1. APCA Ethanol Ecstasy But… Isn’t Long-Term Euphoria a Contradiction in Terms? Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Canadian Farm Business Management Council Farm Management Innovation Workshop Ottawa, Ontario May 28, 2007

2. APCA In Times of Exploding Demand –The current program 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 3.4 billion bushels for 2007—double 2005 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

4. APCA Logical Implications 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

5. APCA Short-Term Considerations US supply response –Arbitrage of crop acres in US to corn 90.5 million acres, Planting Intentions Report 12 million more acres than 2006, highest since the 1940s –Means less 7 mil. acres less soybeans and 3 mil. acres less cotton –Some land converted to cropland; more of such conversion in long-run

6. APCA Short-Term Considerations International corn supply response –Increased international production Mexico: 4 million ac. Argentina: 30 percent increase in acreage Brazil: 230 million bushels more “second season corn—80 million to be exported Canada: 20 percent increase in acreage? –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

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, Canada, 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 not consume significantly more food –Little self-correction on the supply side Farmers do not produce significantly less output

21. 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”

22. APCA Thank You