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High Prices and the 2007 High Prices and the 2007 Farm BillFarm Bill

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

Henderson County Cooperative ExtensionAg Oulook

Henderson, Kentucky July 17, 2007

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In Times of Exploding Demand

–The current program will work

–Any farm program will work

–NO program at all will work

• The key question is:Are high prices the future?

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Are High Prices the Future?Are High Prices the Future?

• The 2007 USDA Baseline projects:

– Corn demand for ethanol• 3.4 billion bushels for 2007—double 2005

• 3.7 billion bushels in 2008 (AFBF says 4.9)

– Over 10 years, baseline prices are north of $3/bu – closer to $4 most years

– Very low corn stock levels by historical standards

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Logical ImplicationsLogical Implications

• Subsidies for program crops would:

– Largely be replaced by market receipts

– Cease to be a budgetary problem for the US Federal Government• Could even transition the direct (AMTA)

payments like Congress’ 1996 intentions

– Cease to be a stumbling block in trade negotiations

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Short-Term ConsiderationsShort-Term Considerations

• US supply response

– Arbitrage of crop acres in US to corn• 92.9 million acres

• 14 million more acres than 2006, highest since the 1940s

– Means 11 million acres less soybeans and millions of acres less cotton

– Some land converted to cropland; more of such conversion in long-run

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Short-Term ConsiderationsShort-Term Considerations

• International corn supply response– Increased international production

• Mexico: 4 million ac. increase

• Argentina: 30 percent increase in acreage

• Brazil: 230 million bushels more “second season corn—80 million to be exported

• Canada: 20 percent increase in acreage?

– Internationally there may be a decreased need for corn imports from the US

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Long-Term ConsiderationsLong-Term Considerations

• US supply response

– Conversion of pasture and grassland—some in CRP?—to crop production

– Investment in yield enhancing technology (300 bu./ac on best land?)

– Conversion of land to cellulosic feedstocks, some of which will not be from current cropland

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Long-Term ConsiderationsLong-Term Considerations

• International supply response

– Development and adoption of drought and saline resistant crops

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

• Narrowing of technology and yield differentials between US and the rest of the world

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Long-Term ConsiderationsLong-Term Considerations

• International supply response

– Long-run land potentially availability 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)

– Easy to underestimate supply growth

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Greatest Short-Term RiskGreatest Short-Term Risk

• Weather event– The 2007 USDA baseline shows a string of

years in which corn carry-out stocks are projected to be below 6 percent of utilization

• Recent historic range has been 10% to 20%– In five of the last 10 years, we have seen

production fall by 300 mil. bu. from the previous year

– A shortfall of that magnitude in an era of tight supplies would trigger skyrocketing prices

• $6 or more per bushel

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Uncharted TerritoryUncharted Territory

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Year ending commercial stocks-to-use ratio for US corn1960-2005 (actual), 2006-2016 (2007 USDA Baseline)

1974 (7.4%) 1983 (5.4%) 1995 (4.6%) 2009 (4.5%)

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Greatest Short-Term RiskGreatest Short-Term Risk

• Weather event– The 2007 USDA baseline shows a string of

years in which corn carry-out stocks are projected to be below 6 percent of utilization

• Recent historic range has been 10% to 20%– In five of the last 10 years, we have seen

production fall by 300 mil. bu. from the previous year

– A shortfall of that magnitude in an era of tight supplies would trigger skyrocketing prices

• $6 or more per bushel

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Short-Term Impact of $6 CornShort-Term Impact of $6 Corn• Demanders

– Outrage & economic pain by • Livestock and ethanol producers

• Food processors and consumer groups

– “Dependable supplier” issue returns• Can the US really guarantee that export

embargoes will never again be imposed?

• Suppliers– Switch more acres to corn

• US (road-ditch to road-ditch?)

