AAPPCCAA

Designing a Farm Bill While Designing a Farm Bill While Under the InfluenceUnder the Influence

of Euphoria

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

National Farmers Union105th Anniversary Convention

Orlando, Florida March 4, 2007

AAPPCCAA

In Times of Exploding Demand

– The current program will work

– Environmental payments will work

– Rural development payments will work

– Any farm program will work

– NO program at all will work

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

AAPPCCAA

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 bushes 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

AAPPCCAA

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

AAPPCCAA

Short-Term ConsiderationsShort-Term Considerations

• US supply response

– Arbitrage of crop acres in US to corn• March Crop Intentions?

• 7 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

AAPPCCAA

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 may alter planting

response (Friday DTN story: 230 million bushels more “second season” corn in Brazil – 80 million to be exported)

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

AAPPCCAA

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

AAPPCCAA

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

– Same DTN story said Brazilian corn yields will increase:

» 10 percent this year due to better varieties

» an additional 10-20 percent with introduction of GMOs

AAPPCCAA

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

AAPPCCAA

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

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 corn1960-2005 (actual), 2006-2016 (2007 USDA Baseline)

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

AAPPCCAA

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

AAPPCCAA

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

AAPPCCAA

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

AAPPCCAA

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”

AAPPCCAA

Can’t the Market Take the Production Away Can’t the Market Take the Production Away That It Brought Forth?That 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

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 US taxpayers

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

AAPPCCAA

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 consume significantly more food

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

AAPPCCAA

What Was That Again?What Was That Again?

• Supply and demand characteristics of aggregate agriculture cause chronic price and income problems– On average supply grows faster than

demand (We will discuss ethanol later)

– Agriculture cannot right itself when capsized by low prices

– (Always year-to-year random variability)

AAPPCCAA

Historically—there have beenHistorically—there have beenTwo Two Major Components of Farm\Major Components of Farm\

Commodity PolicyCommodity 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

AAPPCCAA

When Policy of PlentyWhen Policy of Plentyis Too Muchis Too Much

• Given agriculture’s inability to quickly adjust to overproduction and low prices, there are 3 policy strategies:– Supply side – Demand side– Just pay money

AAPPCCAA

Traditional Farm Policy Traditional Farm Policy ElementsElements

• From 1973 (or earlier) to 1996, U.S. domestic farm policy generally included the following elements:

– Base acreage

– Acreage reduction / set-asides

– Nonrecourse loans to support prices

– Government storage of commodities

– Domestic and foreign demand expansion

– Target price for major crop commodities

• Deficiency payments for the difference between target price and market price

AAPPCCAA

Critical ChangesCritical Changesin U.S. Policyin U.S. Policy

• Since 1985 there has been:

– An export “mindset”

– A movement away from “managing plenty” to supporting income with government payments

• This view culminated in the 1996 FAIR Act:– Elimination of supply control instrument: set

aside program– Replaced “price floors” with government

payments

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

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

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.

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

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 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

Implications for the WTO

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

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

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

AAPPCCAA

What Agribusinesses WantWhat Agribusinesses Want• Volume (paid flat per bushel rate; sell inputs)

• Low Prices (low cost of ingredients)• Price instability (superior information

systems provide profit opportunities)• Reduced regulation of production and

marketing practices (seller-to and buyer-from beware)

• More market power over competitors and their customers/suppliers (Want everyone at a competitive disadvantage)

AAPPCCAA

Whose Policy Is It, Anyway??Whose Policy Is It, Anyway??

• One alternative is passively sit by, be co-opted, and let others commandeer the policy agenda– That is exactly what producers have increasingly done since

the mid-eighties!!!

– Crop producers get subsidy-tarred while real subsidy beneficiaries (integrated livestock producers and other users, sellers of inputs and marketers of output) remain above the fray

– Tufts University estimated that the poultry and hog industries alone saved $20 billion between 1997 and 2005 because corn and soybean prices were below the cost of production

• Tyson saved $2.6 billion

• Smithfield saved $2.5 billion

AAPPCCAA

Whose Policy Is It, Anyway??Whose Policy Is It, Anyway??

• One alternative is passively sit by, be co-opted, and let others commandeer the policy agenda– That is exactly what producers have increasingly done since

the mid-eighties!!!

– Crop producers get subsidy-tarred while real subsidy beneficiaries (integrated livestock producers and other users, sellers of inputs and marketers of output) remain above the fray

– Advocating unfettered free markets, promising export growth, or claiming a level playing field as farmers’ magic bullet, etc., ain’t workin.

– And, given the realities of agriculture discussed so far, they hold little promise for the future.

AAPPCCAA

My Question to US Farmers Is: What My Question to US Farmers Is: What Are You Going to Do About It?Are You Going to Do About It?

• Must be a mindset change– Producers and farm and commodity

organizations must refuse to carry water

– Must design policies based on “the realities” not hope or wishful thinking

– Work as hard to become independent as we have “worked” to become subservient in the past

AAPPCCAA

My Question to US Farmers Is: What My Question to US Farmers Is: What Are You Going to Do About It?Are You Going to Do About It?

• Did I mention that there must be a mindset change?

• Everything should be on the table. Take nothing for granted.– Previous programs: DNA testing (seeing what

happens when most of them are eliminated) have exonerated most of the “failed programs of the past”

– In all cases, do not contradict or ignore any of “the realities” when developing policy

AAPPCCAA

Some Policy OptionsSome Policy Options

• Continue 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/Farm Savings Accounts

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

AAPPCCAA

From My Perspective…From My Perspective…

• Farm Bill needs to address:

– Unique characteristics of crop agriculture that result in chronic price/ income problems

– Variation in production due to weather and disease

– Trade issues like dumping

– Environmental and conservation issues

– Rural development beyond agriculture

AAPPCCAA

From My Perspective…From My Perspective…• The 2007/2008 Farm Bill needs to include

provisions for:– Buffer stocks to provide a reserve supply of

grains and seeds in the case of a severe production shortfall and to ensure orderly marketing

– Inventory Management to manage acreage utilization in the same way that other industries manage their capacity—bring back the nonrecourse loan

– These approaches provide means to deal with the price unresponsiveness of supply and demand

AAPPCCAA

From My Perspective…From My Perspective…

• The 2007/2008 Farm Bill needs to include provisions for:

– Bioenergy production to manage acreage utilization without heavy dependence on idling acreage

– Keep the land in production so that we don’t pay farmers not to farm

– Provide a needed energy source not unlike the horsepower of times past

AAPPCCAA

From My Perspective…• Merge Ag and Energy Policy

– Biofuels recycle atmospheric, not fossil, carbon

– Look at crops not in food equation & NOT internationally traded

– Switchgrass (as an illustrative example only)

• Perennial• Reduced inputs• Multi-year setaside• Burned in boilers for electricity• Converted to ethanol• Less costly than present ag programs

AAPPCCAA

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

• Need a “Policy for all Seasons”

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