1. APCA Designing a Farm Bill While Under the Influence Designing a Farm Bill While Under the Influence of Euphoria Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center National Farmers Union 105 th Anniversary Convention Orlando, Florida March 4, 2007

2. APCA In Times of Exploding Demand –The current program will work –Environmental payments will work –Rural development payments will work –Any farm program will work –NO program at all will work The key question is: Are high prices the future?

3. APCA 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

4. APCA 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. APCA Short-Term Considerations US supply response –Arbitrage of crop acres in US to corn March Crop Intentions? 7 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. APCA 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 may alter planting response (Friday DTN story: 230 million bushels more “second season” corn in Brazil – 80 million to be exported) –Internationally there may be a decreased need for corn imports from the US

7. APCA 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. APCA 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 –Same DTN story said Brazilian corn yields will increase: »10 percent this year due to better varieties » an additional 10-20 percent with introduction of GMOs

9. APCA 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. APCA 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. 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%)

12. APCA 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. APCA 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. APCA 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. APCA 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. APCA Can’t the Market Take the Production Away That 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. 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

18. 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

19. APCA 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

20. APCA 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 consume significantly more food –Little self-correction on the supply side Farmers do not produce significantly less output

21. APCA 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)

22. APCA Historically—there have been Two 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

23. APCA When Policy of Plenty is 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

24. APCA Traditional Farm Policy Elements From 1973 (or earlier) to 1996, U.S. domestic farm policy generally included the following elements: –Base acreage –Acreage reduction / set-asides –Nonrecourse loans to support prices –Government storage of commodities –Domestic and foreign demand expansion –Target price for major crop commodities Deficiency payments for the difference between target price and market price

25. APCA Critical Changes in U.S. Policy Since 1985 there has been: –An export “mindset” –A movement away from “managing plenty” to supporting income with government payments This view culminated in the 1996 FAIR Act: –Elimination of supply control instrument: set aside program –Replaced “price floors” with government payments

26. 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 As Dr. Phil would say, “So, how has that been workin’ for ya?”

27. APCA China Net Corn Trade China Net Corn Trade What We Expected During Debate of 1996 FB: 1996 FAPRI Projections of Net Corn Trade Corn Exports Corn Imports Mil. Bu. 1996 FAPRI Projections

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

29. 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

30. APCA What about Exports? Billion Dollars Bulk Exports Total Agricultural Exports

31. APCA 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

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

33. 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

34. APCA Implications for WTO WTO negotiations drastically limit the ability to set domestic farm policy in this and other countries –Seems as if it subscribes to the “What is good for General Motors (multinationals)…” syndrome –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

35. APCA What Agribusinesses Want Volume (paid flat per bushel rate; sell inputs) Low Prices (low cost of ingredients) Price instability (superior information systems provide profit opportunities) Reduced regulation of production and marketing practices (seller-to and buyer-from beware) More market power over competitors and their customers/suppliers (Want everyone at a competitive disadvantage)

36. APCA Whose Policy Is It, Anyway?? One alternative is passively sit by, be co-opted, and let others commandeer the policy agenda –That is exactly what producers have increasingly done since the mid-eighties!!! –Crop producers get subsidy-tarred while real subsidy beneficiaries (integrated livestock producers and other users, sellers of inputs and marketers of output) remain above the fray –Tufts University estimated that the poultry and hog industries alone saved $20 billion between 1997 and 2005 because corn and soybean prices were below the cost of production Tyson saved $2.6 billion Smithfield saved $2.5 billion

37. APCA Whose Policy Is It, Anyway?? One alternative is passively sit by, be co-opted, and let others commandeer the policy agenda –That is exactly what producers have increasingly done since the mid-eighties!!! –Crop producers get subsidy-tarred while real subsidy beneficiaries (integrated livestock producers and other users, sellers of inputs and marketers of output) remain above the fray –Advocating unfettered free markets, promising export growth, or claiming a level playing field as farmers’ magic bullet, etc., ain’t workin. –And, given the realities of agriculture discussed so far, they hold little promise for the future.

38. APCA My Question to US Farmers Is: What Are You Going to Do About It? Must be a mindset change –Producers and farm and commodity organizations must refuse to carry water –Must design policies based on “the realities” not hope or wishful thinking –Work as hard to become independent as we have “worked” to become subservient in the past

39. APCA My Question to US Farmers Is: What Are You Going to Do About It? Did I mention that there must be a mindset change? Everything should be on the table. Take nothing for granted. –Previous programs: DNA testing (seeing what happens when most of them are eliminated) have exonerated most of the “failed programs of the past” –In all cases, do not contradict or ignore any of “the realities” when developing policy

40. APCA Some Policy Options Continue the Exports/Trade Liberalization Will Save Us Course – Or All We Really Need is Market Access Switch to Green Payments based on Conservation/Environmental/ Rural Development Considerations Insurance/Farm Savings Accounts Policy to Address Crop Agriculture’s Long-Standing Problem—“A Policy for all Seasons”

41. APCA From My Perspective… Farm Bill needs to address: –Unique characteristics of crop agriculture that result in chronic price/ income problems –Variation in production due to weather and disease –Trade issues like dumping –Environmental and conservation issues –Rural development beyond agriculture

42. APCA From My Perspective… The 2007/2008 Farm Bill needs to include provisions for: –Buffer stocks to provide a reserve supply of grains and seeds in the case of a severe production shortfall and to ensure orderly marketing –Inventory Management to manage acreage utilization in the same way that other industries manage their capacity—bring back the nonrecourse loan –These approaches provide means to deal with the price unresponsiveness of supply and demand

43. APCA From My Perspective… The 2007/2008 Farm Bill needs to include provisions for: –Bioenergy production to manage acreage utilization without heavy dependence on idling acreage –Keep the land in production so that we don’t pay farmers not to farm –Provide a needed energy source not unlike the horsepower of times past

44. APCA From My Perspective… Merge Ag and Energy Policy –Biofuels recycle atmospheric, not fossil, carbon –Look at crops not in food equation & NOT internationally traded –Switchgrass (as an illustrative example only) Perennial Reduced inputs Multi-year setaside Burned in boilers for electricity Converted to ethanol Less costly than present ag programs

45. APCA In Times of Exploding Demand –Any farm program will work –NO program at all will work But times of exploding demand always come to an end And crop agriculture is no better at adjusting to low prices now than decades ago Need a “Policy for all Seasons”

46. APCA Thank You