA-NASS and USDA-WAOB
Figure 3
Figure 3. US beef production, 2007–2018
Source: USDA-NASS and USDA-WAOB
Figure 4
Figure 4. US pork production, 2007–2018
Source: USDA-NASS and USDA-WAOB
Figure 5
Figure 5. US net farm income, 2007–2018
Source: USDA-ERS