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Leveling the Policy Framework Between Crops and Biomass

USDA Agricultural Outlook Forum 2007. Leveling the Policy Framework Between Crops and Biomass. Daryll E. Ray, Daniel G. De La Torre Ugarte, and Harwood D. Schaffer University of Tennessee Agricultural Policy Analysis Center. Presented Thursday, March 1, 2007. Introduction.

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Leveling the Policy Framework Between Crops and Biomass

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  1. USDA Agricultural Outlook Forum 2007 Leveling the Policy Framework Between Crops and Biomass Daryll E. Ray, Daniel G. De La Torre Ugarte, and Harwood D. Schaffer University of Tennessee Agricultural Policy Analysis Center Presented Thursday, March 1, 2007

  2. Introduction • 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

  3. 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

  4. Logical 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

  5. Short-Term Considerations • US supply response • Arbitrage of crop acres in US to corn • March Crop Intentions? • 7 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

  6. Short-Term Considerations • International supply response • Increased international production • Mexican crop response: 4 million ac. • Argentina, Brazil, Africa • All have indicated that $4.00 corn may alter planting response • Internationally there may be a decreased need for corn imports from the US

  7. Long-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

  8. Long-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

  9. Long-Term Considerations • International supply response • Long-run land availability for major crops • 250 mil. ac. of savannah land in Brazil • Savannah land in Venezuela, Guyana, and Peru • Land in former Soviet Union • Arid land in China’s west • Savannah land in Sub-Saharan Africa • Easy to underestimate supply growth

  10. Greatest 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

  11. Uncharted Territory 1974 (7.4%) 1983 (5.4%) 1995 (4.6%) 2009 (4.5%) Year ending commercial stocks-to-use ratio for US corn 1960-2005 (actual), 2006-2016 (2007 USDA Baseline)

  12. Greatest 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

  13. Short-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

  14. Greatest 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

  15. On 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”

  16. Thank You

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