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Crop Agriculture During and After the Euphoria

Crop Agriculture During and After the Euphoria. Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center. Agrium 2007 Board Stategy Meeting Calgary, Alberta September 27, 2007. Introduction. Are high crop prices the future?

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Crop Agriculture During and After the Euphoria

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  1. Crop Agriculture During and After the Euphoria Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Agrium 2007 Board Stategy Meeting Calgary, Alberta September 27, 2007

  2. Introduction • Are high crop prices the future? • From farmers’ viewpoint, does it really matter? Even if prices collapse, self-correction happens, right? • What’s the deal with exports? Are exports going to make crop agriculture prosperous or not? • WTO implications of export situation • Implications for Agrium and input suppliers in general

  3. Are High Prices the Future? • The 2007 USDA Baseline projects: • Corn demand for ethanol • 3.4 billion bushels for 2007—double 2005 • 3.7 billion bushels in 2008 (Brock says 4.1; American Farm Bureau Fed says 4.9) • Over 10 years, baseline prices are north of $3/bu – closer to $4 most years • Very low corn stock levels by historical standards

  4. Logical Implications • US subsidies for program crops would: • Largely be replaced by market receipts • Cease to be a budgetary problem for the US Federal Government • Could even transition the direct (AMTA) payments like Congress’ 1996 intentions • Cease to be a stumbling block in trade negotiations • Continued growth for input suppliers

  5. Short-Term Considerations • US supply response—2007 crop • Acres were switched to corn • 92.9 million acres • 14 million more acres than 2006, highest since the 1940s • Meant 11 million acres less soybeans and millions of acres less cotton • Some land converted to cropland; more in long-run

  6. Short-Term Considerations • International 2007 corn supply response • Increased international production • Mexico: 4 million ac. increase • Argentina: 20 percent increase in acreage • Brazil: 230 million bushels more “second season corn—80 million to be exported • Canada: 10-20 percent increase in acreage • Internationally there may be a decreased need for corn imports from the US and Canada (now faltering yields, however)

  7. Long-Term Considerations • US supply response • Conversion of pasture and grassland—some in CRP?—to crop production • Acceleration of yield enhancing technology (continued seed advances, controlled release nutrients) • Corn—300 bu./ac. on best land?? • Soybeans—100 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, input-use, and thus yield differentials between US/Canada and the rest of the world

  9. Long-Term Considerations • International supply response • Long-run land potentially available 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 • The 2007 USDA baseline shows a string of years in which corn carry-out stocks are projected to be below 6 percent of utilization • 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 • The 2007 USDA baseline shows a string of years in which corn carry-out stocks are projected to be below 6 percent of utilization • Recent historic range has been 10% to 20% • In five of the last 10 years, we have seen corn production fall by 300 mil. bu. from the previous year but also 20% drop in earlier years (’83 ’88 ’93) • A shortfall of that magnitude in an era of tight supplies would trigger skyrocketing prices • $6 to $8 or more per bushel (talkin’ season average)

  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; add cropland • US (road-ditch to road-ditch?) • Brazil, Argentina, Mexico, Canada, and elsewhere

  14. Greatest Long-Term Risk • Acreage and yields greatly increase worldwide—just a question of how fast • With $6 to $8 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

  16. Can’t the Market Take-ith Away The Production It Brought Forth? • 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 consume significantly more food • Little self-correction on the supply side • Farmers do not produce significantly less output

  17. Characteristics 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

  18. Characteristics 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

  19. Why Chronic Problems In Ag? • Supply and demand characteristics of aggregate agriculture cause chronic price and income problems • On average supply grows faster than demand (Yes, even “after the lovin” of the ethanol craze) • Agriculture cannot right itself when capsized by low prices. Self-correction does not readily occur. Why? Well because: • You won’t eat more meals each day • Farmers won’t quit growing so much • (Always year-to-year random variability)

  20. Exports, Exports, Exports • For the last quarter century, exports have been heralded—and continue to be by some—as crop agriculture’s salvation • Exports is the production safety valve that can rebalance agricultural markets • Exports will grow at accelerating rates • As Dr. Phil would say, “So, how has that been workin’ for ya?”

  21. China Net Corn TradeWhat We Expected During Debate of 1996 FB: Mil. Bu. 1996 FAPRI Projections of Net Corn Trade Corn Imports Corn Exports 1996 FAPRI Projections

  22. China Net Corn TradeWhat We Got: Mil. Bu. 1996 FAPRI Projections of Net Corn Trade Corn Imports Corn Exports PS&D Actual Net Corn Trade with 2004 Projection

  23. China Net Corn TradeComparison between 1996 and 1999 FAPRI projections, 2007 USDA projections and USDA PS&D actual Mil. Bu. 1996 FAPRI Projections of Net Corn Trade Corn Imports 1999 FAPRI Projections of Net Corn Trade 2007 USDA Projections of Net Corn Trade Corn Exports Actual Net Corn Trade Overtime, the expectation remains—just further into the future.

  24. Total Agricultural Exports Billion Dollars Bulk Exports What About Exports?

  25. What About Exports US Domestic Demand US Population US Exports *Adjusted for grain exported in meat Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops 1979=1.0

  26. What About Exports? • Why have exports not fulfilled our hopes? • Export demand is braked by issues of food security/food sovereignty • International crop production is impacted by: • Increased acreage: Stage of development • Yield advances: World-wide distribution of technology • US role as the leading nation in the world • Politically, economically, technologically, and militarily • And in prices too: Others price off US prices

  27. Implications for the WTO • Market access may not be sufficient • May benefit beef and Anjou pears • What about crops covered by the Farm Bill?

  28. What About Exports? US Exports Thousand Metric Tons Developing Competitors’ Exports Developing competitors: Argentina, Brazil, China, India, Pakistan, Thailand, Vietnam 15 Crops: Wheat, Corn, Rice, Sorghum, Oats, Rye, Barley, Millet, Soybeans, Peanuts, Cottonseed, Rapeseed, Sunflower, Copra, and Palm Kernel

  29. Implications for WTO • WTO negotiations drastically limit the ability to set domestic farm policy in the US, Canada and other countries • To me: • The whole WTO process shows a complete lack of understanding of the unique characteristics of food and agriculture • Food security and other social objectives often trump economic considerations in the case of food and agriculture • Agribusiness will benefit but not necessarily major-crop farmers in the US or Canada • With increased/complete access achieved, international commodity markets may greatly/significantly increase trade • But access—while necessary—may not be sufficient to generate the expected benefits to grain producers in the US and Canada

  30. Historically—there have beenTwo Major Components of Farm\Commodity Policy • Policy of Plenty: Ongoing public support to expand agricultural productive capacity through research, extension and other means • Policy to Manage Plenty: Mechanisms to manage productive capacity and to compensate farmers for consumers’ accrued benefits of productivity gains

  31. Implications for Agrium • Profitable economic environment ahead • Short-run: Growth in grain demand will keep prices at profitable levels for crop farmers • Extreme volatility (Demanders truly living on the edge) • Longer-term: Grain supply growth WILL catch and surpass demand growth—“It’s just a matter of time” • Presumptuous comment section: • Input market is saturated in US/Canada (increase retail share??) • Mammoth opportunities internationally long-to-longer term (but tread carefully)

  32. Thank You

  33. 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

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