Organic Broadcaster

Commodity system creates persistent losses

By Ken Meter & Megan Phillips Goldenberg

This article is based on the MOSES 2019 workshop, “Strengthening Community-Based Food Systems,” presented by the authors. This is Part I on the commodity system.
Click here for Part II on organic markets.

To begin with, let’s consider the economic context all organic farmers operate within. Setting the terms under which we farm, this dominant, conventional commodity economy both creates the potential for organic farmers to thrive, and simultaneously limits it.

Chart 1 shows the history of U.S. farming over the past century. On this chart, the orange line shows the cash receipts earned by all farmers since 1910. As you can readily see, there have been tremendous increases in the sales of farm commodities. However, the maroon line shows that production expenses have risen just as fast. The red line on Chart 1 shows the net cash income of the farm sector—production expenses subtracted from cash receipts. While farm families have other ways to earn income, this red line shows how profitable it is to raise crops and livestock.

Chart 1. Source: USDA Economic Research Service Farm Income Balance Sheet data

A quick glance at this chart shows that there has been no sustained growth in net cash income for more than 100 years. In fact, at the time this data set was compiled, the net cash income for all farmers was nearly zero for 2016-2018, after a few peak years in which prices rose to abnormal levels. In an earlier compilation, the one we showed in our workshop, ERS showed negative net cash income for U.S. farmers in 2015. For reasons we are not clear about, this estimate has now been changed.

Thus, the nation that claims to feed the world has created extensive supports and incentives for commodity production, but these encourage the market conditions that lead to persistent losses. These results are both a testimony to the fragility of all farm enterprises—due to farmers’ dependence on the weather and other uncertainties—and a caution about the actual efficacy of public policy.

Yet it is also important to consider this same data from a slightly different perspective. The value of the U.S. dollar has declined over the past century as a result of inflation. This means a dollar earned in 1910 was worth about $25 today. So we like to adjust this data for inflation to show what these same trends look like in today’s dollars. That adjusted data is shown in Chart 2.

Chart 2. Source: USDA Farm Income Balance Sheet data, adjusted for inflation to 2018 dollar values

Visible in Chart 2 are several periods of prosperity for the U.S. farm sector: a) the “Golden Age” of 1910-1914 when the U.S. dominated global commodity markets and living costs were low. This era is still viewed as the standard for farm prosperity, and was followed by more robust sales, spurred by World War I, that lasted to 1920; b) the period during and immediately after World War II when wartime and recovery-era sales and new technology combined to boost farm income; c) the OPEC oil crisis of 1973-1974, when the U.S. sold massive shipments of grain to the USSR in order to retrieve its dollar supply; and d) the global housing debt crisis of 2008-2011 when speculators’ bidding up grain prices and rising ethanol use conspired to create a commodity price bubble.

What this adjusted chart shows is that the only truly prosperous periods for U.S. agriculture were due to global market power (a), which was lost in mid-century as other nations became competitive producers, or to external shocks (a-d). Overall, net cash income has trended downward, reaching levels lower than the Great Depression (1932) in 1983, 2000, and 2018. Moreover, each of these bubbles led to further decline, not to lasting prosperity for the farm sector.

Chart 2 shows only the income that farmers earn from selling crops and livestock and does not include other common sources of farm income. These include government subsidies, renting out land, and doing custom farm work for a neighbor (for example, harvesting their corn crop for pay). Incorporating these additional forms of incomes does make this picture a bit brighter, but not significantly.

The USDA also compiles data covering nonfarm sources of income, but unfortunately these are only available for 1960 and later years. These data (USDA ERS Farm Household Income and Characteristics, adjusted for inflation) show that in 1960 farm families earned about $40,000 per year, $20,000 each from farm and nonfarm sources. Today, more than $90,000 is earned off the farm, while farm income has barely risen, to $24,000 per household, despite the fact that farmers have more than doubled productivity.

The ups and downs in farm income inflict steep consequences for health, as well. This is obviously of great concern to organic growers and their families. As one example, let’s consider the aftermath of the prosperity bubble that commodity farmers enjoyed in 1973-1974. After the Soviet Union began growing grain for itself again, it stopped buying from the U.S. Commodity farmers were left with immense stocks of corn and wheat they could not sell. While following the advice of Agriculture Secretary Earl Butts, who had exhorted farmers to “plant fence row to fence row” in order to meet what he claimed was rising global demand, farmers produced record crops. Suddenly no one was buying. Country elevators stored huge piles of grain in the open air on their properties. Given this surplus, grain prices plummeted.

Meanwhile a new enzymatic process was introduced that allowed for the low-cost production of high-fructose corn sweetener. Since corn was cheap, it became quite easy for food processors to switch to High Fructose Corn Syrup (HFCS) as a primary product. Corn sweetener use increased rapidly from 1974 to 1985.

