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Risk Factors in Agriculture

Risk Factors in Agriculture. Chad Hart Center for Agricultural and Rural Development Iowa State University E-mail: chart@iastate.edu June 9, 2008 Ag. Credit School Iowa State University Ames, Iowa. Brief List. Food, feed, and energy demand Agricultural, energy, and trade policy

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Risk Factors in Agriculture

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  1. Risk Factors in Agriculture Chad Hart Center for Agricultural and Rural Development Iowa State University E-mail: chart@iastate.edu June 9, 2008 Ag. Credit School Iowa State University Ames, Iowa

  2. Brief List Food, feed, and energy demand Agricultural, energy, and trade policy Input and output pricing Production / crop progress General economic conditions

  3. Population Source: U.S. Bureau of the Census, International Data Base

  4. Real GDP Sources: International Financial Statistics, Global Insight

  5. Real GDP by Country Source: Global Insight

  6. Per Capita Meat Consumption Source: FAPRI

  7. Wheat Production and Stocks Sources: USDA, FAPRI

  8. Corn Production and Stocks Sources: USDA, FAPRI

  9. Liquid Fuel Usage Source: U.S. Dept. of Energy, Energy Information Administration

  10. Crude Oil Prices Source: U.S. Dept. of Energy, Energy Information Administration

  11. Crude Oil Futures Prices Source: NYMEX, June 6, 2008

  12. Price Movements in 2008

  13. Historical Ethanol Margins

  14. Renewable Fuels Standard

  15. Target Price Changes

  16. Loan Rate Changes

  17. Average Crop Revenue Election (ACRE) Gives producers a one-time option to choose a revenue-based counter-cyclical payment program, starting in 2009 Producers choose between the current stable of programs or ACRE Producers choosing ACRE agree to 20% decline in direct payments and 30% decline in loan rates

  18. ACRE Program has state and farm trigger levels, both must be met before payments are made Expected state and farm yield based on 5 year Olympic average yields per planted acre ACRE price guarantee is the 2 year average of the national season-average price

  19. ACRE Structure ACRE revenue guarantee = 90% of ACRE price guarantee * Expected state yield ACRE actual revenue = Max(Season-average price, Loan rate) * Actual state yield per planted acre Farm revenue trigger = Expected farm yield * ACRE price guarantee + Producer-paid crop insurance premium

  20. ACRE Payments Payment rate = Min(ACRE revenue guarantee – ACRE actual revenue, 25% * ACRE revenue guarantee) Payments made on 83.3% of planted/base acres in 2009-11, 85% in 2012 ACRE payment adjustment: Payment multiplied by ratio of Expected farm yield to Expected state yield

  21. Countries Pursuing Biofuels • US • Brazil • Argentina • Colombia • Paraguay • Canada • Uruguay • Mexico • Thailand • New Zealand • South Africa • South Korea • Philippines • Indonesia • Pakistan • China • India • Malaysia • Australia • Japan • EU • Russia • Not a complete list

  22. World Trade Organization Ongoing negotiations for WTO agriculture agreement Targeting changes in domestic support, tariffs, tariff quotas, and export subsidies Both general and product-specific guidelines for agricultural policy changes

  23. Weather For Iowa Percent Planted 6/1/08 6/1/07 Average Corn 97 99 100 Soybeans 82 91 92 Percent Emerged 6/1/08 6/1/07 Average Corn 77 91 93 Soybeans 37 66 64 Crop Condition V. P. Poor Fair Good Excellent Corn 1 4 29 55 11 Source: USDA, Crop Progress, June 2, 2008

  24. GM Crops

  25. Input Costs Source: USDA, Agricultural Prices, May 30, 2008

  26. Changing Basis Patterns

  27. Current Basis

  28. Implied Price Volatilities Looking at July Corn futures in May: 2005 26% 2006 30% 2007 38% 2008 40%

  29. Corn Price Distributions Based on May 2008 USDA mid-point price of $5.50 per bushel Implied Volatility = 25% Implied Volatility = 15% $ per bushel

  30. Thanks for your time!Any questions?

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