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2012 Farm Bill Setting and 2012 Farm Bill Setting and Agriculture’s Economic RealitiesAgriculture’s Economic Realities

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

National Society of Accountants for Cooperatives2011 Annual Meeting of the South Atlantic Chapter

Asheville, NCJune 14, 2011

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Challenging Setting for 2012 FB Challenging Setting for 2012 FB DebateDebate

• Tight Budget– Spending capped at 2008 FB level

• That’s a theoretical statement actually…– Cuts are inevitable in this political environment – Even programs with a “baseline budget” from the 2008 FB

– Craig Jagger, House Ag Com. Econ. Says:• 37 programs have no baseline budget after 2012—a

$9 billion additional cost to bring back in– Wetland and Grassland Reserve Programs– Most energy programs– SURE “permanent?” disaster program (ends after 2011)– McGovern-Dole International “School-Lunch” program

• Lose about $4.5 billion in “timing shifts”

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Challenging Setting for 2012 FB Challenging Setting for 2012 FB DebateDebate

• Economic Conditions (Shades of 1996)

– High prices and high incomes• Farm Bill Preferences (for commodity programs)

– Keep all major 2008 FB program elements– Forego “Direct Payments” to keep others– A sampling of other views:

• Replace subsidies with farmer savings accounts• Merge existing programs into insurance products• Move monies to

conservation/environmental/sustainable agriculture programs

• No commodity programs needed with trade access

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Mammoth Exports Are a CominMammoth Exports Are a Comin’’

• The largest farm organization and largest commodity groups say so (again)

– All that is needed is complete access to growing world markets (all would be great “only if”…)

• Our import customers would import more and we could better compete with our export competitors

• Result: US exports will grow at accelerating rates providing a permanent source of farm prosperity

• Crop price and income programs could be eliminated

• This is last in of long line of “Only Ifs”

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Historical Only Ifs…• We have been told for four decades that exports are agriculture’s future

– It just has not happened yet-but it will. Trust me.

– Actually we were told it would happen “only if:”• Support/floor prices were lowered (an only if of the 80s)

• Acreage reduction programs were eliminated (an 90s only if)

• Exchange rates were different (a periodic only if)

• Inflation/interest rates were not so high (only ifs in 70s and 80s)

– Each time crop producers were promised that:• All would be fine in the world that is US agriculture• Ag prices and incomes would be stable and “high”• Because importers would import more and export competitors

would export less

– But apparently our import customers and export competitors did not get the memo

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1970s Syndrome1970s Syndrome

Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops1979=1.0

US Population

US Exports *Adjusted for grain exported in meat

US Domestic Demand

•Soviet Union policy change

•Oil money flowed to banks

•Banks lent money to less developed countries

•Those countries bought food

•Result: Grain import demand exploded

•US had capacity to capture most of the demand.

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Historical ResultsHistorical Results

Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops

1979=1.0

US Population

US Exports

US Domestic Demand

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US and World exports of Barley, Corn, Oats, US and World exports of Barley, Corn, Oats, Milled Rice, and Wheat, 1980-2010Milled Rice, and Wheat, 1980-2010

Mill

ion

Met

ric

To

ns

World Exports of 5 Grains

US Exports of 5 Grains

261 MMT

197 MMT

107 MMT 88 MMT

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US Percent of World Exports of Barley, Corn, US Percent of World Exports of Barley, Corn, Oats, Milled Rice, and Wheat, 1980-2010Oats, Milled Rice, and Wheat, 1980-2010

Per

cen

t

US 5 Grains Exports as % of World54 %

34%

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US and World exports of 5 Grains and US and World exports of 5 Grains and Soybeans, 1980-2010Soybeans, 1980-2010

Mill

ion

Met

ric

To

ns

World Exports of 5 Grains and Soybeans

US Exports of 5 Grains and Soybeans

217 MMT

360 MMT

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US Percent of and World exports of 5 grains and US Percent of and World exports of 5 grains and soybeans, 1980-2010soybeans, 1980-2010

