The Government Shutdown Affected Agriculture, Tootags: agriculture, economics
Bruce E. Baker of Newcastle University and Barbara Hahn of Texas Tech University are the authors of New Orleans Bulls vs. New York Bears: Capitalism, Corruption, and the Great Cotton Corner of 1903, and are currently seeking a publisher for it.
Thomas Jefferson imagined America as a nation of independent farmers. Since the creation of the U.S. Department of Agriculture in 1862, however, farmers have been increasingly dependent on the federal government. One of the most important government services is simply crop reporting: what is being grown, and how much of it is being produced, influences its price. Accurate information can come only from disinterested parties who don’t have a position in the market -- in this case, the federal government. The value of government information became painfully clear to farmers in the past few weeks as the government shutdown wreaked havoc on commodities futures markets.
Every month, the USDA issues crop reports. These are particularly important during harvest season. The September 2013 cotton report, for instance, predicted a very small cotton crop. Traders were waiting to see if the October 11 report would change that view. But the report never came because the statisticians compiling it had been furloughed. What happens when you take government information out of the market? In the case of the futures market, traders are less able to determine what the price should be. Price volatility increases as rumor and guesswork replaces the accurate crop reporting of the USDA. As a result, cotton futures prices fell by 4.4 percent in the first week of the shutdown -- a dramatic change. Farmers will suffer as a result.
A similar crisis faced Southern cotton farmers at the end of the nineteenth century, before government began to supply information to better regulate the futures market. Cotton futures trading had developed at the end of the 1860s once the United States -- the leading producer of cotton -- was linked by transatlantic cable to the United Kingdom -- the leading consumer of cotton. Futures trading meant that traders’ predictions of future supply and demand would shape cotton prices. As a president of the New Orleans Cotton Exchange once said, “We suppose that prices are governed by the actual relation of supply and demand, but they are not. They are governed by what people think is going to be the relation of supply and demand.” Good information about the cotton harvest helped traders buy and sell at the right price for cotton to be delivered months ahead. The problem was figuring out who had the best information.
The USDA wanted to distribute accurate information about the cotton crop to everyone. Better information would help stabilize futures prices, and decreased price volatility would help the producers and ultimate consumers at either end of the market. Crop reporting had been an essential function of the USDA since it was founded, but it took on greater urgency and organization at the end of the 1890s. The USDA had slowly been building up a network of local correspondents across the cotton-growing region -- planters reporting their own harvests, gin operators, county correspondents, and salaried state-level statisticians -- who would send in monthly reports estimating the amount of cotton being grown that season in their area. Statisticians at the USDA compiled these reports and every month produced a statement about the condition of the crop that was publicly available, posted at every post office in the cotton South.
Throughout the 1880s and 1890s, though, the voices that spoke loudest in the cotton trade belonged to powerful brokers who tended to be bears in the market, trying to push prices down. They succeeded by deliberately spreading bad information about the size of the cotton crop. Overinflated predictions in the summer made people think the crop would be very large, and futures prices fell as a result. The prices farmers were paid as they began to harvest their cotton in August and September were based on these low futures prices. By the time all the cotton was harvested and ginned and out of the farmers’ hands in January, the truth would begin to emerge. The same prominent cotton traders who had predicted huge crops in July would revise their figures downwards, often by millions of bales. Futures prices would rise accordingly, but those who profited were not the farmers but the traders on the cotton exchanges, most of whom had probably never seen the back end of a mule or plucked a handful of cotton from its boll in their lives.
The impetus for government intervention came during the crop season of 1899-1900, when the influential Liverpool cotton trader Henry M. Neill pushed the price of cotton around mercilessly. Every time the USDA published its monthly crop report, Neill would announce a new, larger estimate. When the USDA predicted no more than 9.5 million bales at the beginning of September, Neill responded two days later with a 12 million-bale estimate “as if to break the force of such announcement.” As a result, the USDA’s carefully collected information did not raise the price as it should have done. Once all the cotton had come to market, however, it turned out that the USDA had been right all along. The price surged from well under 7 cents per pound to as high as 10.25 by the end of the crop season. Southern farmers who sold in October lost out on $17.10 for each bale they had produced.
This was enough to persuade Congress to step in. When the Census Bureau became a permanent part of the federal government in 1902, it began to collect and distribute weekly bulletins on cotton production data from September to January of each year based on surveys of the cotton actually ginned. Having two sources of disinterested information, from the USDA and from the Census Bureau, could undercut the power of information provided by people with positions in the market.
A century ago, the federal government expanded its activities in order to make the market work better -- to make price better reflect supply and demand. The government shutdown has once again made farmers and traders subject to bad prices created by bad information produced by traders who want the price lower or higher to benefit themselves. Without government intervention, the market mechanism fails to provide farmers with prices based on real-world conditions.
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