A New Era for Agriculture?

1. A New Era for Agriculture? Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Fourth Annual Water Law, Policy and Science Conference Lincoln, Nebraska March 26, 2007

2. Short-term and Long-term 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

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 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

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 will alter planting response • Internationally there may be a decreased need for corn imports from the US. That is, US corn exports would decline

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 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

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 1947 (4.9%) 1983 (5.4%) 1995 (4.6%) 2009 (4.5%) Year ending commercial stocks-to-use ratio for US corn 1938-2005 (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

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

18. Stocks-to-Use – All Types Government: Commodity Credit Corp. (CCC) Farmer-Owned-Reserve (FOR) PIK Program WWII & Post WWII Russian Grain Deal Commercial Baseline Year ending Commercial, CCC, and FOR stocks-to-use ratio for US corn 1938-2005 (actual), 2006-2016 (2007 USDA Baseline)