Per

cen

t

US 5 Grains and Soybean Exports as % of World58%

37%

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US Soybean Exports Are Sure US Soybean Exports Are Sure Enough Going UpEnough Going Up

Mill

ion

Met

ric

To

ns

US Exports

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But BrazilBut Brazil’’s Exports Have s Exports Have Gone Up by More…Gone Up by More…

Mill

ion

Met

ric

To

ns

Brazil Exports

US Exports

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So the US Share of World Exports So the US Share of World Exports Has Dropped Precipitously Has Dropped Precipitously

Per

cen

t

US Soybean Exports as % of World Exports

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US Corn Exports as a Percent US Corn Exports as a Percent of World Exportsof World Exports

Per

cen

t

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US Wheat Exports as a % of US Wheat Exports as a % of World ExportsWorld Exports

Per

cen

t

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Post-70s: Developing-Country Post-70s: Developing-Country Competitors Did WellCompetitors Did Well

Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam

15 Crops: Wheat, Corn, Rice, Sorghum, Oats, Rye, Barley, Millet, Soybeans, Peanuts, Cottonseed, Rapeseed, Sunflower, Copra, and Palm Kernel

Th

ou

san

d M

etri

c T

on

s

US Exports

Developing Competitors’ Exports

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Before We Leave Exports…Before We Leave Exports…

• Our President has set a goal of doubling the value of US exports in 5 years

• Our Sec. of Agr. says don’t expect that from agriculture– Wise warning—In fact, odds are that

agricultural export value will drop, not increase, in the next few years

– Most of the mammoth increase in the value of exports over the last 3 years came from price not volume (will prices continue to grow?)

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US Corn, Soybeans, and Wheat – US Corn, Soybeans, and Wheat – Value and Volume of ExportsValue and Volume of Exports

Vo

lum

e o

f E

xpo

rts

Value of Exports

Volume of Exports

Billio

n D

ollars

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Historically—there have beenHistorically—there have beenTwo Two Major Components of U.S. Major Components of U.S.

Farm Commodity PolicyFarm Commodity Policy

• Policy of Plenty: Ongoing public support to expand agricultural productive capacity through research, extension and other means

• Policy to Manage Plenty: Mechanisms to manage productive capacity and to compensate farmers for consumers’ accrued benefits of productivity gains

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Ag Policy Did Not Start in 1932Ag Policy Did Not Start in 1932

• Historic policy of plenty– Land distribution mechanisms – 1620

onward– Canals, railroads, farm to market roads– Land Grant Colleges – 1862, 1890, 1994– Experiment Stations – 1887– Cooperative Extension Service – 1914– Federal Farm Credit Act – 1916

• This policy of plenty often results in production outstripping demand causing prices to be “low”

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So What’s the Problem…So What’s the Problem…

• Lower prices should automatically correct itself– Consumers buy more– Producers produce less– Prices recover—problem solved!

• That will work for food and agriculture too, correct?

• Well…

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What’s Not ConsideredWhat’s Not Considered? ? • FOOD IS DIFFERENT—domestically…

– A biological necessity• People will pay almost anything to get what they need• When prices drop, they don’t buy more• People do not eat four meals a day in response to lower

prices• May change their mix of foods• Add services (Lean Cuisine, eat out, etc.)

– Aggregate domestic demand (quantity demanded) changes very little due to lower prices

Little self-correction from domestic demand

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What’s Not ConsideredWhat’s Not Considered? ? • FOOD IS DIFFERENT—internationally…

– Food is a national security issue—just like military security is to the US. So …

• Countries want to domestically produce as much of their food staples as possible

• Political considerations– Need to feed the population– Need to provide a living for millions in agriculture– Need an orderly exit of workers out of agriculture

– Exports change much less than expected in response to lower prices

Little self-correction from export demand

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What’s Not ConsideredWhat’s Not Considered? ? • FOOD IS DIFFERENT—in supply too

