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Farm Policy Confusion and Farm Policy Confusion and Agriculture’s EuphoriaAgriculture’s Euphoria

Daryll E. RayUniversity of Tennessee

Agricultural Policy Analysis Center

Cotton Economics Research Institute7th Annual Research/Extension Symposium

Lubbock, Texas April 11, 2007

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Lost Our Policy BearingsLost Our Policy Bearings

• Without a clue and highly impressionable

– When it comes to farm policy, we seem not to have a clear idea about anything including:

• what the “problem” is or

• what objectives are to be achieved

– So we are willing to believe anything!

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We Seem Willing to Believe that:We Seem Willing to Believe that:

• Staple crops are not sufficiently important to have emergency reserves(oil is sufficiently important)

• Less than full use of farm productive capacity is inefficient (SOP to not use full capacity in other sectors—currently at 77% of capacity)

• Farmers can extract billions of dollars for commodity programs—so they do

• Hence, commodity programs are a waste– do away with them or– pay out the money on some other basis

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What for, Farm Programs? What for, Farm Programs? • To address self-correction problems• Not to enrich agribusinesses• Not to provide cheap feed to livestock

integrators• Not to dump commodities on international

markets• Not to crash commodity prices in

developing countries• Not to be a mark for entrepreneurs to pull

government money through loopholes

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Ag Policy Did Not Start in 1932Ag Policy Did Not Start in 1932

• 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 often results in production outstripping demand

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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 US taxpayers

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

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Why Chronic Problems In Ag?Why Chronic Problems In Ag?

• Lower prices should automatically correct itself– Consumers buy more– Producers produce less– Prices recover—problem solved!

• But in agriculture lower prices do not solve the problem– Little self-correction on the demand side

• People do not consume significantly more food

– Little self-correction on the supply side• Farmers do not produce significantly less output

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What Was That Again?What Was That Again?

• Supply and demand characteristics of aggregate agriculture cause chronic price and income problems– On average supply grows faster than

demand (We will discuss ethanol later)

– Agriculture cannot right itself when capsized by low prices

– (Always year-to-year random variability)

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When Policy of PlentyWhen Policy of Plentyis Too Muchis Too Much

• Given agriculture’s inability to quickly adjust to overproduction and low prices, there are 3 policy strategies:– Supply side – Demand side– Just pay money

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Short-term and Long-term Short-term and Long-term Economic Setting For Ag.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

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Are High Prices the Future?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 bushes 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

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Logical ImplicationsLogical 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

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Short-Term ConsiderationsShort-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

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Short-Term ConsiderationsShort-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

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Long-Term ConsiderationsLong-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

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Long-Term ConsiderationsLong-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

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Long-Term ConsiderationsLong-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

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Greatest Short-Term RiskGreatest 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

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1995 (4.6%)

Uncharted TerritoryUncharted Territory

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

1938 1947 1958 1968 1978 1988 1998 2008

Year ending commercial stocks-to-use ratio for US corn1938-2005 (actual), 2006-2016 (2007 USDA Baseline)

1947 (4.9%) 1983 (5.4%) 2009 (4.5%)

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Greatest Short-Term RiskGreatest 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

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Short-Term Impact of $6 CornShort-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

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Greatest Long-Term RiskGreatest 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

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On Knife’s EdgeOn 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”

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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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