This had health consequences for U.S. consumers. Chart 3 shows that in 1974, just as HFCS was introduced, the number of youth who were overweight began to increase.

Source: National Center for Health Statistics National Health and Nutrition Examination Survey 1999 Chart by Melinda Hemmelgarn

 

Obesity is only one of several health conditions related to sweeteners. Today, one in every 10 U.S. residents (more than 30 million people) has been diagnosed with diabetes (Centers for Disease Control Behavior Risk Factor Surveillance Survey, 2017).

The American Diabetes Association calculates that the total medical cost of treating diabetes in the U.S. has risen to $327 billion per year, which is equal to 86% of all the cash receipts earned by U.S. farmers through the sale of crops and livestock. These medical costs, along with the costs of other diet-related medical conditions and environmental debacles (such as the Dead Zone in the Gulf of Mexico and the decline of bee and insect populations), are only some of the external costs that are not taken into account when USDA calculates the production expenses of farming.

Finally, ethnobotanist Gary Paul Nabhan captured a humbling trend in his new book, Food From the Radical Center (2018). Nabhan found that despite four decades of government intervention to protect our precious environmental resources, including actions for protecting clean water, protecting clean air, remediating brownfields, and levying fines on polluters, public support for environmental concerns has actually diminished. Citing Gallup Polls, he states that in 1991, 78% of all U.S. adults considered themselves environmentalists. By 2016, that figure had fallen to 42%. He continues by saying that what is actually working to bring people together to protect the environment are community-based conservation initiatives, more effective and less polarizing than broad federal programs. (Nabhan does not argue, nor do we, that federal protections should be eliminated, since they are essential policy tools. Yet they have not in themselves increased support for environmental protection).

PART II

Community-based food systems support organic markets

 

Organic food sales are the fastest-rising sector in the grocery industry, growing from $13 billion in 2005 to $47 billion in 2018 (Organic Trade Association). Moreover, dedicated advocacy has expanded markets far beyond the co-ops and smaller stores that initially launched organic sales. By 2011, more than half of all organic food items were sold through traditional retailers.

Despite sales growth, there are difficulties in each of the largest organic markets in the U.S.: vegetables, dairy, and grain. As you’ll see, businesses that have created a basis of community support are best situated to weather these difficult times.

Organic Vegetables

This chart shows the acreage devoted to organic vegetable production in recent years. Acreage declined in 2010 and 2011 after peaking briefly in 2008, likely because the global housing finance crisis interrupted consumer fascination with purchasing healthier foods. After 2012, acreage began to increase again, but reached a new plateau in 2015-2016.

Source: USDA Economic Research Service. No data were reported for 2009, 2012, or 2013. Data for 2014-2016 are from USDA National Agricultural Statistical Service Organic Survey, which reports numbers different from ERS.

Yet growth in organic food sales did not consistently spark the planting of new produce fields in the U.S. Instead, produce imports have risen, fueled by production in countries such as Mexico, where land and labor are less expensive. This represents both a market failure and a failure of policy to create infrastructure and incentives that connect more consumers to U.S. farmers to meet rising demand.

Now that organic vegetables are widely available at Walmart, Aldi, and other stores, shoppers can easily access food with an organic label on it, but gain very little sense of who grew it. Larger growers, who have adopted the USDA Organic label in order to sell wholesale at higher prices, often lack long-term market power to maintain these premiums. Meanwhile, it continues to be a challenge to amass the capital required to invest in land and equipment at a scale required to meet wholesale demand, where prices are constrained.

While some supermarket shoppers seem content to trust a USDA Organic label without probing into the actual practices of farmers in other nations, many organic growers across the country are selling direct to their customers without the organic label. These growers find that their buyers place little value on certification and instead buy from a farm they trust. This has resulted a rise in food items marketed as “non-certified but chemical free,” or “better than organic,” among others, and sold through direct channels. Without third-party certification, it’s up to the consumer to verify these claims.

Yet many organic farms that built their businesses by reaching out directly to consumers through mechanisms such as a CSA or farmers market sales now feel hampered by these relatively confined, direct markets. Some want to move into less labor-intensive wholesale markets. Consumers are experiencing direct-market fatigue, too—CSA renewal rates and farmers market sales have diminished across the country as shoppers turn back to supermarkets for convenience, lower prices, and year-round supply. 

This dynamic and competitive food sector requires that farmers innovate to create new opportunities. One of the best models is Fifth Season Co-op in Viroqua, Wisconsin. Here a savvy core of experienced growers reached out to Gunderson Hospital and Reinhart Foods, and asked workers to join them on the board of a multi-stakeholder co-op. In the absence of a public policy framework that creates supply management and fair pricing, this cluster of collaborators has created a system of their own.

