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CARD: Center for Agricultural and Rural Development

Winter 2004, Vol. 10 No. 1

In this issue...

Risk-Free Farming?

Targeting Efficiency in the Conservation Security Program

Agricultural Situation Spotlight: Agricultural Price Swings and Iowa's Economy

The Expanding U.S. Market for Fresh Produce

pdf for printing Agricultural Situation Spotlight:
Agricultural Price Swings and Iowa's Economy

Chad E. Hart

Over the past few months, we have seen tremendous variability in commodity prices. Soybean futures prices have increased by roughly 50 percent since mid-July, spurred on by lower-than-expected production and an ever-tightening supply. Cattle futures prices have fallen by nearly 20 percent since the announcement of the bovine spongiform encephalopathy (BSE) case in Washington. But what do these price swings mean for Iowa's agricultural and overall state economy?

Table 1
One way to look at the impacts is through the values of production for Iowa's major agricultural products. The big four commodities (corn, soybeans, hogs, and cattle) account for roughly 90 percent of all agricultural cash receipts in Iowa. Table 1 shows the values of production for these commodities (2003-04 figures are projections). On average, the corn crop provides 38 percent of total value, followed by hogs at 26 percent, soybeans at 24 percent, and cattle at 12 percent.

Table 2

Table 3
The projections include the price increase for soybeans but were computed before the BSE announcement. But as is evident by a comparison of the 2002 and 2003 values, the price increase of 2003 was more than offset by the drop in soybean production. However, it is not always the case that prices and production move in opposite directions (at the state level). The increase in soybean production values between 2001 and 2002 can be attributed to increases in both prices and production. Table 2 and Table 3 show historical and projected marketing year average prices and production levels for corn, soybeans, cattle, and hogs.
The projections for 2004 show prices holding steady for corn, a large drop in the prices of soybeans and cattle, and a slight increase in prices for hogs. Corn production and prices are projected to be near 2003 levels. While Iowa soybean production is expected to rebound in 2004, soybean prices may fall back to 2002 levels. Both hog production and prices are expected to rise in 2004. Before the BSE announcement, cattle production and prices were expected to maintain near 2003 levels. However, even with a 20 percent reduction in price (following the futures market), Iowa cattle production values for 2004 would be near 2002 levels and the total value of production for the four commodities would approach $9.9 billion, far exceeding the production values for 2000 and 2001.
But looking at production values does not tell the whole story as far as agriculture's impact on Iowa's economy. Oftentimes, when you hear news reports on the size of Iowa's economy, it is stated in terms of the "gross state product" (GSP). The GSP, much like the gross domestic product (GDP) for the nation, is a measurement of the "values added" in production by the labor and resources contained within the region. Values added is the difference between the value of the output from production and the value of intermediate inputs (output from other production sources) used in the creation of the output. For example, the values added in livestock production is the difference between the livestock value and the value of such inputs as feed, machinery, and veterinary services used to raise the livestock.

Figure 1
The Bureau of Economic Analysis, an agency within the U.S. Department of Commerce, tracks values added, GSP, and GDP. Values added can be obtained for on-farm agricultural production, agricultural services, food production (for both human and animal consumption), manufacturing, other services, and so on. As Figure 1 shows, the GSP due to on-farm agricultural production has remained fairly stable since 1977. Adding in the values added due to agricultural services and food production doubles the impact of agriculture on Iowa's economy. However, these direct impacts are somewhat small in comparison to Iowa's total economy. Since the late 1970s, Iowa economy has tripled in size, from just over $25 billion in 1977 to $90 billion in 2001. Production agriculture's share of the gross state product has fallen from 14 percent in 1978 to under 3.25 percent in the last few years. The combination of agricultural production, services, and food production accounts for only 8 percent of Iowa's GSP.
For Iowa, the data for on-farm agricultural production indicates that roughly 30 percent of the production value is considered as values added. Using this as a rough guide to production agriculture's direct impact on the State's economy, the consequences of the price downturn in cattle due to BSE are smaller than might be expected. Based on a 20 percent price drop, Iowa cattle production values would fall by $250 million. Using the 30 percent values-added relationship, this would translate into a $75 million drop in gross GSP from on-farm production. That is less than one-tenth of 1 percent of total GSP.
The point here is not to say that agriculture is not a major contributor to Iowa's economy. Estimates of agriculture's overall impact (direct and indirect through related industries) range from 15 to 25 percent of the state's total GSP. Rather, in light of the BSE case, it is important to note that the large price swings we see in agriculture have smaller effects on Iowa's overall economy than might be anticipated by the general public, especially when the price swings are viewed as temporary movements in the market. ?