October 26, 2007
Oppedahl on the agriculture R&D conference
By Guest Blogger David Oppedahl
Have you ever wondered how the U.S. can produce so much food with relatively few farmers? On September 24, 2007, at the Federal Reserve Bank of Chicago you could have learned some of the reasons behind the cornucopia of output from U.S. agriculture at our conference The Role of R&D in Agriculture and Related Industries: Today and Tomorrow. The conference explored the role of research and development (R&D) in agriculture, biotechnology, and the food industry, focusing on policies that promote industry growth and rural development. This conference brought together those interested in the R&D issues facing agriculture and related sectors of industry, particularly biofuels and food manufacturing.
The goals of the conference were to examine agricultural R&D from a midwestern perspective, explore the implications of R&D for industry growth, and discuss the influence of government R&D policies on industries and rural development. The sessions of the conference covered the following topics: 1) agriculture R&D and funding, 2) biotechnology and food R&D, 3) biofuels R&D, and 4) a policy discussion about the best ways to promote agriculture-related R&D. Next I’ll highlight a few of the presentations.
William Testa, vice president and director of regional programs at the Chicago Fed, kicked off the day with opening remarks that emphasized the role Chicago has played in the development of agriculture in the Midwest. “Almost from its inception, Chicago has been the nexus and commercial center for a broader region whose wealth emanates from production agriculture,” Testa said. Yet, shifts in agricultural labor due to increased productivity have affected the region’s economy. Testa noted that fewer production jobs in agriculture and related industries have led to struggles in rural development, though agriculture remains a key sector. “At heart, production agriculture must remain in the Midwest where land, climate, and transportation infrastructure are superior,” Testa stated. Moreover, R&D activities have played a key role in shoring up the District economy and offer hope for a bright future. The web of R&D efforts in the Midwest is likely to grow, creating more opportunities for the region through better products and new technologies. Testa concluded, “I am optimistic here today that the dissolution between research lab and factory and farm that has taken place in other regions and in other industries is not our Midwest region’s destiny.”
My presentation opened the first session and emphasized the link between the amazing productivity in agriculture during the last 60 years and agricultural research. Recent data from the U.S. Department of Agriculture demonstrated that, while using fewer inputs than in 1948, the agricultural sector in the U.S. produced more than 2.5 times as much output in 2004 as it did over a half century ago. Of course, the use of some inputs, like fertilizers, has increased. However, the contraction in farm labor more than offset these increases. Yet, there was a shift in the source of agricultural productivity during this period. In the 1948–1980 period, almost three-quarters derived from an increase in inputs per worker, whereas in the 1981–2004 period, two-thirds derived from growth in total factor productivity (TFP), which reflects changes in technology and other factors rather than labor-saving productivity alone. Government policies fostering agricultural research have promoted the long-term health of agriculture via TFP. According to Fuglie and Heisey, “There is a consensus that the payoff from the government’s investment in agricultural research has been high.” There are even greater benefits to the public from agricultural research when one considers the social returns from private research as well as public funding.
Orion Samuelson, agribusiness director at WGN Radio Chicago since 1960, presented the keynote luncheon speech, expanding on this theme of the changes in agriculture due to government policies. He passed along a few of his many experiences related to the changes in agriculture during his association with the industry. Orion touted rural electrification as the single factor that changed agriculture the most in the twentieth century; farm life was transformed by a reliable supply of electricity. He also said that research played a vital role in agriculture’s growth and that research funding should be expanded to sustain the industry’s growth. An example of the key role of research is the ongoing development of drought-resistant crop genetics via biotechnology, which will contribute to the record corn crop this year. Samuelson contended that we’re just seeing the beginning of biotechnology’s impact across the industry. Moreover, he predicted that U.S. agriculture would rise to the challenge of helping feed the world through agricultural R&D, just as it has over past decades.
The final session explored policies that would strengthen agricultural R&D in the U.S. Jeffrey D. Armstrong, dean of the College of Agriculture and Natural Resources at Michigan State University, discussed CREATE-21, a set of proposals to integrate the U.S. Department of Agriculture’s research, extension, and teaching functions and double U.S. funding of agricultural research to about $5.4 billion per year over a seven-year period. Moreover, the funding would become more competitive under CREATE-21, making research better suited to the changing needs of agriculture.
