U.S. Agricultural Production Capacity: Comment

The conclusion follows from the finding by YTQ that in 1985 the "feasible supply capacity" (their expression) of U.S. agriculture would be 67% greater than equilibrium demand and output, given a set of projected conditions (p. 47). This margin of excess capacity occurs, however, at real prices (prices received by farmers divided by prices paid) 80% above the 1967 level and 79% above equilibrium level in 1985 (table 2, p. 43). Do YTQ mean that capacity would not be "challenged" until output had risen to 190 (1967 = 100) and real prices to 180 (1967 = 100)? If so, their conclusion is correct, given their measure of capacity; but American consumers and many foreign buyers of American farm products, faced with unprecedently high real prices, likely could find little comfort in it. If YTQ mean that the challenge to capacity would arise only as output approached 190, the consequences for consumers of U.S. farm products are not fundamentally changed because the elasticity of the long-run supply curve (table 2, p. 43) is such that real prices rise more or less proportionately throughout its length as output increases. Suppose, for example, that the shift in the demand curve from 1974 to 1985 were greater than YTQ have projected it, bringing equilibrium demand and supply in 1985 to 131.5, and the real equilibrium price to 120 (table 2). By YTQ's criterion, capacity would not be challenged. However, the real price would be 13% above the 1974 level of 106 (table 2, footnote a); that is, the trend of real prices would be rising, a reversal of the historical trend of real farm prices in the United States. Apart from periods of war and their aftermath and prolonged economic depression, the secular movement of these prices until 1973 was downward, particularly from the end of World War II until the early 1970s, when technological progress in American agriculture was rapid.2 I suggest that most consumers, agricultural economists, and those responsible for agricultural policy would regard a long-term rise in the real cost of farm products, reversing the trend of several previous decades, as a highly negative development, even though, by YTQ's definition, capacity were "unchallenged." The argument that capacity were unchallenged likely would be viewed as irrelevant, if not harmful, for it would obscure the emergence of a fundamental and unfavorable change in the cost conditions of American agriculture. I am not taking issue here with the concept of capacity employed by YTQ. They argue, quite rightly in my judgment, that because it is possible to increase U.S. agricultural production virtually without limit if one is prepared to pay the cost, a concept of capacity as an absolute maximum output makes little sense. Accordingly, they define feasible supply capacity in terms of the elasticity of supply, an approach with which I agree. However, the supply curve they specify for 1985 (table 2) has about the same elasticity at levels of output and prices near equilibrium as at the levels corresponding to feasible supply capacity. Unless the supply curve becomes much less elastic just beyond feasible supply capacity-and there is nothing in the YTQ article to suggest this-then their results show that efforts to increase output much beyond equilibrium would have the same proportionate effect on prices as efforts to increase output at feasible supply capacity. Consequently, the "challenge" to capacity, measured by the behavior of prices, would emerge at levels of output substantially less than the feasible supply capacity specified by YTQ. The implication of this argument is that YTQ, in accordance with their own definition, should have specified a much lower level of output and prices as corresponding to feasible supply capacity. This might be granted. YTQ still could assert, however, that demand would not challenge capacity by 1985, at least in three of the five scenarios they consider, because equilibrium prices that year in those three scenarios are below the 1974 price (table 2). The margin of unutilized capacity would be much smaller than YTQ assert, but by the criterion of the effect on prices of efforts to increase output, capacity would not be challenged between 1974 and 1985. Pierre Crosson is a senior fellow at Resources for the Future. The author is grateful to Kenneth Frederick and Ronald Cummings for helpful' comments. 1 Unless otherwise identified, all page references are to the YTQ article. 2 U.S. Department of Commerce, pp. 48-489, and USDA (1976).