SOUTHERN JOURNAL OF AGRICULTURAL ECONOMICS
JULY, 1985
CAPITAL FOR THE AGRICULTURE OF THE FUTURE
James S. Plaxico and Glenn J. Knowles
The rapid growth in value of farm assets
and the explosive increase in farm debt over
the past three decades are well known facts
to agricultural economists. The current “fi-
nancial stress” has become a survival crisis
for some farmers, and the commodity pro-
grams that were once reasonably effective are
now at best inefficient. The sequence of events
that led to our present agricultural dilemma
may be debated, but it is clear that: (1) the
current economic-financial environment of
agriculture bears little resemblance to that
of the pre-1970,s; (2) the direction for the
future is clouded by uncertainties; and (3)
the manner by which the current financial
dilemma in agriculture is resolved will have
a major impact on the scenario for the longer
term future.
A major characteristic of the current eco-
nomic-financial environment is that forces
outside agriculture play a dominant role in
determining the current and future state of
the agricultural industry and the welfare of
agricultural producers and investors. Some
of those major forces are the emergence of
remarkably well integrated international cap-
ital and commodity markets, drastically re-
structured domestic financial markets, an
expansive domestic fiscal policy confronted
by a restrictive monetary policy, a less than
buoyant world economy, and continued
instability in world energy markets. One con-
sequence is that the U.S. economy and U.S.
agriculture are no longer effectively isolated
from impacts of international markets. Rather,
the United States is a part of what may best
be characterized as a one economy world,
and U.S. agriculture is an integral part of an
international food system.
In this paper, some of the major forces
shaping the agricultural environment for fi-
nancing agriculture over the remainder of
the century are examined. Emphasis is given
to identifying the major variables and insti-
tutions affecting the system and the apparent
options available. Major implications are
summarized and appropriate research and ed-
ucation emphasis areas are suggested.
IMPACT OF INTERNATIONAL MARKETS
The emergence of internationally inte-
grated financial and commodity markets and
the growing importance of agricultural trade
have and will continue to have profound
impacts on agriculture and agricultural cap-
ital markets. Furthermore, the competitive
forces of international markets will exert
pressure on domestic agricultural product
and input prices. Rural communities, insti-
tutions, and farmers are no longer sheltered
from the competition in national and inter-
national financial and commodity markets.
Movement towards flexible exchange rates
set the stage for a major restructuring of the
international financial system. Concurrently,
but not coincidentally, commodity markets
were also undergoing significant change. Many
countries were relying on the commodity
markets as a source of foreign exchange earn-
ings. While the term “petrodollars” conveys
this notion of the integration of capital and
commodity markets, a similar transition was
occurring in agricultural markets. Shocks to
balance of payments positions attributable to
the commodities markets necessarily quick-
ened the pace of this evolution and forced
institutional changes in domestic markets.
Under a regime of fixed exchange rates,
current account (trade of goods and services
plus net earnings on foreign investments, and
net transfers) deficits were matched by cap-
ital account (money lent or invested) sur-
pluses or by central banks adjusting reserves.
In the past, changes in balance of payments
positions were due primarily to shifts in trad-
ing preferences. Currently, under floating ex-
change rates, with minor and infrequent
James S. Plaxico is a Professor and Glenn J. Knowles is an Assistant Professor, Department of Agricultural
Economics, Oklahoma State University.
Invited paper presented at the annual meeting of the Southern Agricultural Economics Association, Biloxi,
Mississippi, February 3-6, 1985. Invited papers are routinely published in the July SJAE without editorial council
review but with review of the copy editor (as per Executive Committee action June 25, 1982)
Oklahoma Agricultural Experiment Station Journal Paper No. J-4766.
103