apca us agricultural policy and trade: the china connection daryll e. ray & harwood schaffer...
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AAPPCCAA
US Agricultural Policy and US Agricultural Policy and Trade: Trade:
The China ConnectionThe China ConnectionDaryll E. Ray & Harwood Schaffer
University of TennesseeAgricultural Policy Analysis Center
Rural Development InstituteChinese Academy of Social Sciences
Beijing, China • June 3, 2008
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Recent U.S. Corn PricesRecent U.S. Corn Prices
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
2005 2005-07 2006 2006-07 2007 2007-07 2008
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What are the Most What are the Most Often Stated Triggers?Often Stated Triggers?
• Ethanol– US corn-based ethanol production is
booming– Federal mandates for biofuels
• Increasing meat consumption in China– Middle class shift from grain-based to
meat-based diets
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Expected U.S. Ethanol Expected U.S. Ethanol DemandDemand
Source: UDSA Baseline Projections to 2017
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We Have Seen This BeforeWe Have Seen This Before
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
1965 1970 1975 1980 1985 1990 1995 2000 2005
7-74 $3.907
5
7-72 $1.267
5
10-05 $1.962
5
4-08 $6.26
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What Were the Triggers Then?What Were the Triggers Then?• Russian grain imports
– Crop failure– Decision not to liquidate cattle herds
• Petrodollar driven exports– Loans to developing countries– Used to import food to feed people
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Laying the Blame: Then & NowLaying the Blame: Then & Now• Then
– Food vs. feed—Western grain-based-meat diets
– Eat less meat so the poor of the world can have grain to eat
• Now– Food vs. fuel—US ethanol mandates– Eliminate grain-based biofuels to the
poor or the world can have grain to eat
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Looking More CloselyLooking More Closely• Low price regimen
• Reduced world-wide grain stocks
• Increased demand for meat in China – But has this put significant upward
pressure on international grain prices?
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Looking More CloselyLooking More Closely• Low price regimen
– US farm program design suppressed prices
– Leaving little incentive to invest and expand production
• It has often been said:– World consumption of grains has
exceeded production in 7 of the last 8 years
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Looking More CloselyLooking More Closely• Dismantling of government stocks
– Expectation that commercials would hold any needed stocks
– Concerns about cost of government stocks programs
– Stocks discouraged by trade policies that put decisions in the hands of markets
• Random weather events– Australia and Ukraine
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World Ending-Year StocksWorld Ending-Year Stocks
World Grains: Ending Crop Year Stock Levels
Source: USDA PS&D
0
100
200
300
400
500
600
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
World
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World Grain StocksWorld Grain Stocks
All Grains: Ending Crop Year Stock Levels
Source: USDA PS&D
0
100
200
300
400
500
600
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
China
World
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World Grain StocksWorld Grain Stocks
All Grains: Ending Crop Year Stock Levels
Source: USDA PS&D
0
100
200
300
400
500
600
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
China
US
World
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World Grain StocksWorld Grain Stocks
All Grains: World less China and the US, Ending Crop Year Stock LevelsSource: USDA PS&D
0
50
100
150
200
250
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n T
on
nes
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Looking More CloselyLooking More Closely• Low price regimen
• Reduced world-wide grain stocks
• Increased demand for meat in China – But has this put significant upward
pressure on international grain prices?
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China MeatChina Meat
25
30
35
40
45
50
55
60
65
70
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
sProduction
Consumption
Production and Consumption of Beef, Pork, and Broilers
Source: USDA PS&D
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China GrainsChina Grains
Grains: Production and Consumption
Source: USDA PS&D
300
310
320
330
340
350
360
370
380
390
400
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
Production
Consumption
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China Grain ImportsChina Grain Imports
Grains: Imports
Source: USDA PS&D
-20
-15
-10
-5
0
5
10
15
20
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
Imports
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China Grain ExportsChina Grain Exports
Grains: Exports
Source: USDA PS&D
-20
-15
-10
-5
0
5
10
15
20
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
Exports
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China Grain TradeChina Grain Trade
Grains: Exports, Imports
Source: USDA PS&D
-20
-15
-10
-5
0
5
10
15
20
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
Exports
Imports
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China Grain TradeChina Grain Trade
Grains: Exports, Net Exports, Imports
Source: USDA PS&D
-20
-15
-10
-5
0
5
10
15
20
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
Net Exports
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China ConnectionChina Connection• Yes, average meat consumption per person is
increasing relatively rapidly in China
• Yes, this has caused increased use of corn and protein meals in China
• So are China’s diet changes causing high corn/grain prices in the US and internationally?
• No! (No? Why not?)
• Because China has used its own grain (production and stocks) to produce meat
• Meat and grain markets are walled within China and have virtually no affect on outside prices
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Historically—there have beenHistorically—there have beenTwo Two Major Components of U.S. Major Components of U.S.
Farm Commodity PolicyFarm Commodity 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
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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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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
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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
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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
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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
• But it is that what happened?
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China Net Corn TradeChina Net Corn TradeWhat We Expected During Debate of 1996 FB:
Co
rn E
xp
ort
sC
orn
Im
po
rts
Mil. Bu.
1996 FAPRI Projections
1996 FAPRI Projections of Net Corn Trade
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China Net Corn TradeChina Net Corn TradeWhat We Got:
1996 FAPRI Projections of Net Corn Trade
PS&D Actual Net Corn Trade with 2004 ProjectionC
orn
Ex
po
rts
Co
rn I
mp
ort
s
Mil. Bu.
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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
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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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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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
– Agriculture cannot right itself when capsized by low prices
– (Always year-to-year random variability)
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Greatest RisksGreatest Risks• Short-term
– Weather, weather, weather: US, Brazil, China, India, elsewhere
• For example, US annual corn yields have dropped by 20 percent in years past (’83 ’88 ’93)
– High input prices• Long-term
– Acreage and yields greatly increase worldwide (not if with current prices)
– Low prices will return– Reduced farm asset values, especially land
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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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Policy for All SeasonsPolicy for All Seasons
• Assume the unexpected will happen– Random policy and weather events do
occur—Plan for them
• Establishment of International Grain and Oilseed Reserve– Moderate impacts of random policy and
weather events by providing stable supply until production responds
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Policy for All SeasonsPolicy for All Seasons
• Keep productive capacity well ahead of demand– Public investment in yield enhancing
technologies and practices
• Provide means to hold arable land in rotating fallow during periods of overproduction– This land can then quickly be returned
to production in the case of a crisis
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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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Weekly Policy ColumnWeekly Policy Column
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China Meat and CornChina Meat and Corn
Indexed Meat Production (Pork, Broilers, Beef) and Corn Feed
Source: USDA PS&D
0.5
1.0
1.5
2.0
2.5
3.0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Ind
exed
199
0=1
Meat Production
Corn Feed