RAW MATERIALS ECONOMIC SEMINAR
A COMMON SENSE ALTERNATIVE
TO OUR ECONOMIC PROBLEMS
Kansas State University
March 25, 1987
by Thayne Cozart
President, National Organization For Raw Materials (NORM)
As I look around this seminar audience today, I think I have a very real feeling about how Daniel felt about going into the lion's den — except Daniel didn't have any choice in the matter and I've volunteered for my fate.
We're here today to learn about Raw Materials Economics — A Common Sense Alternative to our Economic Problems. As I prepared for this seminar, I recalled how simple and uncomplicated my life was when I was a faculty member here at KSU, Oklahoma State University and Washington State University — or even when I was simply the publisher of FARM TALK and my energies were focused on getting that business started and making it prosper.
I'm here today suffering no illusions that I'm going to change the thinking of the economics faculty in attendance. That's expecting a bit much because, in essence, I'd be expecting you to reject the lion's share of your formal university training and professional experience. However, I'm living testimonial that an old dog can learn new tricks, especially if the old tricks can't stand up to the test of time.
So, I ask you faculty members to bear with good will the indignity of a basic economics lecture from me — a communicator with very little formal economics training as compared to yours. And please spare me the deprecating snickers and the label ''kook'' until I've taken my leave and headed home for the safety of the Balkans of Southeast Kansas.
If I earn the label ''kook'' today, let me assure you that I'm a very sincere kook, a very dedicated kook, a very patriotic kook, an intellectually honest kook, and a very confident and self-assured kook in regards to the raw materials economic message I bring today.
As I feed your thoughts about agricultural and economic policy, I want to review a few basics with you.
WHAT IS THE MOST IMPORTANT ASPECT OF AGRICULTURE?
(1) Is it solely to benefit farmers and stockmen?
(2) Is it solely to provide cheap, abundant and wholesome food for Americans and others around the world?
(3) Is it to protect our natural resource base of soil and water upon which our food supply depends?
(4) Is to balance our federal trade deficit?
(5) Is it to provide jobs and investment outside of agricultural production?
(6) Is it all of the above?
I think we'd all agree that all of the above are worthy and lofty goals for agriculture.
I want you to start thinking about agriculture — Kansas agriculture in particular — just as you would any manufacturing plant. That is the proper perspective because:
(1) The production plant is acres.
(2) The units of production are pounds, tons and hundredweights of vegetative matter and pounds and hundredweights of red meat and poultry.
(3) The manufacturing catalysts are sunshine, chlorophyll, photosynthesis, rainfall, soil nutrients, and microbial actions in the soils and intestines of farm animals.
(4) The labor and management expertise is supplied by farmers and stockmen.
(5) The capital is supplied by a combination of product sale, inventory value, land value, and the banking system.
Now any manufacturing industry is considered to be doing its maximum for all of society when it:
(6) Is producing as many units as possible.
(7) Selling each unit at as profitable a price as possible ... and
(8) Employing as many persons as possible. Jobs are the absolute bottom line. Just ask any economic development entity, chamber of commerce, or tax-collecting entity if you doubt it.
Now if you can accept that premise, then I hope you can see that it logically follows that the bottom line on agricultural policy — as a part of overall economic policy — is as follows, it is the crux of my message today.
THE MOST BROADLY USEFUL AGRICULTURAL POLICY IS ONE THAT MAXIMIZES THE DISPOSABLE INCOME PER ACRE.
I didn't say that maximizes the gross income per farmer, or that maximizes employment. Agricultural policy that MAXIMIZES DISPOSABLE INCOME PER ACRE will accomplish our above listed broad goals for agriculture.
Where do we start to begin realizing those goals?
The head of the agricultural policy question is PRICE, not PRODUCTION. You see, income for agriculture is just like any other business — units sold times the price per unit. That's a basic economic precept that we can all agree on. However, it's much easier to make net income progress through price improvement than through production improvement. K-State can work 20 years to get a new variety of wheat that improves production 5 bushels per acre and that improvement does indeed increase income. However, a five minute flurry of activity on the Chicago Board of Trade based on, say, a rumor of an upcoming USDA report can increase or decrease disposable Kansas farm income by a much greater amount. We have virtually no expectation of a 50 percent improvement in production efficiency, however, it is very much within the realm of expectation and possibility for commodity prices to improve by half — provided we follow raw materials economic policy.