– Constrained by biological processes—unlike most manufactured goods

• Limited to annual production periods• Constrained by natural forces

– Weather—temperature, rainfall, hail, length of day– Pests

• As a result, a precisely controlled production environment is not available to crop agriculture

– These realities often overwhelm other influences on crop yields

Little self-correction in supply within season

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What’s Not ConsideredWhat’s Not Considered? ? • FOOD IS DIFFERENT—in supply too

– Even when prices are low across seasons…• Farmers continue to plant all their acres• Farmers don’t and “can’t afford to” materially reduce their

use of fertilizer, seed, and other “high-yield” inputs• Who farms the land may change• But the essential resource—land—remains in production in

the short-to-medium run

– With continued low prices, farmers continue to produce—depleting equity if required

Little self-correction in aggregate supply from one year to next

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Historically—there have beenHistorically—there have beenTwo Two Major Components of U.S. Major Components of U.S.

Farm Commodity PolicyFarm Commodity Policy

• Policy of Plenty: Ongoing public support to expand agricultural productive capacity through research, extension and other means

• Policy to Manage Plenty: Mechanisms to manage productive capacity and to compensate farmers for productivity gains that benefit consumers

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Policy of Plenty has changed Over Policy of Plenty has changed Over TimeTime

• There were farm policies that provided– Floor Prices– Supply management tools– Price stabilization and reserves

• Over the years and especially since 1996– All three were eliminated– Replaced with payment programs:

• Coupled to price and production (Deficiency Payments) and Decoupled (Direct Payments)

• Partially government-funded insurance schemes• The 2008 FB added another revenue based insurance

scheme (ACRE)

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Current U.S. Policy Can CauseCurrent U.S. Policy Can CauseEconomic Crises Economic Crises (can and has)(can and has)

When supply outruns demand:– U.S. Commodity prices plummet

– U.S. grain farmers become wards of the state

– U.S. livestock producers, other grain users and farm input suppliers are subsidized

– Low grain prices are triggered internationally

– Many countries, especially developing countries, are unable to neutralize impacts of low prices

– U.S. accused of dumping

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Government Payments as a Government Payments as a Percent of Net Farm IncomePercent of Net Farm Income

12.78.9

5.915.5

6.511.5

19.1

18.613.6

14.0

24.2202.0

53.8

165.2

37.3

87.3

25.0

65.3

148.6

29.0

16.844.712.7

2.8

6.7

69.039.0

42.1

154.3

82.7

60

52.3

85.8

14.2

36.510.8

20.5

12.7

121.5

11.9

3.6

29.2 104.5

129.3102.6

21.8

40.3

Government Payments as a Percentage of Net Farm Income

1999

Less than 24.9%

25.0% - 49.9%

50.0% - 74.9%

75.0% - 99.99%

100% and Above

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Current U.S. Policy Can CauseCurrent U.S. Policy Can CauseEconomic Crises Economic Crises (can and has, cont.)(can and has, cont.)

When demand outstrips supply:– Short-Run

• Crop prices explode• Livestock/dairy producers go bankrupt• Food prices increase at alarming rates• Countries hoard rather than export• Additional millions become

undernourished/starve in developing countries– Long-Run

• High prices bring big resources into ag production worldwide

• Prices crash again

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You say that supply catches up with demand (and it doesn’t usually take long).

Then you say that supply growth tends to exceed demand growth.

But, but, but…What about all that talk…About the coming population

explosion and Double-digit growth in per capita

incomes in Asia, India...

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2050 According to FAO2050 According to FAO• World population to increase to near 10

billion (70 percent increase from 1995)

– Nearly all the growth will be in developing countries

• Sub-Saharan Africa the fastest (108 percent, 910 million)

• South East Asia the slowest (11 percent, 228 million)

• Need for a doubling of cereal and meat production

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Will There Be Enough Production Will There Be Enough Production in the Future?in the Future?