Lastly, Robert L. Thompson, Gardner Chair in Agricultural Policy at the University of Illinois at Urbana–Champaign, looked at the resource constraints facing world agriculture, even as world food demand could double by 2050. In this scenario, research investment is particularly essential for the future as well as it has been in the past. Also, the Midwest may play an even larger role in feeding the world with exports because of the water and land constraints that many regions across the globe face. But increased funding of R&D is needed to meet the rising global demand for food products. Indeed, R&D plays a key role in achieving greater output and in enhancing productivity, which will allow for more exports. Moreover, a better mix of funding with enhanced government participation would benefit agriculture and the world because private sector investment alone will not reach the socially optimal level in all areas of research.
The other presentations at the conference were excellent as well. Most of the presentations from the conference are now available online, so be sure to check them out to learn more about R&D in the agricultural, food, and biofuel sectors. (A special Chicago Fed Letter summarizing the conference presentations will come out in the near future.)
Posted by Testa at 10:54 AM | Comments (0)
October 11, 2006
Global Agriculture Conference
On average, rural America has not been faring as well as metropolitan America in terms of population and income growth. Is this trend yet another painful adjustment that can be attributed to globalization?
Globalization policies continue to be closely intertwined with agricultural markets, which have been the historic lifeblood of rural communities in the Midwest. Last month, the Chicago Fed held a conference on “Globally Competitive Agriculture in the Midwest.” The event included the Midwest release of a task force report by the Chicago Council on Global Affairs, Modernizing America’s Food and Farm Policy. Conference discussion concerned how current global trends and policy debates are affecting agriculture and rural communities, and how prospective policies such as the next Federal farm bill and the Doha round of the world trade talks might play out.
During the conference discussion, several presenters expressed the opinion, without challenges from the audience, that globalization was in some way responsible for the lagging economic performance and stark challenges facing the rural Midwest. However, I think that it is somewhat mistaken to confuse globalization with technological advances and associated structural changes now taking place in the production of agriculture.
First, to concede some ground to the opposition, several forces of globalization have hastened structural adjustments taking place in smaller towns and rural communities. In particular, an expansion of the world market for goods and services has sharpened the economic specializations of many countries and their subnational regions. For the U.S., as global markets in goods, services, and capital have been opened up, the domestic economy has shifted away from manufacturing production and less-skilled services such as back office processing, some software production, and call center activity in favor of advanced services such as finance, investment, and management. For such advanced services, the large urban form, rather than the smaller city or rural town, is the more productive and favorable locale. This preference of industries performing such advanced services has contributed to the growth of large metropolitan areas, such as New York, Chicago, Washington, D.C., Atlanta, and San Francisco.
Aside from that, there is little to argue about globalization as a detriment to rural economic growth. And even at that, I would argue that technological advancements, rather than globalization, account for most of the structural changes that are moving us toward an advanced services economy in the U.S. New technologies, particularly their adaptation in wireless communication and in advanced computing, are highly complementary to such service production, with or without globalization. This is evident the world over as wages, salaries, and employment opportunities have risen sharply for those workers who have the education and technical skills to work with advanced communication and technical tools.
While rural areas have not fared as well in advanced services, the net effects of globalization on commodity production and income in rural areas are mixed rather than one-sided. In much of rural America, the local economy is highly dependent on commodity agriculture or on commodity materials such as energy products, minerals, and timber. Here, relentless productivity advances, especially in agriculture, have obviated the need for as much labor as in the past. In turn, lessened labor demand has put pressure on rural growth.
Yet, such labor substitution is hardly related to globalization. It is true that global markets can introduce competition into commodity markets. Yet, on the flip side, falling transport costs and more open markets also increase possibilities for heightened exports and firmer prices for the commodities produced in rural areas. In the Midwest, for example, global exports in soybean and corn have helped to sustain jobs and income. More recently, as developing countries have improved their diets, U.S. exports of beef, pork, chicken, and poultry have grown. Here, the competitive advantage in grain production translates into local livestock production. The processing of grains and livestock (in order to shed weight and volume before exports) is kept close to the location of grain and livestock production, that is, rural communities.