Another economic precept, just as basic and equally important, is the ECONOMIC TRADE TURN FOR AGRICULTURE. That trade turn ranges from 3 to 5 within the state of production and from 5 to 7 in the entire U.S. economy. Any measure of economic development for agriculture must be figured with the TRADE TURN in mind.
It amazes me how little attention professional ag economists place upon the agricultural trade turn. And it amazes me even more because I know the land-grant system understands it. When I worked for land-grant universities, I always used the agricultural trade turn to express the magnitude of production improvements and thereby justify budget expenditures and budget requests. The 5-bushel improved wheat yield that I mentioned earlier was multiplied times the anticipated planted acreage to get a total yield improvement figure. That in turn was multiplied times the expected price and multiplied again times the trade turn figure to show how tax dollar investments in ag research pays good dividends.
That’s all perfectly legitimate and correct reasoning. However, my point is that it’s equally legitimate and correct to use that argument to show why proper pricing of raw materials, particularly agricultural, also pays handsome dividends — providing we execute some sort of pricing policy other than "let the chips fall."
You see, agriculture is unique as the catalyst for economic development because it is the primary source of renewable, annual new wealth. Seventy percent of all the raw materials consumed in the U.S. each year is agricultural. As such, the products of the soil are the starting point for primary purchasing power in the economy.
Can we afford to let agriculture languish as an economic stimulus through inadequate prices? I don't think so. Here's why. The USDA reports that all the urbanized land in America covers an area barely larger than Missouri. If we are going to let the economic activity from that relatively small piece of real estate serve as the backbone for all our earned income, then we’re letting millions and millions of productive agricultural and forestry lands get shortchanged. Our economy is in such a mess that we must have all the land producing its MAXIMUM AMOUNT OF DISPOSABLE INCOME PER ACRE.
Quite literally, agriculture can be the prime provider of an economy with an exchange medium — currency — based upon something more concrete than a computer entry in a central bank that bases the currency upon interest-bearing debt and with no more foundation that the fickle confidence of the American populace.
The annual new wealth from agriculture, when properly monetized or converted to currency through proper pricing, can be spent in all segments of the economy without incurring compound interest. That, my friends, is the source of new jobs. That, my friends, frees up earned income for purchases that otherwise is wasted paying interest.
Wheat is the clearest example. An example: if Kansas farmers sell one million bushels of wheat for $2/bushel, they have $2 million in primary income to pay costs and leave some amount for discretionary spending. Suppose only a 3 times trade turn. That gives Kansas $6-million in economic activity. Those same bushels selling for $4/bushel gives $4 million in farm income and ultimately $12 million in general economic activity. At full parity around $6/bushel, the figures are $12 million in primary income and $36 million in general economic activity.
And here’s a sobering thought -- once an economy fails to properly monetize its annual production of new wealth through appropriate pricing, that lost income is gone forever -- it can never be recaptured.
Why is agriculture sick today? Why is the U.S. economy laboring under a debt load of more than $9.3 TRILLION? Why do we have an annual budget deficit around $200-billion? Why is our annual balance of trade more than $120-billion in deficit? Why is the unemployment figure hovering around 8 percent? Why is the interest rate still around 10 percent?
The answer, of course, is because our agricultural policy puts such a high priority on so-called cheap food. And while it's true that Americans spend less than 16 percent of their disposable income for food in the supermarket and restaurants, the untold story is the HIDDEN COSTS OF OUR CHEAP FOOD POLICY.
If there’s one truism about an economy in a free constitutional republic like ours, it's that only one group ultimately pays the full tab. That group is CONSUMERS. But they can pay the tab either directly at the time of purchase, or in HIDDEN COSTS THAT ARE OBSCURE, BUT STILL PAID BY SOCIETY AS A WHOLE.
Just stop and think about the HIDDEN FOOD COSTS associated with our present agricultural policy of dealing in high volume and low price per unit.
(1) The cost of displacing around 1,000 farmers per week, more than half a million of them since the ag crunch began.
(2) The loss of jobs both in the agribusiness sector and on the farm.
(3) The costs of agribusiness consolidations, lost profits, and depreciated stocks.
(4) The costs of unemployment benefits, food stamps, job retraining, moving expenses, increased health care, mental anguish and suicide.
