Farm Policy During the Ethanol Era

1
Farm Policy During the Ethanol Era

• Daryll E. Ray
• University of Tennessee
• Agricultural Policy Analysis Center

Western Wisconsin Ag Lenders Conference
Menomonie, Wisconsin January 11, 2007
2
Lost Our Policy Bearings

• Without a clue and highly impressionable
• When it comes to farm policy, we seem not to have
  a clear idea about anything including
• what the problem is or
• what objectives are to be achieved
• So we are willing to believe anything!

3
We Seem Willing to Believe that

• Staple crops are not sufficiently important to
  have emergency reserves(oil is sufficiently
  important)
• Less than full use of farm productive capacity is
  inefficient (SOP to not use full capacity in
  other sectorscurrently at 77 of capacity)
• Farmers can extract billions of dollars for
  commodity programsso they do
• Hence, commodity programs are a waste
• do away with them or
• pay out the money on some other basis

4
What for, Farm Programs?

• To address self-correction problems
• Not to enrich agribusinesses
• Not to provide cheap feed to livestock
  integrators
• Not to dump commodities on international markets
• Not to crash commodity prices in developing
  countries
• Not to be a mark for entrepreneurs to pull
  government money through loopholes

5
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

6
Characteristics of Ag Sector

• Agriculture is different from other economic
  sectors.On the demand side
• With low food prices
• People dont eat more meals a day
• They may change mix of foods
• Aggregate intake remains relatively stable

7
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 dont and cant afford to reduce their
  application of fertilizer and other major
  yield-determining inputs
• Who farms land may change
• Essential resourcelandremains in production in
  short- to medium-run

8
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

9
Why Chronic Problems In Ag?

• Lower prices should automatically correct itself
• Consumers buy more
• Producers produce less
• Prices recoverproblem 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

10
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)

11
Historicallythere have beenTwo 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

12
When Policy of Plentyis Too Much

• Given agricultures inability to quickly adjust
  to overproduction and low prices, there are 3
  policy strategies
• Supply side
• Demand side
• Just pay money

13
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

14
Critical Changesin 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

15
Exports, Exports, Exports

• For the last quarter century, exports have been
  heraldedand continue to be by someas crop
  agricultures 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?

16
China Net Corn TradeWhat We Expected During
Debate of 1996 FB
Mil. Bu.
1996 FAPRI Projections of Net Corn Trade
Corn Imports
Corn Exports
1996 FAPRI Projections
17
China Net Corn TradeWhat We Got
Mil. Bu.
1996 FAPRI Projections of Net Corn Trade
Corn Imports
Corn Exports
PSD Actual Net Corn Trade with 2004 Projection
18
What About Exports
US Domestic Demand
US Population
US Exports
Adjusted for grain exported in meat
Index of US Population, US Demand for 8 Crops and
US Exports of 8 Crops 19791.0
19
What About Exports?
Corn Exports
Corn Price
Thousand Metric Tons
Dollars per Bushel
20
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

21
Implications for the WTO

• Market access may not be sufficient
• May benefit beef and Anjou pears
• What about crops covered by the Farm Bill?

22
What About Exports?
US Exports
Thousand Metric Tons
Developing Competitors 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
23
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

24
From My Perspective

• Crop exports did not deliverwill not deliver
• For crop agriculture, timely freemarket
  self-correction is a fantasy
• Emerging agricultural powerhouses Excess
  capacity will be a worldwide endeavor in the
  future
• Farmers version of the Concentration game Buy
  inputs from few suppliers and sell output to few
  buyers
• Current US farm programs are not sustainable
• US policy alternatives The preferable (well,
  preferable in my opinion), the possible and the
  likely

25
From My Perspective

• Crop exports did not deliverwill not deliver
• For crop agriculture, timely freemarket
  self-correction is a fantasy
• Emerging agricultural powerhouses Excess
  capacity will be a worldwide endeavor in the
  future
• Farmers version of the Concentration game Buy
  inputs from few suppliers and sell output to few
  buyers
• Current US farm programs are not sustainable
• US policy alternatives The preferable (well,
  preferable in my opinion), the possible and the
  likely