This innovative approach was only possible because the community of Viroqua had built exceptional bonds of trust over the past five decades. Few communities across the U.S. have built such social connectivity.

On the direct sales side, community also is the core. Those farms that have built the strongest connection with their CSA members are the ones that report the best renewal rates. Similarly, those farms that have formed a personal bond with farmers market consumers are the most likely to sustain loyalty. At both larger and small scales, community-building is key to economic success.

Organic Dairy

The past few years have been increasingly difficult for the dairy industry. Several new large-scale producers entered the market, expanding supply but depressing prices since overall demand is limited. Ironically, this expansion has occurred in part because of Organic Valley’s success in raising the pay price for milk. As this more lucrative market was created, conventional producers converted to organic production.

As the chart shows, Organic Valley’s pay price for milk peaked in 2015. In 2018 when supplies exceeded demand, Organic Valley made across-the-board reductions rather than asking any farmers to leave the co-op.

Organic Valley has built its business by building community. This has allowed the co-op to flourish when times are good, and also seems to be critical to maintaining cohesion now that conditions are more trying. It offers special services to its 1,961 members such as research grants, technical assistance, and community-building activities, in addition to representing them in the marketplace.

Source: Organic Valley and media reports

Organic Valley has maintained independence by funding itself, drawing upon member equity rather than taking on massive debt. When possible, the co-op has shared profits with its members. Farmers are engaged in business decisions and elect seven farmer-members to serve on the co-op board. The co-op’s system of supply management helps members know that prices will hold firm for at least a year.

As competition has ramped up, other firms have tried to entice Organic Valley farmers away from the co-op. Having a strong culture of community is probably the most potent defense Organic Valley has to ride through these harsh conditions. Thus, for the intensely industrial and larger-scale national dairy industry, just as in smaller more scattered produce operations, building community has been key to ensuring resiliency.

Organic Grain

We know of no national data sets that would incisively show the progression of the organic grain trade over the past few years, similar to those we showed for produce and dairy. The next chart shows organic grain sales for two recent years; the subsequent chart shows how much more profitable organic grains can be when compared to conventional. These data show quite starkly how much more profitable organic corn, soybeans, and wheat are than their conventional and GMO counterparts.

Chart by Megan Phillips Goldenberg, Relocalizing Niche Grains, 2016

The U.S. is a formidable producer of grains, serving as the world’s largest exporter of corn and second-largest exporter of soybeans. Overall, 40% of U.S. soybeans and 20% of corn is exported annually (USDA Economic Research Service, 2018). Yet U.S. growers have been slow to adopt organic practices. This means that imported corn made up 37% of the U.S. organic supply in 2017 (Mercaris 2017), and doubled from 2015 to 2016 (Jacqui Fatka, Farm Progress, July 17, 2017). The situation for organic soybeans was even more dire, with Mercaris reporting that 74% of U.S. organic soybeans supplied from 2014-2017 were imported. Imports have slowed since 2016, which could be due to softening demand or a weaker U.S. dollar.

The organic grain trade holds tremendous potential for community-level collaborations and relationships built on trust, transparency, and loyalty. In part, this is because grain, which is relatively easy to store, maintains its nutrient value for a longer time using fewer energy inputs. A second reason is that grain lends itself to three separate operations that complement each other: a farmer harvests grain, which can be milled into flour, which can then be baked into bread. Each adds value to the product in a community. This creates excellent opportunities for effective business clusters that help create a culture of community collaboration and engage diverse customers.

At MOSES Organic University in 2017, panelists Thor Oeschner of Oeschner Farms (Newfield, New York), Harold Wilken of Janie’s Farm (Danforth, Illinois), and John Wepking of Meadowlark Organics (Ridgeway, Wisconsin) talked about these types of collaborations. Oeschner mills heritage grains to order through his on-farm mill and has built a bread CSA. Wilken has 2,400 acres of organic grain production and has now built a mill on his farm. Wilken purchases from neighboring farms for the mill, selling high quality flour into the Chicago, St. Louis, and Ann Arbor-Detroit markets (full disclosure: Phillips Goldenberg represents Wilken in Michigan). The Wepking family is collaborating with Paul Bickford (Bickford Organics), to raise organic grains that they mill through a collaboration with   Lonesome Stone Milling. The Wepkings also are pursuing a unique land transfer arrangement to gradually acquire Bickford’s farm.

These are privately owned firms in which the owners establish collaborative relationships. Each panelist spoke of the importance of building solid relationships of mutual trust, and operating in a highly transparent manner, as the foundation for these clusters to succeed.

Ken Meter is with Crossroads Resource Center in Minneapolis. Megan Phillips Goldenberg is with New Growth Associates in Saline, Michigan.
kmeter@crcworks.org; 612-385-8664
phillips.megan.e@gmail.com; 906-869-0372

 

From the March | April 2019 and May | June 2019 issues

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