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Economic Outlook for American Agriculture

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Title: Economic Outlook for American Agriculture


1
Economic Outlook for American Agriculture
  • Robert L. Thompson
  • Gardner Professor of Agricultural Policy
  • University of Illinois at Urbana-Champaign
  • January 16, 2007

2
2006 Farm Income
  • Total value of farm production 279.5 billion
  • crops up 7.1 billion
  • livestock down 4.7 billion
  • government payments down 7.8 billion
  • forestry services up 1.7 billion
  • With input costs up 11 billion, net farm income
    down from 73 bil. in 2005 to 58.9 bil. in 2006.
  • Total direct government payments down from 24.3
    billion in 2005 to 16.5 billion in 2006
  • With rapid increase in land prices, farm sector
    equity increased 7 over 2005, with debt-to-asset
    debt-to-equity ratios down.

Source ERS Jan. 12, 2007 report
3
Exports Are Critical to Ag Profitability
  • American agriculture exports the production of
    one out of three acres of cropland. These exports
    generate 1/4 of farm sales revenue.
  • In 2006 U.S. ag exports totaled 68 billion
  • Grains oilseeds 28.4 billion
  • Horticultural products 16.7 billion
  • Animal protein 13.2 billion
  • Cotton 4.9 billion
  • Most important markets
  • Canada 18
  • Mexico 16.5
  • Japan 12
  • China 11
  • E.U. 10

4
General Economy
  • Current economic expansion over 5 years old
  • Deceleration in 2nd half of 2006 due to declines
    in housing motor vehicle sectors the latter
    has worked inventories down, but not housing
  • Consumer spending holding up well despite
    negative wealth effect of housing slowdown
  • Drop in energy prices increased consumer
    purchasing power
  • Indices of consumer confidence rising
  • Business profits have been high, lifting stock
    prices encouraging business expansion.
  • Unemployment rate lowest in 5 years job creation
    strong real wages rising

5
General Economy (contd)
  • Soft landing may be over growth accelerating
  • Core inflation seems to be under control
  • But Fed will be cautious in changing discount
    rate
  • Risk of rise in energy food prices
  • Strong economic growth in other countries, e.g.
    EU, Japan, China and India, providing strength to
    U.S. exports
  • Americans spending more than their incomes
  • Build-up of consumer debt worrisome with higher
    interest rates
  • 100 of the U.S. Government debt associated with
    Federal budget deficit is sold overseas,
    principally to governments of China and Japan
  • U.S. dollar sliding and likely will fall further

6
Ethanol Driving Ag Outlook
  • Ethanol industry growing rapidly with large
    subsidies, mandated use, tax exemptions, and
    protection from imports from lower-cost suppliers
  • This increased industrial demand for corn has
    resulted in higher prices exports will fall.
  • Higher feed grains prices reducing profitability
    of U.S. livestock and poultry industries.
  • How long before we have technology for producing
    ethanol from cellulosic feedstocks?
  • Farmers and politicians are more enamored with
    growth in ethanol and other biofuels than with
    exports and WTO trade negotiations.

7
Growth in Ethanol Industry
  • 2000 1.6 billion gallons of ethanol produced
    used 6 of U.S. corn harvest
  • 2006 5 billion gal. used 20 of corn harvest
  • Now 110 ethanol plants are operating w/total
    capacity of 5.4 billion gal. 73 more are under
    construction plus 8 more expanding
  • This will bring capacity to 11.4 billion gal. by
    2008-09
  • Energy Bill of 2005 mandated 7.5 billion gal. of
    biofuels by 2012

8
Corn Feed Grains
  • Rapid growth in use in ethanol production has
    driven up price to record levels to bid corn away
    from exports and livestock poultry feeding and
    to bid land away from soybeans, wheat, etc. in
    2007.
  • U.S. corn exports may go to zero within a few
    years
  • Jan. 12 crop report reduced size of 2006 corn
    crop by 210 million bu. when supply-demand
    balance was already tight implies stocks below
    pipeline level drove corn price even higher, and
    took wheat and soybeans along with it.
  • How many mill. acres will corn pull from other
    crops? How fast can corn yields increase?

