Economic Report of the President

Many nations have policies to shelter their economies from extremefluctuations in commodity prices. The European Community,for example, maintains higher farm prices in member countries byvarying duties on farm commodity imports and the subsidies on exports.These practices tend to make world commodity prices morevariable by increasing the variability of European Community exportand import levels. European food prices are therefore more stablethan ours but are generally higher, with a resulting reduction in theEuropean standard of living.Centralized trading decisions by other grain exporters and by mostof the grain-importing countries have also tended to increase thevolatility of world grain prices. Canada and Australia, for example,routinely impose quantitative restrictions on grain exports when domesticprice stability is threatened. Furthermore, an increasing proportionof exported grain is going to countries that do not allow thefree movement of prices to allocate resources internally. The centrallyplanned and certain developing countries, for example, rely on theUnited States and other major exporters for marginal supplies,making "needed" purchases without much apparent regard for price.Taken together, the efforts by other countries to stabilize their domesticfood prices and supplies have shifted the costs of increasedprice variability onto farmers and consumers in the United States.Prices and income may vary at times as a result of international politicalconsiderations. The January 1980 ban on the sale of certain agriculturalproducts to the Soviet Union originated from considerationsother than the typical tug-of-war between consumer prices andfarm income, namely, foreign policy considerations following theSoviet invasion of Afghanistan. The Administration was obviouslyaware of the potentially adverse economic effects of that sales suspensionand took significant steps to minimize them.Unpredictable actions of other countries can also impose priceshocks on the United States. A unilateral reversal in agriculturalpolicy by the Soviet Union or China or a deterioration in East/Westrelations would have major implications for the U.S. farm sector.Thus, the fact that our growing food trade is now affected by internationalpolitical affairs is a source of added risk to private investors inthe agricultural sector.The need for stabilization mechanisms in this environment shouldbe evident. Agricultural demand and supply are both quite inelasticin the short run. Small changes in either can lead to large changes inprice. While such price movements serve the important economicpurpose of allocating available supplies, they can also have disruptiveconsequences. Rising corn prices, for example, set in motion adjustmentsin the livestock sector that have implications for domestic meat118