• Brazil, Argentina, Mexico, Canada, and elsewhere

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Greatest Long-Term RiskGreatest Long-Term Risk

• Acreage and yields greatly increase worldwide—just a question of how fast– With $6 per bushel corn

• Acreage shifts in the short-run

• Longer-run investments that increase acreage and yields

– With $3 to $4 corn or somewhat lower• Increases in acreage & yields but at slower rate

• Lower prices return– Recreate problems for farmers worldwide and for

the US treasury

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On Knife’s EdgeOn Knife’s Edge

• Short-term object lesson?– Need strategic reserves

• Like a properly managed Farmer-Owned-Reserve• Reduce economic dislocation

• Long-term reality?– “New Era?” (fourth “New Era” in my lifetime)

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

• This time, surge in productive capacity will be global

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Can’t the Market Take-ith Away The Can’t the Market Take-ith Away The Production It Brought Forth?Production It Brought Forth?

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

• But in agriculture lower prices do not solve the problem– Little self-correction on the demand side

• People do consume significantly more food

– Little self-correction on the supply side• Farmers do not produce significantly less output

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Characteristics of Ag SectorCharacteristics of Ag Sector

• Agriculture is different from other economic sectors.On the demand side:– With low food prices—

• People don’t eat more meals a day• They may change mix of foods • Aggregate intake remains relatively stable

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Characteristics of Ag SectorCharacteristics of Ag Sector

• Agriculture is different from other economic sectors.On the supply side:– With low crop prices—

• Farmers continue to plant all their acres• Farmers don’t and “can’t afford to” reduce

their application of fertilizer and other major yield-determining inputs

• Who farms land may change• Essential resource—land—remains in

production in short- to medium-run

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Why Chronic Problems In Ag? Why Chronic Problems In Ag?

• Technology typically expands output faster than population and exports expand demand– Much of this technology has been paid

for by US taxpayers

• The growth in supply now is being additionally fueled by– increased acreages in Brazil, etc.– technological advance worldwide

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Why Chronic Problems In Ag?Why Chronic Problems In Ag?

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

• But in agriculture lower prices do not solve the problem– Little self-correction on the demand side

• People do not consume significantly more food

– Little self-correction on the supply side• Farmers do not produce significantly less output

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Exports, Exports, ExportsExports, Exports, Exports

• For the last quarter century, exports have been heralded—and continue to be by some—as crop agriculture’s salvation

– Exports is the production safety valve that can rebalance agricultural markets

– Exports will grow at accelerating rates

• As Dr. Phil would say, “So, how has that been workin’ for ya?”

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China Net Corn TradeChina Net Corn TradeWhat We Expected During Debate of 1996 FB:

-750

-500

-250

0

250

500

750

1000

1994 1996 1998 2000 2002 2004 2006 2008

1996 FAPRI Projections of Net Corn Trade

Co

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xp

ort

sC

orn

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po

rts

Mil. Bu.

1996 FAPRI Projections

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China Net Corn TradeChina Net Corn TradeWhat We Got:

-750

-500

-250

0

250

500

750

1000

1994 1996 1998 2000 2002 2004 2006 2008

1996 FAPRI Projections of Net Corn Trade

PS&D Actual Net Corn Trade with 2004 ProjectionCo

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Mil. Bu.

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China Net Corn TradeChina Net Corn TradeComparison between 1996 and 1999 FAPRI projections, 2007

USDA projections and USDA PS&D actual

-750

-500

-250

0

250

500

750

1000

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

1996 FAPRI Projections of Net Corn Trade

Actual Net Corn Trade

1999 FAPRI Projections of Net Corn Trade

Co

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xp

ort

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po

rts

Mil. Bu.

What’s a billion bushel error among friends?What do you think $4.00 corn will do to China’s corn production and exports?

2007 USDA Projections of Net Corn Trade

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What About Exports?What About Exports?

