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Global Protein OutlookGlobal Protein Outlookand Other Stuffand Other Stuff

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

The Purchasing and Ingredients Suppliers ConferenceSandestin, Florida

March 12, 2009

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What We’re Going To DoWhat We’re Going To Do• Global Protein Outlook (It’s my assignment!)

• Exports: Perpetual Promises

• Two Views of Commodity Policy– “Show Me the Money”

– “Houston, We’ve Got a Problem”

• Policy for All Seasons

• WTO Implications

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The CalmThe CalmAfter the StormAfter the Storm

(Well, relatively anyway)

• Soybean meal prices are way down and likely will go lower in the months ahead

• Next year:– Large soybean crop probable – Protein prices could be considerably lower

• Soybean meal continues to dominate the U.S. protein market

• Will China gobble up our soybean supply?

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Weekly CBOT Soybean Meal PriceWeekly CBOT Soybean Meal Price

February 2, 2007 – March 6, 2009

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The CalmThe CalmAfter the StormAfter the Storm

(Well, relatively anyway)

• Soybean meal prices are way down and likely will go lower in the months ahead

• Next year:– Large soybean crop probable – Protein prices could be considerably lower

• Soybean meal continues to dominate the U.S. protein market

• Will China gobble up our soybean supply?

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Rapeseed Meal – 7%

US Domestic Consumption US Domestic Consumption of Protein Meals - 2007of Protein Meals - 2007

Soybean Meal – 88%

Peanut Meal – <1%

Fish Meal – 1%

Cottonseed Meal – 1%

Sunflowerseed Meal – 1%

Imports are 5.8% of this total

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Rapeseed Meal – 92%

US Imports US Imports of Protein Meals - 2007of Protein Meals - 2007

Soybean Meal – 6%Fish Meal – 2%

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Rapeseed Meal – 12%

World Production/Consumption World Production/Consumption of Protein Meals - 2007of Protein Meals - 2007

Soybean Meal – 68%

Peanut Meal – 3%

Fish Meal – 2%Cottonseed Meal – 7%

Sunflowerseed Meal – 5%

Copra – 3%

Palm Kernel Meal – 3%

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The CalmThe CalmAfter the StormAfter the Storm

(Well, relatively anyway)

• Soybean meal prices are way down and likely will go lower in the months ahead

• Next year:– Large soybean crop probable – Protein prices could be considerably lower

• Soybean meal continues to dominate the U.S. protein market

• Will China gobble up our soybean supply?

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China SoybeansChina Soybeans

0

5000

10000

15000

20000

25000

30000

35000

40000

1964 1969 1974 1979 1984 1989 1994 1999 2004

1,0

00

To

nn

es

Soybean Imports

Soybean Production

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China Soybean MealChina Soybean Meal

0

5000

10000

15000

20000

25000

30000

35000

1964 1969 1974 1979 1984 1989 1994 1999 2004

1,0

00

To

nn

es

Soybean Meal Imports

Soybean Meal Production

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Chinese Soybean ImportsChinese Soybean Imports

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

1990 1992 1994 1996 1998 2000 2002 2004 2006

Th

ou

san

d T

on

nes

ChinaTotal Imports

Imports from US

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Soybean ExportsSoybean Exports

0

5000

10000

15000

20000

25000

30000

35000

1964 1969 1974 1979 1984 1989 1994 1999 2004

1,0

00

To

nn

es

Brazil

United States

Argentina

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Soybean Complex ExportsSoybean Complex Exports

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1990 1992 1994 1996 1998 2000 2002 2004 2006

Th

ou

san

d T

on

nes

US. Total Exports

US Total Exports less China

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Soybean Complex TradeSoybean Complex Trade

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

1990 1992 1994 1996 1998 2000 2002 2004 2006

Th

ou

san

d T

on

nes Total World Exports

Arg. & Br. Exports

US Exports

China Imports

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Exports: Perpetual PromisesExports: Perpetual Promises

• Be a permanent source of ever increasing US agricultural prosperity

• Correct the long-term price and income problems in agriculture

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Data Show or “Survey Says...”Data Show or “Survey Says...”

Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops

1979=1.0

US Population

US Exports

US Domestic Demand

*Adjusted for grain exported in meat

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What About Exports?What About Exports?

Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam

15 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

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What About Exports?What About Exports?B

illio

n D

olla

rs

Bulk Exports

Total Agricultural Exports

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What Were We Thinking …What Were We Thinking …Why would we expect trade to deliver crop agriculture to the Promised Land?

