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High Agricultural High Agricultural Prices: Current Reasons Prices: Current Reasons and Prospects for the and Prospects for the

FutureFutureDaryll E. Ray

University of TennesseeAgricultural Policy Analysis Center

FDIC’s US-China Rural Finance SeminarDallas, TexasMay 22, 2008

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Recent Corn PricesRecent Corn Prices

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

2005 2005-07 2006 2006-07 2007 2007-07 2008

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What are the Most Often What are the Most Often Stated Triggers?Stated Triggers?

• Ethanol– US corn-based ethanol production is

booming– Federal mandates for biofuels

• Increasing meat consumption in China and India– Middle class shift from grain-based to

meat-based diets

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Expected Ethanol DemandExpected Ethanol Demand

Source: UDSA Baseline Projections to 2017

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We Have Seen This BeforeWe Have Seen This Before

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

1965 1970 1975 1980 1985 1990 1995 2000 2005

7-74 $3.907

5

7-72 $1.267

5

10-05 $1.962

5

4-08 $6.26

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What Were the Triggers Then?What Were the Triggers Then?• Russian grain imports

– Crop failure– Decision not to liquidate cattle herds

• Petrodollar driven exports– Loans to developing countries– Used to import food to feed people

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Laying the Blame: Then & NowLaying the Blame: Then & Now• Then

– Food vs. feed—Western grain-based-meat diets

– Eat less meat so the poor of the world can have grain to eat

• Now– Food vs. fuel—US ethanol mandates– Eliminate grain-based biofuels to the poor

or the world can have grain to eat

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Looking More CloselyLooking More Closely• Low price regimen• Dismantling of government stocks• Random weather events• Reduced world-wide grain stocks• Increased demand for meat in China

– But has this put significant upward pressure on international grain prices?

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Looking More CloselyLooking More Closely• Low price regimen

– US farm program design suppressed prices

– Leaving little incentive to invest and expand production

• This was also true for corn production in China beginning in 1999(?)

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Looking More CloselyLooking More Closely• Dismantling of government stocks

– Expectation that commercials would hold any needed stocks

– Concerns about cost of government stocks programs

– Stocks discouraged by trade policies that put decisions in the hands of markets

• Random weather events– Australia and Ukraine

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World Ending-Year World Ending-Year StocksStocks

Grains: Ending Crop Year Stock LevelsSource: USDA PS&D

0

100

200

300

400

500

600

1990 1992 1994 1996 1998 2000 2002 2004 2006

Mill

ion

Met

ric T

ons

World

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Looking More CloselyLooking More Closely• Low price regimen• Dismantling of government stocks• Random weather events• Reduced world-wide grain stocks• Increased demand for meat in China

– But has this put significant upward pressure on international grain prices?

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China MeatChina Meat

25

30

35

40

45

50

55

60

65

70

1990 1992 1994 1996 1998 2000 2002 2004 2006

Mill

ion

Met

ric T

ons

Production

Consumption

Production and Consumption of Beef, Pork, and BroilersSource: USDA PS&D

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China Meat and CornChina Meat and Corn

Indexed Meat Production (Pork, Broilers, Beef) and Corn FeedSource: USDA PS&D

0.5

1.0

1.5

2.0

2.5

3.0

1990 1992 1994 1996 1998 2000 2002 2004 2006

Inde

xed

1990

=1

Meat Production

Corn Feed

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China GrainsChina Grains

Grains: Production and ConsumptionSource: USDA PS&D

300

310

320

330

340

350

360

370

380

390

400

1990 1992 1994 1996 1998 2000 2002 2004 2006

Mill

ion

Met

ric T

ons

Production

Consumption

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China GrainsChina Grains

Grains: ImportsSource: USDA PS&D

-20

-15

-10

-5

0

5

10

15

20

1990 1992 1994 1996 1998 2000 2002 2004 2006

Mill

ion

Met

ric T

ons

Imports

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China GrainsChina Grains

Grains: ExportsSource: USDA PS&D

-20

-15

-10

-5

0

5

10

15

20

1990 1992 1994 1996 1998 2000 2002 2004 2006

Mill

ion

Met

ric T

ons

Exports

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China GrainsChina Grains

Grains: Exports, ImportsSource: USDA PS&D

-20

-15

-10

-5

0

5

10

15

20

1990 1992 1994 1996 1998 2000 2002 2004 2006

Mill

ion

Met

ric T

ons

Exports

Imports

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China GrainsChina Grains

Grains: Exports, Net Exports, ImportsSource: USDA PS&D

-20

-15

-10

-5

0

5

10

15

20

1990 1992 1994 1996 1998 2000 2002 2004 2006

Mill

ion

Met

ric T

ons

Net Exports

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China GrainsChina Grains

Grains: Ending Crop Year Stock LevelsSource: USDA PS&D

0

100

200

300

400

500

600

1990 1992 1994 1996 1998 2000 2002 2004 2006

Mill

ion

Met

ric T

ons

China

World

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China ConnectionChina Connection• Yes, meat consumption per person is increasing

relatively rapidly in China• Yes, this has caused increased use of corn and

other grain (also protein meals) in China• So are China’s diet changes causing high

corn/grain prices in the US and internationally?• No! (No? Why not?)• Because China has used its own grain (production

and stocks) to produce meat• Meat and grain markets are walled within China

and have virtually no affect on outside prices

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Greatest RisksGreatest Risks• Short-term

– Weather, weather, weather: US, Brazil, China, India, elsewhere

• For example, US annual corn yields have dropped by 20 percent in years past (’83 ’88 ’93)

– High input prices• Long-term

– Acreage and yields greatly increase worldwide (not if with current prices)

– Low prices will return– Reduced farm asset values, especially land

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On Knife’s EdgeOn Knife’s Edge• Short-term object lesson?

– Need strategic reserves• A properly managed stocks 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 suggesting need for global supply management

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Long-Term ConsiderationsLong-Term Considerations• International supply response—yield

– 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—acreage

– 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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Policy for All SeasonsPolicy for All Seasons• Assume the unexpected will happen

– Random policy and weather events do occur—Plan for them

• Establishment of International Grain and Oilseed Reserve– Moderate impacts of random policy and

weather events by providing stable supply until production responds

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Policy for All SeasonsPolicy for All Seasons• Keep productive capacity well ahead of

demand– Public investment in yield enhancing

technologies and practices • Provide means to hold arable land in

rotating fallow during periods of overproduction– This land can then quickly be returned to

production in the case of a crisis

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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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