FAPRI Market Outlook and Role in the Farm Policy Process

1. Patrick Westhoff (westhoffp@missouri.edu) FAPRI (www.fapri.missouri.edu) University of Missouri FAPRI Market Outlook and Role in the Farm Policy Process National Farm Business Management Conference, St. Louis, June 15, 2009

2. Agenda • How we got here • Why the boom and bust in commodity prices? • What has it meant to the farm sector? • Where we might be going • Macroeconomy • Agricultural markets • FAPRI’s role in the farm policy process

3. What went up, has come down Jun 08: $7.08 Dec 08: $3.64

4. What went up, has come down Aug 08: $95.80 Sep 08: $62.60 Feb 09: $78.80 Nov 08: $40.70

5. What went up, has come down Jul 08: $19.40 Feb 09: $11.60

6. What went up, has come down Jul 08: 0.9% Apr 09: -0.2%

7. What went up, has come down

8. Will what’s gone up, come back down?

9. Why did prices rise, then decline? Why prices rose • Reduced grain production in Europe, Australia

10. Competitor production of wheat, barley and corn Decline in production from 2004-2007: 73 mmt Increase in US exports, 2004/05-2007/08: 21 mmt Source: USDA’s PSD Online, January 2009

11. Why did prices rise, then decline? Why prices rose Why prices fell Sharp increase in global grain production in 2008 • Reduced grain production in Europe, Australia

12. Competitor production of wheat, barley and corn Increase in production, 2007-2008: 81 mmt Decline in US exports, 2007/08-2008/09: 25 mmt Source: USDA’s PSD Online, January 2009

13. Why did prices rise, then decline? Why prices rose Why prices fell Sharp increase in global grain production in 2008 • Reduced grain production in Europe, Australia • Economic growth in Asia and elsewhere

14. Real GDP growth(Global Insight, January 2009)

15. Why did prices rise, then decline? Why prices rose Why prices fell Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown • Reduced grain production in Europe, Australia • Economic growth in Asia and elsewhere

16. Real GDP growth(Global Insight, January 2009)

17. Why did prices rise, then decline? Why prices rose Why prices fell Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown • Reduced grain production in Europe, Australia • Economic growth in Asia and elsewhere • Weaker dollar

18. Value of the dollar(IHS Global Insight, January 2009)

19. Why did prices rise, then decline? Why prices rose Why prices fell Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown Stronger dollar • Reduced grain production in Europe, Australia • Economic growth in Asia and elsewhere • Weaker dollar

20. Value of the dollar(IHS Global Insight, January 2009)

21. Why did prices rise, then decline? Why prices rose Why prices fell Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown Stronger dollar • Reduced grain production in Europe, Australia • Economic growth in Asia and elsewhere • Weaker dollar • Higher petroleum prices

22. Corn and petroleum prices

23. Why did prices rise, then decline? Why prices rose Why prices fell Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown Stronger dollar Lower petroleum prices • Reduced grain production in Europe, Australia • Economic growth in Asia and elsewhere • Weaker dollar • Higher petroleum prices

24. Corn and petroleum prices

25. Why did prices rise, then decline? Why prices rose Why prices fell Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown Stronger dollar Lower petroleum prices • Reduced grain production in Europe, Australia • Economic growth in Asia and elsewhere • Weaker dollar • Higher petroleum prices • Rapid biofuel expansion

26. U.S. biofuel production

27. Why did prices rise, then decline? Why prices rose Why prices fell Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown Stronger dollar Lower petroleum prices Slower biofuel growth • Reduced grain production in Europe, Australia • Economic growth in Asia and elsewhere • Weaker dollar • Higher petroleum prices • Rapid biofuel expansion

28. Ethanol dry mill operating costs and returns Source: FAPRI-MU projections, Jan. 2009 Note: Assumes current tax credits and tariffs extended

29. U.S. ethanol production capacity Source: Renewable Fuels Association. Note: Idle nameplate capacity (1.8 billion gallons on 6/9/09) was not reported in 2007 or 2008.

30. Why did prices rise, then decline? Why prices rose Why prices fell Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown Stronger dollar Lower petroleum prices Slower biofuel growth Policy response Speculation • Reduced grain production in Europe, Australia • Economic growth in Asia and elsewhere • Weaker dollar • Higher petroleum prices • Rapid biofuel expansion • Policy response • Speculation

31. Some macroeconomic indicators(IHS Global Insight, March 2009 forecast)

32. Petroleum price forecasts from IHS Global Insight *NYMEX July futures, 6/10/09

33. 2008/09 corn, petroleum prices Source: FAPRI 2008 stochastic baseline.

34. 2008/09 corn, petroleum prices Futures, 6/6/08, March 2009 contracts: NYMEX petroleum: $136.93-$5.00 basis; CBOT corn: $6.92-$0.40 basis Source: FAPRI 2008 stochastic baseline.

35. 2008/09 corn, petroleum prices Futures, 2/17/09, March 2009 contracts: NYMEX petroleum: $34.97-$3.00 basis; CBOT corn: $3.49-$0.25 basis Source: FAPRI 2008 stochastic baseline.

36. Biofuel use required by 2007 energy bill Source: EISA 2007, Biodiesel RFS assumed constant after 2012

37. Biofuel consumption and the Renewable Fuel Standard (RFS) Source: FAPRI projections, Jan. 2009. Assumes tariffs and tax credits extended Notes: RFS adjusted for shortfall in cellulosic production relative to mandate; one gallon of biodiesel assumed to count as 1.5 gallons of biofuel

38. U.S. ethanol consumption Source: FAPRI January 2009 baseline. Note: Assumes no intermediate (e.g., E-15) blends are permitted.

39. US corn use Source: FAPRI baseline projections, Jan. 2009

40. US soybean use Actual 2008/09 exports will be higher, resulting in lower stocks Source: FAPRI baseline projections, Jan. 2009

41. Corn farm prices *Futures line uses USDA estimate for 2008/09. For later years, December Chicago futures less $0.30/bu. assumed basis.

42. Soybean farm prices *Futures line uses USDA estimate for 2008/09. For later years, November Chicago futures less $0.30/bu. assumed basis.

43. US corn receipts and variable expenses Source: FAPRI projections, Jan. 2009. Notes: Variable expenses exclude land and other fixed costs. Payments include loan program benefits and ACRE payments (on a per-planted acre basis) and direct and countercyclical payments (on a per-base acre basis)

44. US soybean receipts & variable expenses Source: FAPRI projections, Jan. 2009. Notes: Variable expenses exclude land and other fixed costs. Payments include loan program benefits and ACRE payments (on a per-planted acre basis) and direct and countercyclical payments (on a per-base acre basis)

45. US corn and soybean market net returns Source: FAPRI baseline projections, Jan. 2009

46. US corn and soybean planted area Source: FAPRI baseline projections, Jan. 2009 and USDA Prospective Plantings, Mar. 2009

47. US land use(Actual and 2009 planting intentions, million acres) *Upland cotton, sorghum, barley, oats, rice, sunflowers, peanuts, sugar beets and sugar cane

48. US corn and soybean yields 156 bu/a 41.8 bu/a Source: FAPRI baseline projections, Jan. 2009. Current conditions might suggest lower 2009 corn yields are likely.

49. 2009/10 corn prices and yields Source: FAPRI 2009 stochastic baseline.

50. US corn supply and use (USDA, June 2009, billion bushels)