Agriculture and the Environment: Searching for Greener Pastures

Index

Prologue

Since the fall of the Berlin Wall, it has become increasingly clear that markets are the best system for improving resource allocation, prosperity, and environmental quality, and this is especially true for agriculture. For centuries, people have registered their preferences for agricultural commodities and changed land-use patterns. More recently, demands for housing and environmental amenities have converted land previously used for agricultural production to subdivisions and to parks and green space. Green fields and forests have been converted to schools, roads, and churches. In some cases, riverbanks that once meandered through undeveloped lands have been converted to retirement communities, shopping malls, and business parks.

Although today’s policy debates focus on land-use conversion from agriculture, market forces also work to preserve agricultural uses, wildlife habitats, and environmental amenities in general. Nationally prominent organizations, such as Ducks Unlimited, the Nature Conservancy, and the American Farmland Trust, as well as many local groups, purchase land and easements to preserve specific land uses.

In nearly all land markets, private sector participants must compete with government programs that work counter to their desires. For example, Ducks Unlimited has had to compete with agricultural programs that encourage wetland conversion. Hence, land-use patterns reflect a combination of market forces and government programs that alter the incentives of natural resource owners and managers.

Especially since the 1930s, the federal government, responding to many interest group pressures, has implemented programs that disrupt the efficiency of the market and reduce environmental quality. More recently, federal programs aimed at environmental protection have imposed constraints on agricultural land use and practices. These new initiatives set aside wild and scenic rivers, historic corridors, and wetlands; require endangered species protection; limit the use of agricultural chemicals; affect the testing and production of new genetically engineered foods; and regulate water use. In some cases, state programs mirror those of the federal government, but in others, states provide different regulations of land and water use.

The implementation of these ad hoc government programs alters the bundle of property rights held by private landowners. In rare instances, government agencies purchase land rights and easements to achieve their regulatory goals, but, more often than not, the agencies simply take property rights by regulatory edict. The resulting interface among agricultural programs, environmental regulations, and market forces moves us farther away from efficient resource use and from environmental quality.

As a first step toward improving this interface, the Political Economy Research Center (PERC) and the Hoover Institution brought together a group of scholars to explore how more reliance on market forces can improve both land-use efficiency and environmental quality. Calling on experts from universities, think tanks, and agricultural organizations, PERC developed a research agenda and commissioned a set of research papers addressing the key areas in which agriculture and the environment intersect. The project moved forward in April 1999, when the paper authors convened for a working conference at the Hoover Institution. Expanded and edited versions of the papers presented and discussed at that conference form the contents of this volume.

The book begins with Bruce Beattie’s chapter on the availability of agricultural land in the United States. He explores the questions: Is urban development gobbling up the supply of agricultural land? What do the data tell us? Professor Beattie carefully examines these questions and finds little support for the contention that we are running out of agricultural land. That being the case, he offers an explanation for why misinformation on the topic prevails.

Given concerns that economic growth and change threaten sensitive habitat and land with natural beauty, Professors Roger Meiners and Bruce Yandle examine the use of conservation easements as tools for improving land allocation. Meiners and Yandle provide data on the growth of land trusts and then provide a legal analysis and a political-economy explanation of trusts. They examine the ancient common-law rule against perpetuities and argue that conservation easements in perpetuity may thwart efficient land use and environmental quality in the long run.

No discussion of agricultural land use would be complete without paying some attention to land taxes, the topic of Richard Wagner’s chapter. Using property rights protection as a guiding light, Wagner discusses and applies some canons of public finance to land taxation. He explains how land taxation can improve or destroy efficient uses of agricultural land and shows how efficient land assembly and management can be facilitated.

Because urban sprawl has catapulted to the forefront of popular political debates, Sam Staley’s chapter is particularly relevant. After describing the urban sprawl debate at both the national and local levels, Staley presents data that suggest the effect of sprawl on agricultural lands is not as serious as some would make it. He then explains why, despite this evidence, politicians continue to press for land-use regulations.

The chapter by Professor Del Gardner examines the issue of chemicals in agriculture, while the chapter by Henry Miller focuses on genetically engineered products. In both chapters, popular controversies and assertions are confronted with facts. Also, the facts, more often than not, are seen as offsetting emotional charges that chemicals and genetically engineered products introduce uncompensated risks. In fact, as the two authors explain, the world would be economically and environmentally impoverished were it not for the advances provided by agricultural chemicals and genetically engineered products.

The book’s final two chapters turn to water use and wildlife habitat, which are significantly intertwined with U.S. agricultural policies. Ike Sugg addresses the challenge posed by the Endangered Species Act, which presents one of the most onerous and publicized problems facing agriculture. Because property rights lie at the heart of the controversy, the solution seems simple: Use tax revenues and user fees to purchase the necessary property rights for protecting endangered species. Sugg gives background for the problem, discusses the species protection record, and offers suggestions for a superior, market-based policy. In a similar way, Terry Anderson and Clay Landry explain how water rights developed in the United States and how increased scarcity of water is forcing the development of new market-based institutions to improve water allocation for both agricultural and environmental uses.