26
Acreage Response toLower Prices?
Four Crop Acreage
Four Crop Price Adjusted for Coupled and
Decoupled Payments
Index (1996100)
Four Crop Price Adjusted for Coupled Payments
Four Crop Price

• Between 1996 and 2000
• Aggregate US corn, wheat, soybean, and cotton
  acreage changed little
• While prices (take your pick) dropped by 40, 30
  or 22

27
Acreage Response toLower Prices?
Four Crop Acreage
Index (1996100)
Four Crop Price

• Since 1996 Freedom to Farm
• Aggregate US corn, wheat, soybean, and cotton
  acreage changed little despite a wide fluctuation
  in price

28
Canada Farmland Planted
Other Oilseeds
Other Grains
Canola
Million Acres
Barley
Wheat

• Canada reduced subsidies in 1990s
• Eliminated grain transportation subsidies in 1995
• Crop mix changed, total acreage remained flat

29
Australia Farmland Planted
Oilseeds
Coarse Grains
Million Acres
Wheat

• Australia dramatically reduced wool subsidies in
  1991
• Acreage shifted from pasture to crops
• All the while, prices declined

30
From My Perspective

• Crop exports did not deliverwill not deliver
• For crop agriculture, timely freemarket
  self-correction is a fantasy
• Emerging agricultural powerhouses Excess
  capacity is likely to rear its ugly head in the
  future
• Farmers version of the Concentration game Buy
  inputs from few suppliers and sell output to few
  buyers
• Current US farm programs are not sustainable
• US policy alternatives The preferable (well,
  preferable in my opinion), the possible and the
  likely

31
Worldwide Excess Capacity May Again Be a Long-run
Problem (Despite Ethanol)

• Dramatic yield increases in other countries (and
  in this country)
• Cargill, Monsanto, John Deere, etc., etc., etc.
• Acreage once in production will be brought back
  in
• Russia, Ukraine and others
• New Acreage
• Brazil
• China

32
From My Perspective

• Crop exports did not deliverwill not deliver
• For crop agriculture, timely freemarket
  self-correction is a fantasy
• Emerging agricultural powerhouses Excess
  capacity is likely to rear its ugly head in the
  future
• Farmers version of the Concentration game Buy
  inputs from few suppliers and sell output to few
  buyers
• Current US farm programs are not sustainable
• US policy alternatives The preferable (well,
  preferable in my opinion), the possible and the
  likely

33
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)

34
Monsantos Control of Crop Genetics

• In 2004, Monsantos technology accounts for
• 85 of all U.S. soybean acreage
• 45 of all U.S. corn acreage
• 76 of all U.S. cotton acreage
• 84 of all U.S. canola acreage was genetically
  modified

Source Center for Food Safety
35
Control of U.S. Grains and Oilseeds

• Cargill, ADM, and Zen-Noh export 81 of U.S. corn
• ADM, Cargill, Bunge, and AGP control 80 of the
  U.S. soybean crush
• Horizon (Cargill and CHS), ConAgra, Cargill, and
  Cereal Food Processors control 63 of flour
  milling in the U.S.

Source Mary Hendrickson
36
From My Perspective

• Crop exports did not deliverwill not deliver
• For crop agriculture, timely freemarket
  self-correction is a fantasy
• Emerging agricultural powerhouses Excess
  capacity is likely to rear its ugly head in the
  future
• Farmers version of the Concentration game Buy
  inputs from few suppliers and sell output to few
  buyers
• Current farm programs provide large share of
  income
• US policy alternatives The preferable (well,
  preferable in my opinion), the possible and the
  likely

37
Government Payments as a Percent of Net Farm
Income
38
Government Payments as a Percent of Net Farm
Income
39
Government Payments as a Percent of Net Farm
Income
40
Government Payments as a Percent of Net Farm
Income
41
From My Perspective