(5) The costs to the banking system, the failed banks, the bankrupt Farm Credit System and its impending federal bailout, the loan write-offs, the loan write-downs, foreclosures, bankruptcies.
(6) The billions of dollars vanished in lost land equity.
(7) The thousands of perfectly good farmsteads abandoned and now rotting into the ground.
(8) The unpaid taxes, the uncollected taxes — costs that the rest of us must pick up for those who aren't paying and/or can't pay.
(9) The direct costs of unnecessary government subsidy payments in excess of $25-billion annually.
(10) The unnecessary legal and accounting costs incurred, the strain on the judicial system.
(11) The permanent loss of rural population upon which the rural infrastructure rests — in fact upon which the future of the College of Agriculture and KSU rests. Will there be enough rural population to sustain our rural schools, hospitals, rural electric co-ops, pay the rural water bonds, sustain phone service, maintain the roads, maintain the county government — including an Extension office in each county?
(12) And finally, the most obscene hidden food cost of all — more than $150-BILLION annually in unnecessary interest payments. (Vince Rossiter will be addressing that cost with his program later.)
Those are just the hidden costs I could think of off the top of my head. Case by case they'd probably stretch from here to the base of the Washington Monument. No one knows how large these hidden costs are. And to the eternal discredit of the land-grant system and the USDA, they're not only not trying to find out the size, but even failing to acknowledge such HIDDEN COSTS exist. I know that's so because I keep on receiving news releases from both entities proudly giving out the garbage that we're spending less than 15 percent of our disposable income for food.
That may be dandy policy for justifying budgets and placating gutless politicians, but it's a disservice to Americans because it misleads them about the true cost of their food supply and it helps keep failed policy in place.
But just because no one knows exactly how large our HIDDEN FOOD COSTS are, it doesn’t make them go away, nor does it keep them from being huge. They have to be huge. And when those hidden foods costs are added to our 15 percent of disposable income figure, the true cost of our food is undoubtedly above 20 percent of disposable incomes — or just about in line with what we'd be paying if we were honest, priced our farm commodities at 90 percent of parity, and paid the full price in the supermarket.
You can raise commodity prices rather strikingly and not raise food prices excessively because the farmer's share of the food dollar is around 30 percent in total and much less than that with grain products.
In short, the entire economy suffers when agriculture suffers. Remember the jobs we all want? Well, I want to cite figures from last summer’s “Choices for Kansas Communities” conference held in Salina. Anthony Redwood, a public policy and business research scientist from the University of Kansas, for Pete's sake, pointed out that the Kansas economy is performing below the national average. From 1980 to 1985, that underperformance has cost an estimated 45,000 to 50,000 jobs, a loss of income of $4.5 to $5-BILLION, and a loss of $250 million in state revenues. In the next 4 years, he projects the loss of 35,000 more jobs, almost $3 billion in income, and more than $135 million in state revenues.
Those aren’t puny figures, except when you compare them lost agricultural income. By failure to price commodities at 90% of parity, Kansas loses more than that every single year just in primary farmer purchasing power, let alone secondary economic activity — all simply because our commodities are underpriced.
If you don’t believe me. Go to the Kansas Census of Agriculture. Find the annual production of commodities. Multiply that production times the price sold to get primary farm income. Now, compare that primary farm income figure with what Kansas ag production would be worth if it sold at 90% of parity. It’s not insignificant. It’s in the billions of dollars — annually.
I know in your schooling and in general news coverage, you hear a lot and will hear a lot more about the importance of ag exports to the Kansas and national economy. I agree wholeheartedly with their importance, but I want to feed you a bit more FOOD FOR THOUGHT ABOUT EXPORTS.
First, there’s not a shred of evidence that we can export our way to ag prosperity. Even during the heydays of the so-called prosperity in the 1970s when our exports soared to $42-BILLION annually, commodity prices were never high enough that off-farm income didn't account for more than half of disposable farm income. Those are USDA figures. Farmers never quit going deeper and deeper into debt. Inflated land equities that farmers borrowed against were the mainstay of the ag economy, not genuine profits.
I’m a goal oriented person and the U.S. is a goal oriented society, but to this day I’ve never found a single federal or state governmental agency person, not a single person in higher education, not a single person in business, nor a single person in a farm organization who will even venture a guess as to the export volume needed to push farm gate prices to profitable levels for efficient family farmers. Policy-wise, we're putting all our eggs in the export market with nothing to back it but a hope and a prayer.