In spite of the vast array of environmental and other constraints that affect productivity, U.S. agriculture is still the envy of the world. By eliminating constraints of governmental regulations and harnessing market incentives, agricultural productivity can be improved even more and scarce environmental resources can be made more productive.

The editors express appreciation to a number of individuals, especially the paper authors, and organizations that made this project possible. John Hosemann, chief economist for the American Farm Bureau Federation (AFBF), provided valuable input into the project, and the AFBF provided financial support. Hoover Institution director John Raisian generously made conference facilities available, and PERC’s Colleen Lane provided excellent conference planning skills. Finally, we extend our appreciation to the staff of the Hoover Institution Press, who ably assisted in editing and publishing this volume.

1

Bruce R. Beattie

The Disappearance of Agricultural Land: Fact or Fiction?

The disappearance of agricultural land—specifically, the loss of prime agricultural land—has been a concern in the United States for a long time. Dating back at least to the end of the homestead era, politicians and their constituencies have regularly proclaimed impending doom if we didn’t start paying serious attention to the preservation of our soil and land resource base for agriculture. Consider, for example:

[Farmland protection is] … our most pressing environmental issue.

—President Richard M. Nixon, 1973

In my lifetime, we’ve paved over the equivalent of all the cropland in Ohio. Before this century is out, we will pave over an area the size of Indiana…. Continued destruction of cropland is wanton, squandering of an irreplaceable resource that invites future tragedy not only nationally, but on a global scale.

—Secretary of Agriculture Bob Bergland, 1979

Such comments by leaders over the years have resonated with most Americans. I remember my father, when I was a child of seven or eight, expressing heartfelt concern about how the new road from Hilger to Lewistown, Montana, a distance of some 15 miles, was cutting right through the middle of Charlie Foster’s wheat field and Bud Vanek’s hay meadow. And I recall, during my undergraduate years at Montana State College, my own distress about the construction of I-90. The wide swath it was cutting through fertile bottom land along the Yellowstone River from Billings to Livingston, and its mindless and relentless path through beautiful ranches and hay meadows along Billman Creek from Livingston to the top of Bozeman Pass en route to Butte and beyond, seemed unforgivable to me.

Such feelings are motivated by various concerns, some implicit and some explicit, in the unending agricultural land-preservation debate. The concerns include maintenance of open space, preservation of rural lifestyles, preservation of local agricultural economies, prevention of urban sprawl, environmental protection (including watershed protection, air quality, and retention of natural systems), and retention of food and fiber production capacity (Heimlich, Vesterby, and Krupa 1991). Localized, firsthand experiences and backgrounds motivate these concerns and influence individual perceptions about them and the intensity with which they pull at our heartstrings. Each of us comes from a different local reference point armed with personal anecdotal data. It is not surprising, therefore, that Americans, easily and quite naturally, jump to the conclusion that there surely must be a problem of inadequate agricultural land looming around the corner.

Despite varied motivations for agricultural land preservation, my specific assignment is to assess the validity of the land base adequacy concern vis-à-vis maintenance of U.S. agricultural capacity. Therefore, this chapter explores three interrelated questions: (1) What is happening to real (inflation-adjusted) prices of agricultural products, and what is the implication for the value of land for agricultural purposes? (2) Is agricultural land disappearing in the United States? (3) Is U.S. agricultural productivity on the decline or rise, and what is the implication for U.S. agricultural capacity?

The first question is briefly addressed in the next section. A simple two-period supply-and-demand model is proposed, and the trend in historical farm-gate prices for raw agricultural commodities is discussed. Implications for the value of and need for farmland are considered. In addressing the second question, historical data for agricultural and nonagricultural land uses are then presented; this is followed by a discussion of cropland data and trends; and finally the issue of farmland losses to urbanization is considered. Later in the chapter, the matter of agricultural productivity is considered, first in terms of output relative to all inputs utilized in agriculture (total factor productivity) and then more narrowly in terms of land resource productivity, namely, crop output per acre. A final section summarizes and concludes. Having exposed the twin myths of impending U.S. agricultural capacity shortfall and shortage of agricultural land, possible alternative rationale and motivation for agricultural land preservation are explored as an epilogue.

Demand, Supply, and Farm Commodity Prices

Aside from the complexities of farm price and income support programs, the value of land for agricultural purposes is driven primarily by the prices that farmers and ranchers receive for the products they produce. These product prices are ultimately determined by the market supply and demand for food and fiber (both domestic and international components). As with markets for all economic goods, events/factors that cause demand to increase will cause the price of those goods to rise. This fact lies at the heart of the farmland-preservation argument.

