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The Widening Gap Between The Widening Gap Between Farm Policy Needs and Farm Farm Policy Needs and Farm

Policy as DeliveredPolicy as Delivered

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

Farmers UnionThe NetherlandsMarch 18, 2008

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Recent Corn PricesRecent Corn Prices

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What Brought This About?What Brought This About?

• In one word—ETHANOL– US corn-based ethanol production is

booming• Farmer investment• Rising oil prices• Elimination of MTBE as gasoline oxygenate

– USDA projects• 13.5 billion gallons by 2018• 4.9 million bushels of corn, up from 1.6

million bushels in 2005

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Projected Ethanol DemandProjected Ethanol Demand

Source: UDSA Baseline Projections to 2017

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Greatest Short-Term RiskGreatest Short-Term Risk

• Weather event– The 2008 USDA baseline shows a string of

years in which corn carry-out stocks are projected to be 8-11 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 corn1960-2006 (actual), 2007-2017 (USDA Baseline Projections to 2017)

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

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Greatest Short-Term RiskGreatest Short-Term Risk• Weather event

– The 2008 USDA baseline shows a string of years in which corn carry-out stocks are projected to be 8-11 percent of utilization

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

production fall by 300 mil. bu. from the previous year but also 20% drop in earlier years (’83 ’88 ’93)

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

• $6 to $8 or more per bushel (talkin’ season average)

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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 to $8 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

• A properly managed stocks 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 suggesting need for global supply management

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Long-Term ConsiderationsLong-Term Considerations

• International supply response—yield

– 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—acreage

– 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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FundamentalsFundamentals

• Reasons for farm/commodity programs– Econ 101 says the market self corrects – Response to price, response to price,

response to price

• In a new era—prices will never again be below…

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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

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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 taxpayers

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

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FundamentalsFundamentals

• Reason for farm/commodity programs

• Exports—present and future

• Importance of agriculture

• Farm family income

• In a new era—prices will never again be below…

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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

• So, how has that been working for farmers?

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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

rn E

xp

ort

sC

orn

Im

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

rn E

xp

ort

sC

orn

Im

po

rts

Mil. Bu.

1.1 billion bushels28 million tonnes

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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

rn E

xp

ort

sC

orn

Im

po

rts

Mil. Bu.

Overtime, the expectation remains—just further into the future.

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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US Exported AcresUS Exported Acres

Percentage of US acres used to produce crops for export have declined from a high of 43 percent in 1980 and 1980 to 33 percent for 2006

0%

10%

20%

30%

40%

50%

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006

% of US Acres Producing Crops for Export

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What About Exports?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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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

c T

on

s

US Exports

Developing Competitors’ Exports

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Worldwide Excess Capacity Will Again Be a Worldwide Excess Capacity Will Again Be a Long-run Problem (Despite Ethanol)Long-run Problem (Despite Ethanol)

• Dramatic yield increases in other countries (and in this country)– Cargill, Monsanto, John Deere, etc., etc., etc.

• Acreage once in production will be brought back in– Russia, Ukraine and others

• New Acreage– Brazil– China

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Policy FoundationsPolicy Foundations• Need to be realistic about the way

aggregate agricultural markets work

– Take into account consumer behavior and food security concerns

– 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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Global Policy For All SeasonsGlobal Policy For All Seasons• In the near-term

– We need commodity reserve stocks held in major producing and consuming countries to protect against extreme• Supply and/or • Demand shocks

• Longer-term– We need international supply

management system to maintain capacity while avoiding gluts

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Global Policy For All SeasonsGlobal Policy For All Seasons• What would it take?

– An extreme whiplash

• What would it involve?– Developed countries

• Near capacity on land base• Financial capacity to compensate

farmers for production limits

– Developing countries• Capacity to expand land base• Willingness to adjust rate of growth in

times of global overcapacity

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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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