• Crop exports did not deliverwill not deliver
• For crop agriculture, timely freemarket
  self-correction is a fantasy
• Emerging agricultural powerhouses Excess
  capacity is likely to be a worldwide creation in
  the future
• Farmers version of the Concentration game Buy
  inputs from few suppliers and sell output to few
  buyers
• Current farm programs provide large share of
  income
• US policy alternatives and premises

42
In Times of Exploding Demand

• The current program will work
• Environmental payments will work
• Rural developments will work
• Any farm The current program will work
• NO program at all will work
• But times of exploding demand always come to an
  end

43
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 Agricultures
  Long-Standing ProblemA Policy for all Seasons

44
Policy-Option Premise Check

• Export Markets/Global Trade
• Mechanisms (and What We Have Done)
• eliminate all price floors
• use the bully-pulpit to generate high- export
  expectations
• extend trade liberalization
• Apparent Premises (faulty in my view)
• Export markets are very price responsive
• Competing exporters will reduce production in the
  face of low prices
• Importing countries prefer to import rather than
  produce it themselves
• US agriculture will be a major beneficiary of
  trade liberalization

45
15 Crop Exports for US and Developing Competitors
US
Thousand Metric Tons
Developing Competitors
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
46
Policy-Option Premise Check

• Insurance/Farm Saving Accounts
• Mechanism
• Government subsidies to commercial insurers or
  provides tax breaks for farmer savings accounts
• Apparent Premises (faulty in my view)
• Low prices are a random event and seldom occur in
  a string of years
• Growth in supply and demand are equal
• Possible Implications
• Income protection ratchets down
• Land prices would go down
• Supplemental payments from Congress would
  skyrocket

47
Policy-Option Premise Check

• Conservation/Environmental/Rural Development
• Mechanism Shift commodity payments to various
  kinds of conservation, environmental or rural
  development activities
• Apparent Premises (faulty in my view)
• Commodity programs address no problem
• Better to have a broader group of farmers receive
  the money to achieve important (read real)
  objectives
• Farmers believe environmental degradation is a
  central concern and/or all that matters are WTO
  rules
• Payments in one form are as good as another
• Implications
• Does not address the long-standing market
  characteristics of aggregate crop agriculture
• Could win a Farm Bill battle but loose the
  credibility war

48
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

49
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
• Both these provide a means of dealing with supply
  and demand inelasticity

50
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 dont pay
  farmers not to farm
• Provide a needed energy source not unlike the
  horsepower of times past

51
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

52
U.S. Dependence on Foreign Oil
Oil Reserves
Rate of Use
25
7
7
3
3
The United States uses more oil than the next
five highest-consuming nations combined.
3
3
3
3
3
3
Updated July 2005. Source International Energy
Annual 2003 (EIA), Tables 1.2 and 8.1-OGJ.
Canadas reserves include tar sands.
53
U.S. Energy Consumption
Biomass Consumption Million dry
tons/year Forest products industry Wood
residues Pulping liquors Urban wood food
other process residues Fuelwood
(residential/commercial electric
utilities Biofuels Bioproducts TOTAL
44 52 35 35 18 6 190
54
Where Could It Be Grown?
Switchgrass(2014, at 50/dt)
Logging Residues
Ugarte, et al. 2006 (forthcoming). Economic
Implications to the Agricultural Sector
of Increasing the Production of Biomass
Feedstocks to Meet Biopower, Biofuels and
Bioproduct Demands.
Perlack, R.D., et al. 2005. Biomass as
Feedstock for a Bioenergy and Bioproducts
Industry Technical Feasibility of a Billion-Ton
Annual Supply.
55
Feedstock for Energy
Does not include forest harvest
56
What Was That Again?

• Crop exports did not deliverwill not deliver
• For crop agriculture, timely free- market
  self-correction is a fantasy
• Demand explosions do not last Excess capacity is
  likely to again raise its ugly head
• Carrying water for agribusinesses typically works
  against farmers best interests
• Need a policy for all seasons

57
Thank You
58
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