AAPPCCAA
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
AAPPCCAA
Recent Corn PricesRecent Corn Prices
AAPPCCAA
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
AAPPCCAA
Projected Ethanol DemandProjected Ethanol Demand
Source: UDSA Baseline Projections to 2017
AAPPCCAA
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
AAPPCCAA
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%)
AAPPCCAA
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)
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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…
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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…
AAPPCCAA
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?
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
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
AAPPCCAA
Agricultural Policy Analysis Center The University of Tennessee 310 Morgan Hall 2621 Morgan Circle Knoxville, TN 37996-4519
www.agpolicy.org
Thank YouThank You
AAPPCCAA
To receive an electronic version of our weekly ag policy column send an email to: [email protected] to be added to APAC’s Policy Pennings listserv
Weekly Policy ColumnWeekly Policy Column