10

20

30

40

50

60

70

1975 1980 1985 1990 1995 2000 2005

Bill

ion

Do

llars

Bulk Exports

Total Agricultural Exports

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What About ExportsWhat About Exports

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

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1962 1965 1968 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004

US Population

US Exports

US Domestic Demand

*Adjusted for grain exported in meat

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What About Exports?

• Why have exports not fulfilled our hopes?– Export demand is braked by issues of food

security/food sovereignty– International crop production is impacted by:

• Increased acreage: Stage of development• Yield advances: World-wide distribution of

technology• US role as the leading nation in the world

– Politically, economically, technologically, and militarily– And in prices too: Others price off US prices

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Implications for the WTO

• Market access may not be sufficient– May benefit beef and Anjou pears– What about crops covered by the Farm Bill?

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What About Exports?What About Exports?

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam15 Crops: Wheat, Corn, Rice, Sorghum, Oats, Rye, Barley, Millet, Soybeans, Peanuts, Cottonseed, Rapeseed, Sunflower, Copra, and Palm Kernel

Th

ou

san

d M

etri

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US Exports

Developing Competitors’ Exports

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Implications for WTOImplications for WTO• WTO negotiations drastically limit the ability to set

domestic farm policy in this and other countries

– Seems as if it subscribes to the “What is good for General Motors (multinationals)…” syndrome

– To me:

• The whole WTO process shows a complete lack of understanding of the unique characteristics of food and agriculture

• Food security and other social objectives often trump economic considerations in the case of food and agriculture

• Multinationals may benefit but maybe not major-crop farmers

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““We” Seem Willing to Believe that:We” Seem Willing to Believe that:

• Staple crops are not sufficiently important to have emergency reserves(oil is sufficiently important)

• Less than full use of farm productive capacity is inefficient (SOP to not to use full capacity in other sectors—currently at 77% of capacity)

• Farmers can extract billions of dollars for commodity programs—so they do

• Hence, commodity programs are a waste– do away with them or– pay out the money on some other basis

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What for, Farm Programs? What for, Farm Programs? • To address self-correction problems• Not to enrich agribusinesses• Not to provide cheap feed to livestock

integrators• Not to dump commodities on international

markets• Not to crash commodity prices in

developing countries• Not to be a mark for entrepreneurs to pull

government money through loopholes

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Complete This Phrase• A commodity policy should…

– Be realistic about the way aggregate agricultural markets work

– Take into account consumer behavior– Take into account producer behavior– Recognize limited ability of exports to

rebalance aggregate agricultural markets

– Recognize demand growth seldom outstrips supply growth for long

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Decoupled/Direct Payments• Examine these using the test I have

suggested:– Direct payments—

• Do not affect consumer behavior• Do not result in increased exports• Do not result in fewer planted acres when

prices are low• Are paid out even when farm prices and

income are high• Same is paid when prices are in the tank

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Some Policy OptionsSome Policy Options• Do the Exports/Trade Liberalization Will Save Us

Course – Or All We Really Need is Market Access

• Switch to Green Payments based on Conservation/Environmental/ Rural Development Considerations

• Insurance/Risk Management Accounts (RMA)/Farm Savings Accounts

• Policy to Address Crop Agriculture’s Long-Standing Problem—“A Policy for all Seasons”

• Continue with current program with slight modifications

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Current BuzzCurrent Buzz• Lugar: Extend the 2002 FB. Prefers RMA accounts.

• Peterson: Rebalance loan rates and target prices. Stricter payment limits would be “FB reform.”

• Harkin: Senate has not started writing the FB yet. Favors CSP; perhaps a form of revenue insurance

• Kind & Others: Shift commodity program funding to Risk Management Accounts (RMA). Broadens recipients of farm payments.

• FB/NCGA/USDA: Revenue insurance (moving ave.)

• FU & Others: Revenue insurance (tied to costs); stock reserve

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In Times of Exploding Demand– Any farm program will work

– NO program at all will work

• But times of exploding demand always come to an end

• And crop agriculture is no better at adjusting to low prices now than decades ago

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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

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