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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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To receive an electronic version of our weekly ag policy column send an email to: dray@utk.edurequesting to be added to APAC’s Policy Pennings listserv

Weekly Policy ColumnWeekly Policy Column

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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