9
Soybeans Oilseeds
  • Record 2006 U.S. soybean crop in 2006
  • Strong export demand China is importing half of
    world soybean trade
  • Growing use of soybean oil and other edible oils
    in biodiesel (rapid growth in Europe) will
    increase price of edible oils, raising value of
    oil fraction.
  • Meal fraction will confront competition from high
    protein ethanol byproduct, distillers dried
    grain, especially in ruminant feeding.
  • Soybean price will have to rise enough to
    stimulate expansion of South American soybean
    acreage to compensate for loss of U.S. soybean
    acreage to corn.

10
Livestock Poultry
  • Huge uncertainty from rising price of feed
  • Likely severe drop in profitability of pork and
    poultry operations due to much higher feed costs
  • Beef dairy feed costs will also rise, but to
    the extent that they can use significant amounts
    of ethanol byproduct (DDGS) in rations, theyll
    be less severely impacted.
  • Expect higher meat prices to consumers as higher
    feed costs get passed through
  • Immigration reform essential to meat packing
    industry.

11
Exports Important to U.S. Meats
  • U.S. exports 13 of its pork production (16th
    consecutive record volume exported)
  • U.S. 2nd largest exporter after EU
  • Feed cost advantage also weak dollar
  • U.S. poultry exports (12-15 of production)
    essential to profitability because U.S. exports
    largely dark meat (leg quarters) which have low
    value in U.S. domestic market
  • Some recovery in beef exports after devastating
    impact of BSE scare shows need for a rules-based
    international trading system with tough SPS
    regulations grounded in sound science.
  • World price of feed will be everywhere higher.
    Net effect on U.S. competitiveness in meats?

12
Wheat
  • Sharp reduction in U.S. and world wheat
    production in 2006. (Australian drought)
  • U.S. winter wheat seeding increased, but will
    some be ripped out to plant corn?
  • Expect recovery of world wheat production in
    2007. Will prices drop again after recovery, or
    will they have to stay high to keep land from
    moving from wheat into corn?
  • More drought-tolerant corn varieties are coming.
  • Will we see more wheat feeding than previously in
    the U.S.?

13
Dairy
  • Global demand for dairy products growing rapidly
    world dairy prices at historic highs
  • Lower U.S. price of milk in 2006
  • Large increases occurring in production per cow
  • Natl. ave. about to break through 20,000
    lbs./cow/yr.!
  • Rapid growth of large, low unit cost of
    production herds that are internationally
    competitive (w/some geographic shifts to states
    with less onerous regulatory costs)
  • What future for small, high cost producers?
  • Whither MILC program?

14
Fruits Vegetables
  • Growing demand from increased consumer health
    consciousness and 2005 revision of USDA Dietary
    Guidelines
  • Rapid increase in U.S. imports of fruits,
    vegetables, wine beer has reduced ag trade
    balance almost to zero.
  • Consumers want diversity and 365-day per year
    availability in supermarkets.
  • Many U.S. export successes, but also keen
    competition from new exporters with lower labor
    costs, e.g. China
  • Immigration reform critical to future
    competitiveness
  • Food safety concerns after incidents in 2006

15
Cotton Rice
  • Will high prices of corn and soybeans pull acres
    out of rice and/or cotton?
  • Profitability and ability to compete in export
    market more dependent on government support than
    other commodities (higher payments per acre and
    per farmer).
  • Will 2007 farm bill reduce this support? Will
    there be a buy-out or buy-down?
  • U.S. has not yet made all the changes mandated in
    WTO Brazil cotton decision. Rice program also
    vulnerable to challenge in WTO.