We ignore the fact that many of our former world grain customers are becoming self-sufficient in grains, largely because of U.S.-developed production and marketing technologies, and low interest- U.S. aid for transportation and export systems. With unseemly policy arrogance on our part, we assume that foreign nations want to be dependent upon us for a large part of their food supply. But we went into paroxysms of anguish a decade ago when the U.S. was dependent upon OPEC for our oil supply. It's simply against human nature to put your supply, and need, of a necessity into the hands of someone other than yourself. Food is certainly a necessity and we can be assured that every country will try its best to be self-sufficient in spite of U.S. protestations and retaliatory threats to the contrary.
We have to face the fact that many of our most fierce export competitors have no choice but to undercut our prices — thanks to the necessity they have of generating income to meet the interest and principal payments on the debts they owe to nine huge banking centers in the U.S., the International Monetary Fund, and the World Bank. Time prevents delving into this very deeply, but for your own information get a copy of the Joint Economic Committee of the Congress's report entitled “The Latin American Debt Crisis.'' The comic strip character Pogo could have been talking about U.S. agriculture when he said, "We have met the enemy and he is us."
We have to accept the fact that we cannot browbeat our trading partners into free trade. Free trade doesn’t exist. It never has. It never will simply because of the diversity of cultures on this spinning globe. World supply and demand doesn't set the price for ag commodities. The opening bell of the Chicago Board of Trade sets the world price. The U.S. loan level sets the world price. Everybody prices off of us, so when we have low prices, everyone has low prices and everyone suffers from a shortage of earned income from their raw materials.
That’s why we have rebellion in South America and Central America. That's why they hate the Gringos. We're ruining their economies while we ruin our own. If they’re going to price below our price, then it might as well be a 90 percent parity price.
And, here's something to think about. Does it make sense for the U.S. to spend billions militarily to protect our third world allies while we simultaneously carry on economic war with them? Down through the ages, there’s been more human suffering and social upheaval from economic dislocation than there has through war.
So you say, well, if we can't browbeat and scare our trading partners into free trade at the GATT conferences, what will work? Here's some more policy food for thought. Will you keep trading with a fellow who always gets the best of you? No. I won't either. Is a market that loses you money worth much? To me it isn't. Will you keep trading with a follow who always gives you a square deal? More than likely yes.
In all the discussions about free trade, protectionism, tariffs and export duties, has it ever crossed your mind why they never work? Why both trading partners always get mad and then get even? Contemplate, by what right does the federal government keep collected tariff fees? Those fees are paid by other nations for the right to bring products or services into our market. Tariff f ees belong to those nations — not to Uncle Sam.
What would happen if we collected those fees, and then put them into an interest-bearing trade account in that nation's or trading entity's name, thereby giving them the right to redeem those credits within one year by purchasing any combination of goods and/or services in our marketplace?
I'll tell you what I think would happen. You make up your own mind. I think we'd then have fair trade. We'd have EQUITY OF TRADE, NOT FREE TRADE.
EQUITY OF TRADE IS FAIR TO BOTH TRADING PARTNERS, IT ENCOURAGES BUSINESS AND BUILDS MARKETS. IT BUILDS GOOD WILL, TRADE TRUST AND LONG AND MUTUALLY BENEFICIAL TRADE RELATIONSHIPS. AND, THE ECONOMIC BOOKS ARE BALANCED EVERY YEAR.
Kansas has a vital stake in EQUITY OF WORLD TRADE, We could sell more wheat, soybeans, airplanes, beef and everything else under equity of trade. At this moment, the Congress is debating a trade bill. One side is for free trade. The other for protectionism. THEY'RE BOTH DEAD WRONG. Either one will further erode Kansas's agricultural economic base.
In closing, I want to toss out a few random morsels of economic policy FOOD FOR THOUGHT.
(1) THE DOUBLE STANDARD APPLIED TO AG — Why is agriculture the only sector of the economy encouraged to export its products at below cost of production for the majority of producers? We also export a lot or military hardware and oil hardware and technology. Are military contractors expected to build tanks, missiles, ammo and sell them overseas at a loss? Does the government call for oil industry suppliers to export at a loss for the good of the country? No. All the above build their goods on contracts, some on cost-plus contracts, and no one even pays particular attention to efficiency.