Figure 1.1 presents the farmland-preservation argument in the form of a first-principles, supply-and-demand diagram. In the figure, S represents the supply curve for some U.S. agricultural product, such as wheat; D1 is the demand curve for wheat in time period one; and D2 is the demand curve in time period two. D2 is positioned to the right of D1 for two reasons. First, the diagram supposes that in period two U.S. and world population has increased relative to period one (more consumers of wheat); second, the diagram supposes that U.S. and worldwide household income has improved between period one and two and that wheat is what economists call a normal good. (Normal goods are goods that consumers demand more of when their incomes rise.) No one questions that U.S. and world population has increased with the passage of time, and it is also true that per capita incomes have risen (to varying degrees) around the world. So, if demand expands (shifts to the right), as it must under such circumstances, what then must happen to price, other things constant. Easy—price will increase (from P1 to P2 in Figure 1.1), reflecting the fact that wheat is more valuable in period two than it was in period one because demand has increased relative to supply.

Figure 1.1 Two-period model of supply and demand for wheat, with demand expansion in period two.

But what do we know about the historical trend in real prices of wheat and other agricultural commodities? Sadly, from the point of view of producers, the real price of most agricultural commodities has fallen, not risen, over time. Bruce Gardner (1992), in an insightful paper titled Changing Economic Perspectives on the Farm Problem, includes a graph of the composite index of real prices received by U.S. farmers for crops and livestock from 1910 through 1989, with 1982 as the index base year (1982 = 100). If one disregards the World War II and earlier period (including the Great Depression), what is revealed is that composite real prices received by farmers dropped rather precipitously from an index value of about 198 in 1945 to about 88 in 1989. Assuming I have interpreted Gardner’s graph correctly, the decline amounts to something to the order of 56 percent, with the 1989 overall inflation-adjusted price index being about 44 percent of that received by farmers at the peak of the post-World War II boom. Gardner (1992, 64) notes, Every one of the major individual commodities shows a similar downward trend. Two colleagues and I recently made some similar calculations for real prices received for the principal field crops in Arizona. For upland cotton, we found a real price decline from 1945 to 1994 of 67 percent; a 73 and 71 percent decline, respectively, for wheat and barley; and a 49 percent drop in the real price of alfalfa hay (Beattie 1998).¹

So what then is wrong with Figure 1.1? How can it be fixed to reflect what has in fact happened in agricultural markets through time? How can we get P2 to be less than, rather than greater than, P1? Figure 1.2 is a reproduction of Figure 1.1 with one added feature; specifically, a shift in supply is included along with the shift in demand. In Figure 1.2, a rightward/downward shift in the supply curve for wheat is shown to reflect increased productivity (lower real cost) in the production of wheat from period one to period two. Now we have a picture/story that is consistent with all the facts—increased population, improved household income, and improved agricultural productivity. What is shown in Figure 1.2 is a lower price in period two than in period one, suggesting that productivity growth (supply expansion) has outpaced demand growth.

Trends in real prices tell a great deal about supply relative to demand. Rising real prices suggest tightness in supply relative to demand, while falling real prices suggest excessive supply capacity relative to effective demand. Unfortunately, for agricultural land preservationists, falling product prices suggest that the demand (need) for inputs to produce those products will fall, other things constant. Land is no exception—when agricultural product prices fall, the demand for and value of land for agricultural purposes will fall in turn.

Figure 1.2 Two-period model of supply and demand for wheat, with both demand and supply expansion in period two.

The next two sections show that, contrary to popular opinion, cropland acreage in the United States has not changed appreciably during the past half century, and its productivity (and the overall productivity of U.S. agriculture) has increased at an astonishing rate. The incredible success story of rising U.S. agricultural productivity, and the fact that land is but one of many interchangeable (substitute) inputs in agricultural production, flies in the face of the case for agricultural land preservation to meet foreseeable food and fiber demand.

Land Use Data

To assess the validity of the claim that agricultural land is disappearing in the United States, this section presents and discusses historical land use data from 1945 through 1992 for agricultural and nonagricultural categories and for cropland. Loss of agricultural land to urbanization is also discussed. To complete the picture, the quality (productivity attributes) of cropland lost is contrasted against the quality of cropland gained over time. This comparison speaks to whether new cropland coming on-line is of lower innate quality than cropland annually succumbing to urban uses.

The U.S. Department of Agriculture’s (USDA) Economic Research Service (ERS) regularly researches and analyzes data on land, water, and other production inputs used in agriculture. The data presented draw extensively from the land-use chapter of USDA/ERS Agricultural Handbook No. 712, Agricultural Resources and Environmental Indicators, 1996–97 (Daugherty