1. APCA 2012 Farm Bill Setting and Agriculture’s Economic Realities Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center National Society of Accountants for Cooperatives 2011 Annual Meeting of the South Atlantic Chapter Asheville, NC June 14, 2011

2. APCA Challenging Setting for 2012 FB Debate Tight Budget –Spending capped at 2008 FB level That’s a theoretical statement actually… –Cuts are inevitable in this political environment –Even programs with a “baseline budget” from the 2008 FB –Craig Jagger, House Ag Com. Econ. Says: 37 programs have no baseline budget after 2012—a $9 billion additional cost to bring back in –Wetland and Grassland Reserve Programs –Most energy programs –SURE “permanent?” disaster program (ends after 2011) –McGovern-Dole International “School-Lunch” program Lose about $4.5 billion in “timing shifts”

3. APCA Challenging Setting for 2012 FB Debate Economic Conditions (Shades of 1996) –High prices and high incomes Farm Bill Preferences (for commodity programs) –Keep all major 2008 FB program elements –Forego “Direct Payments” to keep others –A sampling of other views: Replace subsidies with farmer savings accounts Merge existing programs into insurance products Move monies to conservation/environmental/sustainable agriculture programs No commodity programs needed with trade access

4. APCA Mammoth Exports Are a Comin’ The largest farm organization and largest commodity groups say so (again) –All that is needed is complete access to growing world markets (all would be great “only if”…) Our import customers would import more and we could better compete with our export competitors Result: US exports will grow at accelerating rates providing a permanent source of farm prosperity Crop price and income programs could be eliminated This is last in of long line of “Only Ifs”

5. APCA Historical Only Ifs… We have been told for four decades that exports are agriculture’s future –It just has not happened yet-but it will. Trust me. –Actually we were told it would happen “only if:” Support/floor prices were lowered (an only if of the 80s) Acreage reduction programs were eliminated (an 90s only if) Exchange rates were different (a periodic only if) Inflation/interest rates were not so high (only ifs in 70s and 80s) –Each time crop producers were promised that: All would be fine in the world that is US agriculture Ag prices and incomes would be stable and “high” Because importers would import more and export competitors would export less –But apparently our import customers and export competitors did not get the memo

6. APCA 1970s Syndrome Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops 1979=1.0 US Population US Exports *Adjusted for grain exported in meat US Domestic Demand Soviet Union policy change Oil money flowed to banks Banks lent money to less developed countries Those countries bought food Result: Grain import demand exploded US had capacity to capture most of the demand.

7. APCA Historical Results 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

8. APCA US and World exports of Barley, Corn, Oats, Milled Rice, and Wheat, 1980-2010 Million Metric Tons World Exports of 5 Grains US Exports of 5 Grains 261 MMT 197 MMT 107 MMT88 MMT

9. APCA US Percent of World Exports of Barley, Corn, Oats, Milled Rice, and Wheat, 1980-2010 Percent US 5 Grains Exports as % of World 54 % 34%

10. APCA US and World exports of 5 Grains and Soybeans, 1980-2010 Million Metric Tons World Exports of 5 Grains and Soybeans US Exports of 5 Grains and Soybeans 217 MMT 360 MMT

11. APCA US Percent of and World exports of 5 grains and soybeans, 1980-2010 Percent US 5 Grains and Soybean Exports as % of World 58% 37%

12. APCA US Soybean Exports Are Sure Enough Going Up Million Metric Tons US Exports

13. APCA But Brazil’s Exports Have Gone Up by More… Million Metric Tons Brazil Exports US Exports

14. APCA So the US Share of World Exports Has Dropped Precipitously Percent US Soybean Exports as % of World Exports

15. APCA US Corn Exports as a Percent of World Exports Percent

16. APCA US Wheat Exports as a % of World Exports Percent

17. APCA Post-70s: Developing-Country Competitors Did Well 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

18. APCA Before We Leave Exports… Our President has set a goal of doubling the value of US exports in 5 years Our Sec. of Agr. says don’t expect that from agriculture –Wise warning—In fact, odds are that agricultural export value will drop, not increase, in the next few years –Most of the mammoth increase in the value of exports over the last 3 years came from price not volume (will prices continue to grow?)

19. APCA US Corn, Soybeans, and Wheat – Value and Volume of Exports Volume of Exports Value of Exports Volume of Exports Billion Dollars

20. APCA Historically—there have been Two Major Components of U.S. 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

21. APCA Ag Policy Did Not Start in 1932 Historic policy of plenty –Land distribution mechanisms – 1620 onward –Canals, railroads, farm to market roads –Land Grant Colleges – 1862, 1890, 1994 –Experiment Stations – 1887 –Cooperative Extension Service – 1914 –Federal Farm Credit Act – 1916 This policy of plenty often results in production outstripping demand causing prices to be “low”

22. APCA So What’s the Problem… Lower prices should automatically correct itself –Consumers buy more –Producers produce less –Prices recover—problem solved! That will work for food and agriculture too, correct? Well…

23. APCA What’s Not Considered ? FOOD IS DIFFERENT—domestically… –A biological necessity People will pay almost anything to get what they need When prices drop, they don’t buy more People do not eat four meals a day in response to lower prices May change their mix of foods Add services (Lean Cuisine, eat out, etc.) –Aggregate domestic demand (quantity demanded) changes very little due to lower prices Little self-correction from domestic demand

24. APCA What’s Not Considered ? FOOD IS DIFFERENT—internationally… –Food is a national security issue—just like military security is to the US. So … Countries want to domestically produce as much of their food staples as possible Political considerations –Need to feed the population –Need to provide a living for millions in agriculture –Need an orderly exit of workers out of agriculture –Exports change much less than expected in response to lower prices Little self-correction from export demand