(2) Do our utilities expect to operate by selling electricity, natural gas, and phone service at a loss? No they're guaranteed by the rate setting commissions of prices that include around a 10 percent return on investment. I don't resent them their profits. They can't operate without them. But I do resent policy that forces our farmers and stockmen to sell their production at below cost in the supposed national good.
(3) Can third world countries afford to buy our food. Some can. Some can't. But in a recent year those nation's spent more than $200-billion on military supplies. So in some cases, it was a matter of their government’s choice.
(4) Does it strike you as somewhat ironical that our national fiscal policy centers around the "THREE EVILS" of INFLATION, HIGH INTEREST RATE, AND UNEMPLOYMENT? Think back. We only make progress on one by making one or both of the others worse. Surely the greatest nation on Earth can come up with a better policy that a bumbling juggling act among those three evils. It makes more sense to me to make a bigger pie than to fight like hell for a piece of a diminishing pie.
(5) Under totally free world trade, where will all the jobs end up? As surely as water runs downhill, the jobs will go where people can and will work the cheapest. Is that best for America?
(6) Of what real value is a foreign market that doesn’t allow you to get back your cost of production or make a profit? Our policy- makers worry themselves sick about losing market share. Why worry about it if it’s losing you money? I don’t want advertisers at FARM TALK who won’t pay a rate that allows me a profit, or worse, who won’t pay their bills.
(7) As you wrestle with economic development decisions, look out your window as you drive across Kansas. Think about the years of pent-up demand to purchase goods and services in agriculture. This demand can be released on the American economy through the mechanism of stable, profitable raw material prices. It is the force that can turn the Kansas economy around -- the national economy around. Just imagine every acre of Kansas farm or ranch land as that gigantic manufacturing unit I talked about earlier. Imagine a $10 laying on each acre that can build itself, through the ag trade turn, into a $50. How about a $100 laying on each acre.? It can and will happen if we as leaders are able to put into place the right policy. That’s where the money and the jobs are created.
(8) The nature of the universe is for balance. The universe is balanced chaos. Nature is balanced without the unbalancing hand of man. Surely, the natural order suggests the possibility and the wisdom of a balanced economy -- an economy whereas the various segments serve as reciprocal markets on an earned income basis, not a debt basis.
Simply put, that's what the National Organization for Raw Materials is all about — a balanced economy. To my way of thinking, that's the way we must think. That’s the way we must lead.
If we don't turn it around, we’ll be like the fellow who had an incurable disease and his doctor told him to go to Kansas and buy a farm with some oil wells on it. The guy says, "Will it make me live longer?" The Doc answers, "No, but it sure will seem like it."
As you finish your degrees and enter your professions, do your own thinking. Don't underestimate the accuracy of your common sense. Don't believe everything you're told — including what I've told you today — until you've weighed it against your good common sense. Smart people can be wrong. Articulate people can say the wrong thing. Charismatic leaders and teachers can lead in the wrong direction.
You’ve a right to be skeptical if someone tells you or teaches you that the bottom line of a business is more important than the people, or that you can borrow your way to prosperity, or that public debt doesn’t matter because we owe it to ourselves, but we still pay the interest to the central banks, or that the government can give you more back than you put into it in taxes, or that you can help consumers by sticking it to business, or that our politicians, educators and bureaucrats today know more about the fundamental direction America needs to go than the Founders of our nation.
You’re inheriting from me and my generation a world with a lot of problems. But that's no reason to be a pessimist, because, you see, the flip side of a problem is an opportunity.
Your generation can reverse our decline and make People’s Capitalism work for all the people as Jefferson, Washington, Franklin, and the signers of the Declaration of Independence and drafters of the Constitution and Bill of Rights envisioned. Those great men abhorred centralization. They knew that our Republic could stand the test of time only through decentralization and the wide distribution of land, money and power in the hands of common folks like you and me.
Which way is America going? Is our current policy the wisest one? Only you can answer that question for yourself.
It's been my distinct pleasure to address you at this seminar. If you desire any further information on raw materials economics, I'll try to help. I've given you a full meal of Food for Thought, I hope it gives you strength and mental agility — not indigestion.
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