Growing global growth has also boosted prices of carbon-based fuels. As a result, exploration, mining, and production of fuel sources are providing more jobs and lifting income in many rural communities. In corn-producing states, federal subsidies have combined with rising prices of fossil fuels to spur rapid expansion of corn-based ethanol capacity as a viable energy source. As a result, prices for corn have been raised and are expected to remain so. Moreover, ethanol plants are being built near corn production in rural communities, thereby boosting associated manufacturing jobs.
But ethanol production has not been the only source of manufacturing jobs in rural communities. In the Midwest, as shown below, rural and nonmetropolitan counties have been gaining share of manufacturing jobs at the expense of metropolitan counties for several decades. There are several reasons for this shift, but the dominant factor points to technological changes in production. In particular, areas with lower population density are favored for many types of production due to easier transportation access and lower land costs. And if these forces have been accelerated by global competition, rural areas are the beneficiaries. Income from manufacturing is replacing income earned on farms as the dominant economic base across the Midwest.
Click to enlarge.
Click to enlarge.
Of course, rural communities in the Midwest face many challenges in the years ahead. For one, manufacturing production centers sited in rural communities are highly vulnerable to global competition. So, too, commodity prices have historically been volatile such that commodity-based economies have often been whipsawed by downward price swings. Global markets show no promise of easing the variability of commodity price swings.
For these reasons, rural communities are striving to avail themselves of development opportunities as they present themselves. On October 24–25, 2006, the Chicago Fed will be partnering with Iowa groups on an informational conference in Ames, Iowa, called “Expanding the Rural Economy through Alternative Energy, Sustainable Agriculture, and Entrepreneurship.”
The question of whether globalization has been a net plus or a net negative for rural areas is not an easy one. Yet, more than ever, rural communities will want to stay closely attuned to trends and policies related to global affairs.
Posted by Testa at 2:01 PM | Comments (0)
May 18, 2006
Small Towns, Big Headquarters
Two corporate headquarters location developments made Midwest headlines on May 10. One was the news story that UAL, the holding company for Chicago-based United Airlines, was considering moving its corporate offices from Chicago's suburbs to the city's central business district or possibly to another city. On the same day, Whirlpool announced a restructuring that will close the headquarters offices of recently acquired Maytag in Newton, Iowa, and consolidate them in Whirlpool’s headquarters location in Benton Harbor, Michigan. Of the two announcements, the Maytag closure illustrates an important trend for small towns and less populous metropolitan areas; large company headquarters are shifting toward more populous metropolitan areas.
Many small towns and smaller metropolitan areas in the Midwest have historically been home to large company headquarters, especially of industrial companies. In fact, some highly successful companies were founded in these places, and they subsequently maintained their headquarters operations there even as their production operations and sales expanded to be national and even global scope. To illustrate, below is a partial listing of Fortune magazine’s top 1,000 companies that can be found in smaller cities and metropolitan areas in the Seventh District states of Illinois, Indiana, Iowa, Michigan, and Wisconsin.
Places that host large company headquarters often fare well in several respects. Headquarters are renowned for funding local charitable and civic programs. In addition, headquarters employees tend to be highly educated and committed to social and public service. Accordingly, the loss of such a headquarters by a small town or metropolitan area can be a difficult blow.
Even after a loss, headquarters towns can be more fortunate in the aftermath than towns that experience large production plant closures. Headquarters sometimes leave behind a substantial legacy, such as philanthropic foundations or founding families, or important institutions, such as hospitals or colleges and universities. In the recent wake of Upjohn/Pharmacia’s headquarters pullout of Kalamazoo, Michigan, an anonymous donor(s) has funded The Kalamazoo Promise program which has promised to pay for college tuition (in-state) for local students who complete high school in good standing. This scholarship program is not necessarily funded by anyone associated with Upjohn, since the town also hosts headquarters of other large companies such as Stryker and other wealthy individuals. However, the original Upjohn Company has left other more apparent legacy assets. For example, the Kalamazoo area hosts the Upjohn Institute, an important labor research organization that was begun by the company’s founder. And the new owner of the former Upjohn-Pharmacia facilities, Pfizer, is assisting the town in several ways including in the creation of local spin-off technology start-ups.
