apca a new era for agriculture? daryll e. ray university of tennessee agricultural policy analysis...
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APCA Are High Prices the Future? The 2007 USDA Baseline projects: –Corn demand for ethanol 3.2 billion bushels for 2007—double 2005 (AFBF says 3.5) 3.7 billion bushels in 2008 (AFBF says 4.9) –Over 10 years, baseline prices range from $3.30 to $3.75 –Very low corn stock levels by historical standardsTRANSCRIPT
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A New Era for Agriculture?A New Era for Agriculture?
Daryll E. RayUniversity of Tennessee
Agricultural Policy Analysis Center
Fourth Annual Water Law, Policy and Science Conference Lincoln, Nebraska March 26, 2007
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Short-term and Long-term Short-term and Long-term Economic Setting For Ag.Economic Setting For Ag.
• Commodity policy under “high” price expectations
• Demand euphoria but what about grain supply in the short-run and long-run?
• What is the greatest risk for agriculture in the short-run; in the long run
• Commodity policy implications
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Are High Prices the Future?Are High Prices the Future?• The 2007 USDA Baseline projects:
– Corn demand for ethanol• 3.2 billion bushels for 2007—double 2005
(AFBF says 3.5)• 3.7 billion bushels in 2008 (AFBF says 4.9)
– Over 10 years, baseline prices range from $3.30 to $3.75
– 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 Federal Government• Could even transition the direct (AMTA)
payments like 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• March Crop Intentions?• 7 or 8 million additional acres, 10? 11? 12?
– Means less soybeans, wheat, and cotton and more corn
– Some land converted to cropland; more of such conversion in long-run
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Short-Term ConsiderationsShort-Term Considerations• International supply response
– Increased international production• Mexican crop response: 4 million ac.• Argentina, Brazil, Africa
– All have indicated that $4.00 corn will alter planting response
– Internationally there may be a decreased need for corn imports from the US. That is, US corn exports would decline
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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
– 2007 US corn carry-out projected to be 5.3% of utilization (in 2005 it was 17.5%)
– For full 10 year USDA baseline, the projected range is 4.5 and 5.7
• 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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1995 (4.6%)
Uncharted TerritoryUncharted Territory
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
1938 1947 1958 1968 1978 1988 1998 2008
Year ending commercial stocks-to-use ratio for US corn1938-2005 (actual), 2006-2016 (2007 USDA Baseline)
1947 (4.9%) 1983 (5.4%) 2009 (4.5%)
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Greatest Short-Term RiskGreatest Short-Term Risk• Weather event
– 2007 US corn carry-out projected to be 5.3% of utilization (in 2005 it was 17.5%)
– For full 10 year USDA baseline, the projected range is 4.5 and 5.7
• 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 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
• Need a “Policy for All Seasons”
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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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Stocks-to-Use – All TypesStocks-to-Use – All Types
0%
10%
20%
30%
40%
50%
60%
70%
1938 1947 1958 1968 1978 1988 1998 2008
Year ending Commercial, CCC, and FOR stocks-to-use ratio for US corn1938-2005 (actual), 2006-2016 (2007 USDA Baseline)
Government: Commodity Credit Corp.
(CCC)
Commercial
Farmer-Owned-Reserve
(FOR)
WWII &Post WWII
RussianGrain Deal
PIKProgram
Baseline