16
Changing World Ag Trade
  • Stagnant food demand in high income countries
    rapid growth in developing countries as middle
    class grows
  • more through supermarkets (with global supply
    chain)
  • Larger percent of world production traded
  • Trade in high value processed products growing
    faster than in commodities
  • Explosion of commodity exports from South
    America expect more from Eastern Europe and
    Former USSR, esp. Ukraine

17
European Union
  • Shrinking population
  • Has as rapid growth of biodiesel as U.S. ethanol
  • Ag policy reforms underway are real
  • even sugar
  • Eliminating all export subsidies will force
    further reform of domestic ag policy
  • e.g. dairy (already planning to get rid of
    quotas)
  • Tough environmental and animal welfare
    regulations significantly raise costs
  • All battery cages to be banned from 2007
  • Rejection of ag biotech setting back its
    competitiveness
  • Aggressive use of SPS barriers to ag imports

18
Eastern Europe Former Soviet Union
  • Severely declining populations
  • Excellent soils in Ukraine and parts of FSU mean
    great ag productive potential
  • Weak applied research
  • Inadequate property rights (especially farm
    land), contact sanctity, rule of law
  • Slow development of necessary ag input and
    product markets

19
East and South Asia
  • Huge population with large numbers of people at
    very low income levels mean huge future food
    demand growth
  • Has much larger percent of worlds population
    than arable land, so food demand likely to outrun
    supply potential

20
China
  • The 800-pound gorilla in all ag and mineral
    commodity markets today
  • Rapid economic growth has generated rapid growth
    in meat consumption, but half of population still
    earns less than 2/day.
  • Average farm size less than 1 acre leads to
    extensive rural poverty
  • To reduce rural poverty (and associated political
    stresses), government abandoned grain
    self-sufficiency objective letting farmers grow
    labor-intensive higher value per acre crops e.g.
    fruits, vegetables animal agriculture. Exporting
    them.
  • Has largest number of pigs in world.

21
India
  • Projected to have 250 million more people than
    China by 2050.
  • Economy is starting to move already 250 million
    middle-class consumers, but also 500 million
    living on less than 1 per day!
  • Huge dairy product consumption has more dairy
    cows than any other country
  • Huge and growing poultry product consumption
  • Most people who dont eat meat dont by reason of
    poverty, not religion.

22
New Zealand Australia
  • After New Zealand went cold turkey on ag
    subsidies, agriculture never more profitable nor
    more entrepreneurial
  • Reform also in Australia, but more gradual with
    buyouts
  • Dairy sectors of both have thrived both have
    been extremely successful in penetrating Asian
    markets
  • Fonterra even markets US dairy products in world
    market
  • Neither is very big, so will never be marginal
    agricultural exporter (Australia has large land
    area, but most is desert.)

23
Canada
  • North-South integration of North American markets
  • NAFTA
  • Reform of rail freight rates
  • Dairy and poultry marketing quotas
  • Attracting sugar-using industries from U.S.
  • Canadian Wheat Board reform?
  • WTO case against U.S. corn program?
  • Revenue insurance programs possible model for US
    ag policy reform?

24
Middle East North Africa
  • Can never be self-sufficient in food due to water
    scarcity
  • Israeli RD provides state of the art
    technology in horticultural crops and efficient
    water use for entire Mediterranean Basin
  • Can only afford to use water on highest value
    crops
  • What future role of Mediterranean countries in
    world fruit and vegetable trade?

25
South America
  • One of only 2 regions with more land that can be
    brought into production
  • Brazilian agricultural export miracle
  • Soybeans frozen concentrated orange juice
  • Now pork and broilers gaining fast
  • Key role of Brazils own ag research (EMBRAPA)
  • Argentinas negative producer support (export
    taxation)
  • Brazil is world leader in ethanol to power
    automobiles (made from sugar cane)
  • How much shift into corn now likely?

26
Sub-Saharan Africa
  • Many countries are basket cases with declining
    per capita food production
  • Corruption bad governance are main reasons for
    agricultures general underperformance
  • Underinvestment in rural infrastructure and
    education and agricultural research
  • There are a few success stories of global supply
    chains, e.g. vegetables cut flowers to Europe
  • South Africa providing regional leadership
  • China active in Africa locking up access to both
    agricultural and mineral commodities
  • Could Southern Cone become the next Brazil?