25. APCA What’s Not Considered ? FOOD IS DIFFERENT—in supply too –Constrained by biological processes— unlike most manufactured goods Limited to annual production periods Constrained by natural forces –Weather—temperature, rainfall, hail, length of day –Pests As a result, a precisely controlled production environment is not available to crop agriculture –These realities often overwhelm other influences on crop yields Little self-correction in supply within season

26. APCA What’s Not Considered ? FOOD IS DIFFERENT—in supply too –Even when prices are low across seasons… Farmers continue to plant all their acres Farmers don’t and “can’t afford to” materially reduce their use of fertilizer, seed, and other “high-yield” inputs Who farms the land may change But the essential resource—land—remains in production in the short-to-medium run –With continued low prices, farmers continue to produce—depleting equity if required Little self-correction in aggregate supply from one year to next

27. APCA Historically—there have been Two Major Components of U.S. 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 productivity gains that benefit consumers

28. APCA Policy of Plenty has changed Over Time There were farm policies that provided –Floor Prices –Supply management tools –Price stabilization and reserves Over the years and especially since 1996 –All three were eliminated –Replaced with payment programs: Coupled to price and production (Deficiency Payments) and Decoupled (Direct Payments) Partially government-funded insurance schemes The 2008 FB added another revenue based insurance scheme (ACRE)

29. APCA Current U.S. Policy Can Cause Economic Crises (can and has) When supply outruns demand: –U.S. Commodity prices plummet –U.S. grain farmers become wards of the state –U.S. livestock producers, other grain users and farm input suppliers are subsidized –Low grain prices are triggered internationally –Many countries, especially developing countries, are unable to neutralize impacts of low prices –U.S. accused of dumping

30. APCA Government Payments as a Percent of Net Farm Income

31. APCA Current U.S. Policy Can Cause Economic Crises (can and has, cont.) When demand outstrips supply: –Short-Run Crop prices explode Livestock/dairy producers go bankrupt Food prices increase at alarming rates Countries hoard rather than export Additional millions become undernourished/starve in developing countries –Long-Run High prices bring big resources into ag production worldwide Prices crash again

32. APCA You say that supply catches up with demand (and it doesn’t usually take long). Then you say that supply growth tends to exceed demand growth. But, but, but… What about all that talk… About the coming population explosion and Double-digit growth in per capita incomes in Asia, India...

33. APCA 2050 According to FAO World population to increase to near 10 billion (70 percent increase from 1995) –Nearly all the growth will be in developing countries Sub-Saharan Africa the fastest (108 percent, 910 million) South East Asia the slowest (11 percent, 228 million) Need for a doubling of cereal and meat production

34. APCA Will There Be Enough Production in the Future? In a word: Yes. But it depends on how you define “enough” Effective demand will be covered— total food requirements will not… In fact, I think excess capacity will be a worldwide problem in the future Increased acreage Increased yields and livestock efficiencies Analysts focus on demand but…

35. APCA It’s Easy to Underestimate Supply Growth Let’ begin with the US: –Investment in yield enhancing technology (300 bu./ac on best land in a few years?— national average a decade or two later??) –Potential conversion to cellulosic feedstocks for ethanol expansion –Conversion of Conservation Reserve Program Acreage and hay/pasture land to crop production

36. APCA It’s Easy to Underestimate Supply Growth International supply growth—yield –Development and adoption of drought/saline/disease resistant crops –Globalization of agribusiness: Near universal access to the new technologies world-wide Narrowing of technology and yield differentials between the developed and developing world

37. APCA It’s Easy to Under Estimate Supply Growth International supply growth—acreage –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) Supply growth has always caught and then surpassed demand growth (and it does not take long)

38. APCA Excess Capacity Plus Instability Supply-Driven Disruptions –Crop-related weather - sporadic –Natural disaster - occasional –Political instability – chronic Demand-Driven Disruptions –Unanticipated surge in demand –Usually only three or so per century (but now???) Can occur in conjunction with supply disruptions Result –Severe price bubbles will occur

39. APCA Our Recent Experience Demand surge (ethanol) –Coupled with wheat shortfall in Australia and Eastern Europe and other cereal shortfalls –Prices of storable agricultural commodities tripled Moderately increased food prices in global North Added 250 million to the 800 million already facing chronic hunger –Results Food riots in over 25 countries Protection of national food supplies via tariffs, taxes and embargoes

40. APCA This Wasn’t Supposed to Happen Commercials argued they would provide reserves –Government “interference” not needed Not to worry –Freer trade ensures availability from one country or another Neither assertion true –Commercials have no incentive to hold stocks –Supply disruptions can affect more than one supplier (country) in a given year Countries view food as a national security issue

41. APCA Policy for All Seasons A policy that –Protects farmers during “hard times” –Does not pile-on during the “good times” In contrast Direct Payments –are paid even though prices are well north of all costs –but provide insufficient help when prices are depressed In contrast Revenue Insurance –protect farmers’ “pure” profits when prices are really high –but when prices fall and remain below the cost of production, revenue insurance guarantee a percentage of those even- below-variable-cost prices A policy that –Helps ensure supply availability for domestic and export markets

42. APCA Policy for All Seasons Assume the unexpected will happen –Random policy and weather events do occur—Plan for them Establishment of Grain/Oilseed/Food Reserves –Moderate impacts of random policy and weather events by providing stable supply until production recovers –Operated/overseen by a multinational commission –Stores strategically purchased reserves

43. APCA Policy for All Seasons Keep productive capacity well ahead of demand –Public investment in yield enhancing technologies and practices Provide means to hold arable land in rotating fallow during periods of overproduction –This land could then quickly be returned to production in the case of a crisis

44. APCA Thank You

45. 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