Climate Change and Economic Constraints Facing Great Plains Agriculture



John M. Antle

Professor, Agricultural Economics and Economics

Director, Trade Research Center

Montana State University - Bozeman

May 1997





The economic implications of climate change for Great Plains agriculture must be understood in the context of the physical and economic constraints it will be facing. Great Plains agriculture consists primarily of grains (feed grains and wheats) and livestock production. It is land extensive, that is, it uses relatively few chemical inputs and relatively little labor per unit of land. In physical terms, the productivity and competitiveness of Great Plains agriculture is constrained primarily by the adaptation of crop varieties to the climatic conditions of the region, and particularly the water availability and temperature patterns. It is notable that the land resource per se is not a constraint on Great Plains agriculture. In fact, currently over 40% of wheat acreage in the region is idled by the Conservation Reserve Program. If crop prices were higher than they have been in the recent past, more land could be brought into crop production in the region.

In economic terms, two important constraints face Great Plains agriculture. The first constraint is the international competition that U.S. producers of grains and livestock are likely to continue to face for the foreseeable future. Figures 1 and 2 show two fundamental economic facts about wheat, and the same is true for the other grains: since the 1950s yields have increased and real prices (prices in constant dollars) have declined at an average annual rate of -2.7%. The price of wheat in 1960, in 1995 dollars, was about $10 per bushel. The price is currently around $4 per bushel, and has not been above $5 per bushel since 1980, except for a brief period in 1996. If prices continue on the same long-term trend until 2020, the price of a bushel of wheat will be under $3 (in 1995 dollars).

The secular decline in the real price of wheat and other grains is simply the result of the forces of supply and demand in the international market place. As Figure 3 shows, world wheat production and trade have more than doubled since 1960. World grains production, driven mainly by the increases in productivity shown in Figure 1, has increased faster than demand, despite rapid income and population growth around the world. The Trade Research Center at Montana State University is sponsoring a conference on The Economics of World Wheat Markets: Implications for North America, May 29-31, 1997. The conclusions of the papers that will be presented by leading experts at that conference is that this long-run trend is not likely to be reversed in the foreseeable future.

Economic studies of the impacts of climate change on agriculture indicate that world grain production is not likely to be affected substantially by climate change (for a recent review of these studies, see Schimmelpfennig et al.). Some studies even show that climate change could have a net positive effect on grain production. None of the studies that I am aware of have examined implications for livestock production, however. One could question the validity of these studies for a variety of reasons, relating to their methodologies and data. Nevertheless, the more recent studies that allow for some adaptation to climate change do not provide any reason to believe that the basic economic constraints facing Great Plains agriculture, and in particular the secular decline in real commodity prices, will be reversed.

Studies also show that climate change is likely to significantly alter where agricultural production takes place. The Northern Hemisphere continental regions such as the U.S. Great Plains could become warmer and drier. If that is true, then Great Plains agriculture could be adversely impacted in economic terms because crop yields would decline to the point that Great Plains producers were not competitive with the rest of the world. Of course, the overall economic impact would depend on how agriculture could adapt to such a change. But considering that the principal constraint on Great Plains agriculture is moisture availability at key times during the year, a drier climate regime would appear likely to have an adverse effect overall.

The second economic constraint I would like to discuss is the economic risk Great Plains farmers face. Under current and likely future policy scenarios, U.S. farmers will need to bear most of the price and production risk they face -- the 1996 Federal Agricultural Improvement and Reform (FAIR) Act largely eliminated the role of government in bearing risk except for crop insurance subsidies. While the FAIR Act provides grain farmers who participated in past subsidy programs with "production flexibility contract payments" through 2001, these payments are fixed and play no role in offsetting variability in production or market prices.

A fundamentally important fact -- or constraint -- faced by Great Plains agriculture is that there are relatively few opportunities for farmers to diversify their production into crops other than grains and livestock to mitigate price and yield risk. Farmers do have available to them market instruments such as futures contracts that they can use to manage risk to some degree. Nevertheless, if climate change results in greater yield and price risk, Great Plains agriculture is likely to be adversely affected and will have relatively few effective options to manage that risk.

Unfortunately, the models now being used to study climate change lack the temporal and spatial resolution needed to accurately assess how climate variability will change, so it is difficult to assess how it might affect climate sensitive activities such as agriculture.

To further illustrate the issue of economic risk, Figure 4 shows distributions of economic returns to Montana spring wheat production for 1995 for three areas of the state. These distributions show the considerable variability in economic returns to wheat production across areas of the state, and also show the considerable variability within an area. These data are for 1995 when the price of wheat was in the $4.50 to $5.00 per bushel range, a relatively high price compared to the trend shown in Figure 2. Clearly, if the trend in prices shown in Figure 2 were to continue, and if the variability in returns were to increase because of climate change, Great Plains producers would be facing a much more difficult economic environment than the one they face today.

References

Antle, J.M., D. Hayes, F. Mohanti, and V.H. Smith, "Long Run Trends in Supply and Demand: Whither the Real Price of Wheat?" Paper prepared for the conference, The Economics of World Wheat Markets: Implications for North America, Trade Research Center, Montana State University -- Bozeman, May 1997.

Schimmelpfennig, D., J. Lewandrowski, J. Reilly, M. Tsigas, and I. Parry. Agricultural Adaptation to Climate Change: Issues of Longrun Sustainability. Economic Research Service, USDA, Agricultural Economic Report No. 740, June 1996.









Figure 1. U.S. Wheat Yields, 1920-1995
Figure 3. World Wheat Production, Consumption and Trade, 1960 - 1995