•1970s Syndrome– Earl Butz said …

– The outsized export share of the 1970s has been viewed as US property from then on

– When exports slowed in the 1980s …• Been on a quest to recapture the Golden Age of

Agriculture (1970s)

• Lowered Loan Rates

• Moved from supply management to writing checks

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What Were We Thinking …What Were We Thinking …Why would we expect trade to solve US price and income problems?•Because we are confused!•We implicitly think US agriculture would be just fine …

– If only “such and such” were removed or different• Complete access to all international markets• Exchange rates were different• Inflation were reduced• Subsidies were eliminated• Etc., etc.

– After these “such and ‘suches’,” the importers would import more and our export competitors would export less

• And all would be fine in the world that is agriculture• Ag prices and incomes would be stable and “high”

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So What’s Not Considered? So What’s Not Considered? • FOOD IS DIFFERENT

– Food is a national security issue—just like military security is to the US. So …

• Countries want to domestically produce as much of their food as possible

• Political considerations– Need to feed the population– Need to provide a living for millions in agriculture– Need an orderly exit of workers out of agriculture

• Suppose there had been total access to all international markets this past year

– Vietnam, Thailand and scores of other countries…

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So What’s Not Considered? So What’s Not Considered? • Except for short periods, production

outstrips demand– This is a good thing– Butz had it right except for one word

• Excess capacity in the future will be a worldwide problem

– Increased acreage– Increased yields

• When prices decline, self-correction does not work (very quickly at least)

– Quantities demanded and supplied change little

(Stay tuned for “The Rest of the Story”

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Expecting Trade To …Expecting Trade To …• Deliver US agriculture to the promised land

of unending prosperity with no government intervention is too much to ask– WTO or no WTO, US agriculture exports will be

limited by• The nature of agricultural importers’ demands

• The nature of US’s agricultural export competitors’ supply

• The US is the residual supplier

– Therefore we should expect continuing periods of low prices when agriculture cannot self-correct on its own

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Two Views of Two Views of Commodity PolicyCommodity Policy

• “Show Me the Money”

• “Houston, We’ve Got a Problem”

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““Show Me the Money”Show Me the Money”• View that commodity programs exist

because:– Farmers have inordinate political power– Farmers “milk” the government

• Corresponding Conclusion– Farm programs are a waste– They address no real problem– Taxpayer gift

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““Show Me the Money”Show Me the Money”• So…

– Get rid of them• Conservative think tanks• Editorial writers and syndicated columnists• Those for which “free market” is not a concept

but a religion plus much of the general public

– Redistribute or “earn” payments• Environmental/Wildlife Groups• States with large vegetable/fruit/etc production• Organic, small farms, land preservation, tourism• Multi-functionality (all the above)

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““Houston, We Have A Houston, We Have A Problem”Problem”

• Chronic price and income problems• Why?

– Market correction does not occur in timely manner

– Economist call this “Market Failure” – Sometimes in remission

…but always comes back• What does this mean, you say…

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In General…In General…• Econ 101 says that (except during

melt-down periods) markets correct on their own

• In times of low prices or increased inventories: – Consumers buy more– Producers produce less– Viola! Self-correction.

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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 taxpayers

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

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Early Policy Was Output Early Policy Was Output ExpandingExpanding

• 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 continues today

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Easy to Under EstimateEasy to Under EstimateSupply GrowthSupply Growth

• US supply response– Conversion of Conservation Reserve

Program Acreage and hay/pasture land to crop production

– Investment in yield enhancing technology (300 bu./ac on best land in a few years—national average a decade or later?)

– Conversion to cellulosic feedstocks for ethanol production

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Easy to Under EstimateEasy to Under EstimateSupply GrowthSupply Growth

• International supply response—yield

– Development and adoption of drought/saline/disease resistant crops

– Globalization of agribusiness: Near universal access to the new technologies world-wide

• Narrowing of technology and yield differentials between the developed and developing world

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Easy to Under EstimateEasy to Under EstimateSupply GrowthSupply Growth

• International supply response—acreage – Long-run land potentially available 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)

• Supply growth has always caught and then surpassed demand growth (and it does not take long)

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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

– Operated by an international commission—decision making/oversight

– Stores strategically purchased/stored

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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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WTO …WTO …• Does not account for the unique nature of food and

agriculture• Needs to understand the difference between DVD

players and staple foods• Needs to be reformulated or replaced with an

organization that recognizes the need for…– Food reserves to address the inevitable shocks to the

availability and price of food– Promoting increases in worldwide productive capacity,

especially each country’s domestic production– Addressing

• Agriculture’s inability to gauge the use of productive capacity to match demand by creating methods to overcome

– Agriculture’s inability to self-correct

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Finally …Finally …(Other) statements that lead farmers and

others to erroneous conclusions:• 95% of the world’s population is outside the

US …• Increases in per capita income and growth or

the middle class in China and India …• The value of the dollar has decreased this

export season ….• The value of US agricultural exports has

increased substantially …

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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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