Nonetheless, the departure of the Upjohn/Pharmacia headquarters will be felt. The list below illustrates some of the places that have been or will be struggling to close the civic gap left behind.
It appears that the tendency for less populous areas to lose these headquarters, which usually happens amidst a merger or acquisition, is part of a broader trend. Studies examining such events over the past 40 years indicate that nonmetropolitan counties in the U.S. are losing share of large company headquarters. The gainers have been metropolitan areas of 1 million or more. Metro areas of this size have been growing in number, especially in the Sunbelt. With their larger population sizes, these metro areas typically have the features that are attractive to headquarters operations, namely diverse business services such as law and accounting, as well as significant air travel capability for headquarters executives.
It remains to be seen if smaller metro areas in the Midwest will be able to reverse or compensate for this trend in other ways. To date, as the chart below illustrates, places of smaller size have generally grown less rapidly over the past 15 years.
Posted by Testa at 12:08 PM | Comments (1)
February 21, 2006
Rural Economies and Globalization
Rural economies in the U.S. are on the front lines of the upheavals associated with globalization. Many rural economic engines are based on commodity production and traded goods—namely, routinized manufactured products and production agriculture. Such industries are coming under competitive pressure from overseas economies that often enjoy significant cost advantages. These are also the types of production activities that regularly experience sharp productivity gains—and attendant labor efficiencies—as a result of technical progress. As a result, many rural work forces are shrinking; rural economies are, on average, underperforming metropolitan area economies. In response, rural areas are searching for ways to become innovative in nature rather than commodity-based as a way to stay vibrant.
The Global Chicago Center of the Chicago Council on Foreign Relations recently convened its second in a series of meetings intended to assist print journalists connect global events with their readerships. The Global Chicago Center has fashioned a web-based guide for media so that local experts on global affairs can be readily sourced by local journalists. This particular meeting in Chicago focused on newspaper journalists in rural regions of the Midwest. Experts and analysts of rural regions met with the journalists to discuss the ways in which globalization is affecting rural economies and what, if anything, can be done about it. For some rural regions, the answer to the latter question is not much.
Due to high productivity on farms, which has helped give Americans the world’s highest standard of living, production agriculture employs relatively few people. Indeed, farmers account for only 2 percent of the U.S. work force and only 11 percent of rural population.
Manufacturing now dominates many more rural counties than does agriculture, but the type of manufacturing activity there is vulnerable to global competition and displacement. Over the past 50 years, manufacturing plants locating in rural areas have been seeking a low-cost environment and high-quality but lower-skilled rural workers. Nonetheless, technological progress and heightened global competition often have an adverse impact on these operations. As the figure below shows, metropolitan economies in the Seventh District are easily outperforming nonmetropolitan areas on average.
Click to enlarge image.
Why are metropolitan areas adapting more successfully to globalization? At least part of the answer is that innovative industries or groups of activities have more frequently emerged or prospered in urban areas. And innovative companies can sometimes stay one step ahead of the competition—even low-cost competition—by spinning out new products and conducting business with new processes and management techniques.
But all is not lost in rural areas, according to Lee Munnich of the Humphrey Institute at the University of Minnesota. Munnich has studied what he calls “rural knowledge clusters” in Minnesota. These clusters are proximate groups of innovative, inter-related firms, workers, entrepreneurs and, sometimes, educational institutions. They have managed to thrive, often building an industry related to local features or activities such as the snowmobile “cluster” of leading firms in northwest Minnesota. Other knowledge clusters in Minnesota identified by Munnich include:
- Mankato: wireless and radio frequency technology
- Alexandria: automation/motion control technology
- Winona: advanced composite materials
- Northwest Minnesota: recreational transport equipment
- Southwest Minnesota: precision agricultural equipment
Munnich argues that you cannot build a knowledge cluster from scratch, but you can identify existing clusters and build on them. Building blocks include programs to encourage further entrepreneurship, mentor and provide seed capital for new ventures, and create complementary work force programs at the local colleges.
