1. APCA Maize and Ethanol: Are the Current High Prices Sustainable? Harwood D. Schaffer University of Tennessee Agricultural Policy Analysis Center FENALCE Bogotá, Colombia June 21, 2007

2. APCA Recent Corn Prices

3. APCA What Brought This About? In one word—ETHANOL –US corn-based ethanol production is booming Farmer investment Rising oil prices Elimination of MTBE as gasoline oxygenate –USDA projects 12 billion gallons by 2016 4.3 million bushels of corn, up from 1.6 million bushels in 2005

4. APCA Projected Ethanol Demand Source: UDSA 2007-2016 Projections

5. APCA Corn Year-Ending Stock Levels Million Bushels US year-ending stock levels for corn, 1938-2005 actual, 2006-2016 USDA baseline Actual Projected

6. APCA 1995 (4.6%) Uncharted Territory Year ending commercial stocks-to-use ratio for US corn 1938-2005 (actual), 2006-2016 (2007 USDA Baseline) 1947 (4.9%)1983 (5.4%)2009 (4.5%)

7. APCA Projected Corn Price Source: UDSA 2007-2016 Projections

8. APCA How Realistic Is This? We have seen price movements like this four times since 1900 –World War I –World War II –Russian grain import in the 1970s coupled with petro-dollar financed imports by developing countries –Ethanol-fueled price boom What were the results?

9. APCA 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

10. APCA 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

11. APCA Why Chronic Problems In Ag? Technology typically expands output faster than population and exports expand demand –Historically, 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

12. APCA Change in Non-US Crop Acreage

13. APCA Why Chronic Problems In Ag? Lower prices should automatically correct itself—Econ 101 says so –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

14. APCA US Corn Price US Corn Price Stochastic Analysis Baseline Mean USDA Deterministic Baseline

15. APCA US Corn Price US Corn Price Stochastic Analysis Baseline Mean 50%

16. APCA US Corn Price US Corn Price Stochastic Analysis Baseline Mean 50% 80%

17. APCA US Ethanol Corn Demand US Ethanol Corn Demand Stochastic Analysis 50% 80% Baseline Mean USDA Deterministic Baseline

18. APCA Causes of High Prices Shortfall in US production –50% of last ten years production fell by over 300 million bushels from previous year Cushioned by stocks over 1 billion bushels –In baseline stocks remain below 800 million bushels Shortfall in non-US production

19. APCA 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 US policymakers have misunderstood role of US in bulk agricultural export markets

20. APCA What About Exports? Billion Dollars Bulk Exports Total Agricultural Exports

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

22. APCA US Exported Acres Percentage of US acres used to produce crops for export have declined from a high of 43 percent in 1980 and 1980 to 33 percent for 2006 % of US Acres Producing Crops for Export

23. APCA Net Export Acreage for 8 Major Crops Million Acres 103.6 76-85 Average 86.8 86-95 Average 77.0 96-02 Average

24. APCA Argentine Soybean Complex Exportable Surplus and Exports

25. APCA Brazilian Soybean Complex Exportable Surplus and Exports

26. APCA What About 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 Thousand Metric Tons US Exports Developing Competitors’ Exports

27. APCA China Net Corn Trade China Net Corn Trade Comparison between 1996 and 1999 FAPRI projections, 2007 USDA projections and USDA PS&D actual 1996 FAPRI Projections of Net Corn Trade Actual Net Corn Trade 1999 FAPRI Projections of Net Corn Trade Corn Exports Corn Imports Mil. Bu. What’s a billion bushel error among friends? What do you think $4.00 corn will do to China’s corn production and exports? 2007 USDA Projections of Net Corn Trade

28. APCA What About Exports? Why have exports not fulfilled US 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

29. APCA US Role in Exports US is the oligopoly price leader –20+ years of US policies to reduce US prices to “World Price” are futile –US price is the “World Price” –US has been playing limbo with itself US is the residual supplier US is the world’s “Ever-Normal Granary”

30. APCA Causes of Low Prices Random high US production –Prices are very sensitive –Any increase in year-ending stocks could send prices plummeting Predictable increases in non-US production –Acreage in Brazil, India, Colombia –Increases in yields due to technology adoption

31. APCA Causes of Low Prices Low crude oil prices –Puts pressure on ethanol prices –Reduce incentives to bring on new plants –Existing plants may reduce production or go off-line for periods of time

32. APCA US Corn Price US Corn Price Stochastic Analysis

33. APCA Causes of Low Prices Extremely high prices –Increase the rate at which resources flow into corn production Additional savannah land Return to production of land in some states of Former Soviet Union Yield enhancing technologies –15 to 18 tonnes/per hectare corn yields

34. APCA Causes of Low Prices Cellulosic ethanol production –More cost efficient than corn-to-ethanol production –Conversion of front end of current corn-to- ethanol plants Sources of cellulose –Forest waste products –Corn stover –Switchgrass, hybrid poplars and willows –Urban waste

35. APCA Feedstock for Energy* * Does not include forest harvest

36. APCA Worldwide Excess Capacity Will Again Be a Long-run Problem (Despite Ethanol) Dramatic yield increases in other countries (and in this country) –Cargill, Monsanto, John Deere, etc., etc., etc. Acreage once in production will be brought back in –Russia, Ukraine and others New Acreage –Brazil –China

37. APCA What Do You Think? Given the history: –World War I –World War II –Russian grain import in the 1970s coupled with petro-dollar financed imports by developing countries Given the analysis I have presented Will the ethanol-fueled price boom be different?

38. APCA Policy for All Seasons Realistic about the way aggregate agricultural markets work Takes into account consumer behavior Takes into account producer behavior Recognizes limited ability of exports to rebalance aggregate agricultural markets Recognizes demand growth seldom outstrips supply growth for long

39. APCA Corn Price Entry $2.80, Release $4.48 Baseline Mean 50%80% Run Mean

40. APCA Thank You

41. APCA 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 Weekly Policy Column

42. APCA Ethanol Demand Entry $2.80, Release $4.48 50% 80% Baseline Mean A B C D Run Mean

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