Farms

By Peter Schirmer and Melissa Taylor

While manufacturing makes a larger contribution to the rural economy overall, agriculture still employs thousands of people. In addition to full-time farms, agriculture provides needed supplemental income to many people across the state who farm part-time. Furthermore, in certain counties farming remains the most significant economic activity, one that is closely linked to the traditions of rural Kentucky. In this new era of globalization, however, some of the traditions of Kentucky agriculture are likely to undergo change. Growth in domestic demand for agricultural products is sluggish, while the global marketplace offers burgeoning opportunities, particularly in the developing world. Already, 20 percent of all U.S. farm output is exported, and one out of every three acres of land is used for export crops (Espy, 1994). International trade is becoming so important that Mike Espy, former Secretary of the U.S. Department of Agriculture, observes that "the U.S. economy simply cannot grow rapidly enough to absorb the output from the steady rise in farm productivity. The expansion of export markets is critical to U.S. agriculture" (p. 3).

Agricultural exports from the United States are comprised of bulk commodities—for example, corn, wheat, and unprocessed tobacco—and value-added agricultural products. Value-added products include intermediate products such as soybean meal or animal feeds, and consumer-oriented products, such as snack foods, fresh and frozen meats, and processed vegetables. In recent years, U.S. exports of bulk agricultural products have slowed while exports of intermediate products have remained steady and exports of consumer-oriented agricultural products have taken off. Exports of value-added, consumer-oriented agricultural products rose $1.5 billion in 1994 to a record $16.2 billion, while exports of bulk commodities fell almost $1 billion to $18 billion (Foreign Agricultural Service, 1995a). Value-added intermediate and consumer-oriented products comprised 55 percent of U.S. agricultural exports in 1993, up from about 33 percent just 10 years earlier. Eighty-five percent of U.S. agricultural export growth since 1985 is attributable to value-added products (Goldthwait, 1994). In the future, the United States will face intense competition and consequently low margins on bulk commodities, but markets for value-added consumer goods are expanding dramatically.

Figure 1: Value of U.S. Agricultural Exports

Although Canada, the European Union, and Japan have been the largest markets for U.S. consumer goods, the fastest growing markets are in Hong Kong, South Korea, Taiwan, Indonesia, Malaysia, Thailand, and Mexico. Developing countries in Asia and Latin America, with their growing incomes and rising standards of living, "promise to be the wave of the future" for U.S. exports as traditional U.S. export markets mature (Drabenstott and Barkema, 1995). The developing countries are becoming less self-sufficient in agriculture because population growth and urbanization are outpacing domestic agricultural output. Developing countries tend to import capital-intensive consumer food items because labor, not capital, is abundant in these countries.

Unfortunately, even as the international market for value-added agricultural products grows, Kentucky remains deficient in value-added businesses related to agriculture. New capital investment in Kentucky lags behind the United States as a whole (University of Kentucky Center for Agricultural Export Development, 1992), and Kentucky farmers raise crops and animals that must be shipped out of state to be processed. This deficiency in value-added businesses does not bode well for Kentucky in the international economy. As developing countries become more competitive in the bulk commodities sector and U.S. agribusinesses establish their presence in other countries, Kentucky risks being left behind. One positive note is that beverage production (particularly distilled spirits) is a large component of the value-added agricultural industry in Kentucky (University of Kentucky Center for Agricultural Export Development), and this is one sector which is expected to enjoy significant growth as a result of the new GATT agreements (U.S. International Trade Commission [ITC], 1994).

Figure 2: Value of Selected U.S. Exports

Kentucky already produces many raw goods which are ultimately processed and sold on the world market. Valerie Vantreese of the Center for Agricultural Export Development at the University of Kentucky believes that "country ham, bourbon and popcorn are Kentucky products with excellent prospects for overseas sales" (Vantreese, 1990, p. 4). Increasing import demand for beef in Pacific Rim countries, especially Japan and South Korea, as well as in Mexico, will provide export opportunities for the United States. U.S. pork exports overall are not expected to increase dramatically, but there will be export opportunities in Mexico and the Pacific Rim. Poultry is expected to experience the greatest export gains as consumption will increase in almost every country. The United States is most likely to increase exports to Japan, Hong Kong, Mexico, Russia, China, South Korea, other Pacific Rim countries, Latin America, and the Caribbean (United States Dept. of Agriculture [USDA], 1994a).

While developing countries will become increasingly important destinations for U.S. agricultural exports, trade opportunities with advanced nations will continue to emerge, often in the form of niche markets. Successful niche marketing requires a substantial investment of time and international market research, but there are numerous opportunities for Kentucky-made products. Snack foods are gaining popularity throughout the world, and U.S. exports of popcorn to Canada and Europe are increasing rapidly. Health foods and convenience foods, including microwavable products, are rising in popularity as more women enter the workforce.

Despite the fact that value-added agricultural products have surpassed bulk commodities in world trade, export demand for some bulk commodities should remain strong in coming years. Worldwide demand for animal feed and industrial products made from coarse grains is expected to increase demand for corn, barley, and sorghum. U.S. exports of these commodities are predicted to rise steadily over the next 10 years as South Korea, Taiwan, Mexico, and China increase imports (USDA, 1994a). Moreover, demand for white corn is increasing as Mexican-style foods and snack foods are gaining popularity in Europe and, to a lesser extent, in other parts of the world. World trade in soybeans and soybean meal will be fueled by demand in developing countries as livestock herds increase in size and number. The United States is expected to increase production and exports of both soybeans and soybean meal, thus reversing a downward trend (USDA).

The North American Free Trade Agreement and the Uruguay Round Agreements (URA) in the General Agreements on Tariffs and Trade should favorably affect the U.S. agricultural trade balance. Most experts agree that the United States will benefit from the increased trade and world demand afforded by these agreements, as closed markets open and current markets expand as a result of liberalized trade. Table 1 reflects the predictions from the U.S. International Trade Commission of the impact of the URA. Only dairy products are expected to see a sizable increase in imports, and no sector should suffer anything worse than a negligible decrease in exports as a result of the URA. On the other hand, several sectors, most notably beverages (especially distilled spirits), should enjoy a significant increase in exports. Other strong agricultural sectors in Kentucky which expect to see more export demand as a result of the URA include livestock, tobacco and dairy products.

Table 1: Potential Impact of the Uruguay Round Agreements of GATT on U.S. Agriculture

The liberalization of global trade, as well as economic advances and population growth in developing countries, should bring significant new opportunities for U.S. agricultural exports. Kentucky will be in a better position to enjoy these developments in world trade if it can increase the value added to its agricultural exports. If we do not anticipate the changes at work in world agriculture and act accordingly, we will be left behind. The experiences of Kentucky's tobacco producers reinforce the message that whether we wish to confront these challenges or not, we are already engaged in global competition: American tobacco growers have seen their share of the world market fall from 23 percent in 1959 to 10 percent in 1991 (Community Farm Alliance, 1993). The increasing quality of foreign tobacco is a major threat to U.S. tobacco production and a driving factor behind the expected decrease in Kentucky's tobacco quotas in coming years (Childress, 1994). But just as globalization brings increased competition, it can also open new markets and introduce U.S. products to hundreds of millions of new consumers.

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