APCA Leveling the Policy Framework Between Crops and Biomass Daryll E. Ray, Daniel G. De La Torre Ugarte, and Harwood D. Schaffer University of Tennessee Agricultural Policy Analysis Center Presented Thursday, March 1, 2007 USDA Agricultural Outlook Forum 2007

APCAIntroduction 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

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 bushels 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

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

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

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 –Internationally there may be a decreased need for corn imports from the US

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

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

APCA Long-Term Considerations International supply response –Long-run land availability for major crops 250 mil. ac. of savannah land in Brazil Savannah land in Venezuela, Guyana, and Peru Land in former Soviet Union Arid land in China’s west Savannah land in Sub-Saharan Africa –Easy to underestimate supply growth

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

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

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

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

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

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”

APCA Thank You