One who agrees with Munnich’s assessment that rural economies are struggling is Mark Drabenstott, Vice President at the Kansas City Fed and Director of their Center for the Study of Rural America. Drabenstott reports that the top 310 fastest growing counties in the U.S. over the past ten years accounted for three-fourths of total U.S. economic growth and that only eight of these were nonmetropolitan counties. Rural areas must find ways to achieve the critical mass of talent and innovation that are needed to compete in today’s global economy.
According to Drabenstott, finding ways to develop rural economies toward greater scale and innovation is far from simple. For one thing, rural areas vary enormously. So what might be a successful path to redevelopment in one area might be entirely different from what will work in another area.
Another hurdle is that rural areas themselves often lack the local capacity to understand and react to global phenomena. And nationally, few resources are being devoted to assisting rural economies in handling their development challenges. For instance, almost two-thirds of USDA expenditures are earmarked for payments and subsidies for commodity agriculture; only 0.5 percent is going toward rural economic development.
Drabenstott sees a few bright spots in rural America. U.S. agricultural exports have been steadily shifting away from commodities and toward “consumer” food products and other higher value added agriculture. So too, many rural manufacturing firms are adapting to global competition by adopting world class manufacturing processes. Immigrants are also bringing their entrepreneurial enthusiasm to parts of rural America, and foreign companies are also scouring rural economies for investment opportunities.
As the Global Chicago Center sees it, newspaper journalists in rural areas can help their readers and their communities in understanding and reacting to the challenges and opportunities that accompany globalization.
Posted by Testa at 10:07 AM | Comments (0)
February 2, 2006
Rural Economic Development
Necessity is the mother of invention, and if ever invention was needed, it is in today’s rural America. This is especially true in the portion of the Midwest stretching from central Illinois westward to Kansas and Nebraska and, from there, north and south from the Dakotas in the north to west Texas in the south. There, declining population, disappearing towns, and falling incomes plague many communities. In such places, farming and farmland have traditionally been the way of life. But rising productivity in farming has almost eliminated the need for farmers to live on and work the land, with barely 1 percent of American’s population living on farms according to the 2000 Census. As jobs and population shrink, derivative businesses such as banks, schools, and hospitals are consolidating and re-shaping vigorously in order to survive and prosper.
Many rural communities continue to fight back. The Chicago Fed’s Community Affairs program and its partners gathered in Des Moines this past November to assess the “invention” taking place in rural America (link). Bankers, economic development officials, and business and community leaders met to explore avenues to economic development in the rural Midwest; they met to share best practices and approaches.
The entire Des Moines conference will be summarized for an upcoming issue of the Chicago Fed publication Profitwise News and Views (link). But for those of us, like myself, who’d rather not wait, many fine presentations from this event are already available online (link).
Many communities have turned to manufacturing and distribution activities as sources of income and jobs. The same roads and rail that are useful for farm products are readily adaptable for hauling processed and finished goods. Today, according to the analysts at the USDA’s Economic Research Service (link), more rural counties count manufacturing as their dominant economic base than they do farming. Those same roads are also often a convenient vehicle to convey skilled workers many miles to jobs at factories and distribution centers. The further processing of farm products continues to boost manufacturing, especially food processing and, more recently, the processing of farm product into bio-fuels (link). A downside has been that rural production wages have not fared well, on average.
Advances in telecommunications hold the promise that service jobs can develop or can be outsourced to rural counties, much as some are decentralizing overseas. Broadband and other high-speed high-capacity infrastructure services have been expanding in rural areas, though this growth lags that of urban areas where proximity makes the up-front costs of connection less prohibitive.
A further impediment to locating many information jobs in rural areas is that information exchange via telecom is not an easy substitute for some types of human discourse, especially where face-to-face communication is needed to evaluate information or where the information is otherwise ambiguous or interpretive in nature. Nonetheless, for those workers who prefer rural living or quality of life, telecom infrastructure at least makes rural location possible.
Many rural communities are on the forefront in making the most of their abundant land resources to enhance rural quality of life. Traditional outdoors amenities such as hiking, birding, and hunting are being augmented with new initiatives like agricultural tourism, including harvest fairs and winery-related tours, retail, and lodging. At the same time, small towns are using available economic development financing tools to redevelop their towns and to help new generations discover the sense of place and social fabric of rural America.
Posted by Testa at 12:33 PM | Comments (0)