• In a word: Yes. But it depends on how you define “enough”

• Effective demand will be covered—total food requirements will not…

• In fact, I think excess capacity will be a worldwide problem in the future

• Increased acreage• Increased yields and livestock efficiencies

• Analysts focus on demand but…

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ItIt’’s Easy to Underestimate s Easy to Underestimate Supply GrowthSupply Growth

• Let’ begin with the US:– Investment in yield enhancing technology

(300 bu./ac on best land in a few years?—national average a decade or two later??)

– Potential conversion to cellulosic feedstocks for ethanol expansion

– Conversion of Conservation Reserve Program Acreage and hay/pasture land to crop production

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ItIt’’s Easy to Underestimates Easy to UnderestimateSupply GrowthSupply Growth

• International supply growth—yield

– Development and adoption of drought/saline/disease resistant crops

– Globalization of agribusiness: Near universal access to the new technologies world-wide

• Narrowing of technology and yield differentials between the developed and developing world

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It’s Easy to Under EstimateIt’s Easy to Under EstimateSupply GrowthSupply Growth

• International supply growth—acreage – Long-run land potentially available for major

crops• Savannah land in Brazil (250 mil. ac. -- USDA says 350)

• Savannah land in Venezuela, Guyana, and Peru (200 mil. ac.)

• Land in former Soviet Union (100 mil. ac.)

• Arid land in China’s west (100 mil. ac. GMO wheat)

• Savannah land in Sub-Saharan Africa (300 mil. ac. -- 10 percent of 3.1 bil. ac. of Savannah land)

• Supply growth has always caught and then surpassed demand growth (and it does not take long)

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Excess Capacity Plus InstabilityExcess Capacity Plus Instability

• Supply-Driven Disruptions– Crop-related weather - sporadic– Natural disaster - occasional– Political instability – chronic

• Demand-Driven Disruptions– Unanticipated surge in demand– Usually only three or so per century (but now???)

• Can occur in conjunction with supply disruptions

• Result– Severe price bubbles will occur

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Our Recent ExperienceOur Recent Experience

• Demand surge (ethanol)– Coupled with wheat shortfall in Australia and

Eastern Europe and other cereal shortfalls– Prices of storable agricultural commodities

tripled• Moderately increased food prices in global North• Added 250 million to the 800 million already

facing chronic hunger– Results

• Food riots in over 25 countries• Protection of national food supplies via tariffs,

taxes and embargoes

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This WasnThis Wasn’’t Supposed to Happent Supposed to Happen

• Commercials argued they would provide reserves– Government “interference” not needed

• Not to worry– Freer trade ensures availability from one country or

another• Neither assertion true

– Commercials have no incentive to hold stocks– Supply disruptions can affect more than one

supplier (country) in a given year• Countries view food as a national security

issue

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Policy for All SeasonsPolicy for All Seasons• A policy that

– Protects farmers during “hard times”– Does not pile-on during the “good times”

• In contrast Direct Payments – are paid even though prices are well north of all costs

– but provide insufficient help when prices are depressed

• In contrast Revenue Insurance– protect farmers’ “pure” profits when prices are really high

– but when prices fall and remain below the cost of production, revenue insurance guarantee a percentage of those even-below-variable-cost prices

• A policy that– Helps ensure supply availability for domestic

and export markets

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Policy for All SeasonsPolicy for All Seasons• Assume the unexpected will happen

– Random policy and weather events do occur—Plan for them

• Establishment of Grain/Oilseed/Food Reserves– Moderate impacts of random policy and

weather events by providing stable supply until production recovers

– Operated/overseen by a multinational commission

– Stores strategically purchased reserves

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Policy for All SeasonsPolicy for All Seasons

• Keep productive capacity well ahead of demand– Public investment in yield enhancing

technologies and practices

• Provide means to hold arable land in rotating fallow during periods of overproduction– This land could then quickly be returned

to production in the case of a crisis

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Agricultural Policy Analysis Center The University of Tennessee 310 Morgan Hall 2621 Morgan Circle Knoxville, TN 37996-4519

www.agpolicy.org

Thank YouThank You

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