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
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
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.