27
Larger Fraction of World Food Production to Move
Through Trade
  • The worlds arable land and fresh water are not
    distributed around in the world in the same
    proportions as population.
  • No way for Asia or Middle East to be
    self-sufficient in food
  • With population growth, urbanization and
    broad-based economic development, many LDCs food
    consumption to outstrip their production capacity
    and they will become larger net importers.
  • Efficient producers of feed grains and soybeans,
    wherever they are, will benefit significantly.

28
The Worlds Arable Land (left)Is Distributed
Very Differentlythan Its Population (right)
29
Projected World Food Demand
  • World food demand could double by 2050
  • 50 increase from world population growth all
    in developing countries
  • 50 increase possible if low income countries
    achieve broad-based economic growth
  • How many presently low income consumers are
    lifted out of poverty will be the most important
    determinant of the future size of world food and
    agricultural product markets.
  • The ability of low income countries to export the
    products in which they have a comparative
    advantage will constrain their ability to reduce
    poverty.

30
Projected Population Growth (U.N. medium
projections)
  • Region 2005 2050
  • World 6,465 9,076 40
  • High Income 1,211 1,236 2
  • Low Income 5,253 7,840 49
  • Africa 906 1,937 114
  • Asia 3,905 5,217 33
  • Latin America 561 783 40
  • North America 331 438 32
  • Europe 728 653 - 10

31
Dynamics of World Food Demand
  • 1.25 billion people live on less than 1 per day,
    of whom 840 million suffer under-nutrition or
    hunger
  • 3 billion (almost half of the worlds population)
    live on less than 2 per day.
  • By 2 per day, most hunger (calorie) problem is
    solved
  • Between 2 and 10 per day people eat more animal
    protein, fruits, vegetables edible oils,
    causing rapid growth in raw ag commodity demand
  • After 10 per day, people buy more processing,
    services, packaging, variety, and luxury forms,
    but not more raw ag commodities

32
Huge Market Growth Potential from Poverty
Reduction
Source World Bank. World Development Indicators
database
33
Doha Round Agricultural Agreement What Is
Possible?
  • Eliminate all forms of ag export subsidies
  • Reduce trade-distorting domestic subsidies
    (highest the most, but exceptions possible)
  • Reduce tariffs (highest the most, but exceptions
    allowed if increase minimum market access)
  • Accelerate economic growth in low income
    countries.

34
Prospects for Doha Round
  • U.S. farm organizations will support a Doha Round
    Agreement that significantly reduces
    trade-distorting domestic subsidies only if the
    Agreement includes significant increases in
    market access.
  • They put too much emphasis on increasing access
    into shrinking markets of the past and not enough
    on growing the total size of the world market.
  • Key sticking points
  • Will the E.U. be able to offer more agricultural
    market access than heretofore?
  • Will the U.S. be able to increase its offer?
  • Will Brazil and India offer more market access
    for services and non-ag manufactured goods?
  • If not, the end of the Doha Round will not likely
    come during the Bush Presidency.

35
Remember
  • The Uruguay Round Agreement on Agriculture will
    continue to set the rules of the road for
    international agricultural trade until some
    future round of negotiations changes them.
  • If this round fails or is delayed, expect more
    cases to be filed with WTO against U.S. commodity
    programs. (No Peace Clause)
  • The U.S. risks losing marketing loans, LDPs and
    CCPs though litigation and get nothing for giving
    them up. If we give them up in the round, we get
    something for giving them up.
  • The round is not so much about reducing farm
    subsidies as it is about moving them from
    trade-distorting to non-trade-distorting
    mechanisms.
  • The big potential payoff is faster economic
    growth in LDCs and, in turn, larger world demand
    for ag products.

36
Thank you.
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