Crop Outlook and ACRE CFNB Annual Crop Insurance Update Meeting Storm Lake, Iowa February 19, 2009 Chad Hart Assistant Professor/Grain Markets Specialist chart@iastate.edu 515-294-9911 1

U.S. Corn Supply and Use $3.90 +574 -638 -686 Source: USDA-WAOB, Feb. 2009 2 2

U.S. Soybean Supply and Use -35 +50 $9.00 +0.25 $9.25 Source: USDA-WAOB, Feb. 2009

Drought in South America Source: USDA-WAOB, Feb. 2009

Argentine Drought Impacts (Early Reports) 2007 Production Corn 20.9 million tons Soybeans 46.2 million tons January 2009 USDA Estimates Corn 16.5 million tons -21% Soybeans 49.5 million tons +7% Current USDA Estimates Corn 13.5 million tons -35% Soybeans 43.8 million tons -5% January Estimates from Buenos Aires Cereal Exchange (BACE) Corn 12.3 to 13.7 million tons -35 to -41% Soybeans 34.5 to 38.2 million tons -17 to -25% Feb. Estimate from BACE Soy 40 million tons -13% Livestock consolidation is underway and with it comes lower feed demand. The recent reduction in crop prices can help ease consolidation pressure, but the economic weakness is also taking its toll on meat demand. Source: Dow Jones Newswires

Chinese Corn Production Source: USDA-WAOB, Jan. 2009

Soybeans in China Source: USDA-PSD, Jan. 2009

Livestock Adjustments Sows farrowing: Sept-Nov 2008 2.99 million, down 6% from last year Dec-Feb 2009 2.97 million, down 3% from last year Mar-May 2009 3.01 million, down 2% from last year Broiler-type eggs set: 203 million, down 7% from last year Broiler chicks placed: 166 million, down 6% from last year Feedlot placements: 2.02 million, down 5% from last year Livestock consolidation is underway and with it comes lower feed demand. The recent reduction in crop prices can help ease consolidation pressure, but the economic weakness is also taking its toll on meat demand. Sources: Various USDA-NASS reports

Ethanol Margins Source: ISU, CARD

Biodiesel Margins Source: ISU, CARD

Renewable Fuels Standard (RFS) Crop Year Billion Bushels 2008 3.57 2009 4.11 2010 4.43 Corn-based ethanol goes in as conventional biofuel. The tables show the amounts of corn needed to meet the conventional biofuel portion of the RFS with corn-grain ethanol. The Renewable Fuels Association lists current ethanol production capacity at 10.95 billion gallons, with another 2.8 billion gallons under construction. So ethanol capacity is large enough to meet the RFS for the next few years. 2009 is the 1st year for the biodiesel portion of the RFS, with 500 million gallons of biodiesel needed to meet the mandate. In 2007, we produced roughly 450 million gallons. And the U.S. has enough biodiesel capacity on the ground today to produce over 2 billion gallons of biodiesel from a variety of sources. 11 11

U.S. Blended Motor Gasoline Consumption One of the biggest factors influencing the biofuel industry is the overall usage of fuel. This graph shows the dramatic decline in projected gasoline consumption for this year and next. The higher energy prices earlier this year had a definite impact. Source: Energy Information Administration

Outside Influences (Jan. 2007 = 1) Agriculture’s link to the energy markets has been a strong one. Corn and soybean prices have tracked with oil prices since late in 2006.

Outside Influences (Sept. 2008 = 1)

Corn & Soybean Area Growth rate of 1.55 million acres per year While total land devoted to crop production has been fairly steady over the past few years, the amount of land planted to corn and soybeans has been on the rise. Minor feed grains and cotton have been giving up ground.

CRP Expiring Contracts Some CRP land has also come back into production. This graph shows the acreage with expiring CRP contracts. The contracts expire at the end of September in each year. So the land that can come out of CRP in 2008 can not enter production until 2009 at the earliest. Currently CRP has 34.7 million acres. But the 2008 farm bill has set 32 million acres as the top for CRP, starting in 2010. So an additional 2.7 million must come out over the next two years. Source: USDA-FSA

Input Costs Source: USDA, Agricultural Prices, Jan. 2009 Input costs have risen dramatically, especially over the past year. Source: USDA, Agricultural Prices, Jan. 2009

Ammonia Prices Source: http://www.fertilizerworks.com/html/market/ TheMarket.pdf

Iowa Corn Prices vs. Costs Average return over the time period, -7 cents per bushel. Current corn prices for Iowa are around estimated costs. Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

Iowa Soybean Prices vs. Costs Average return over the period, 31 cents per bushel. Current Iowa prices still slightly above estimated costs. Source: USDA-NASS and Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-21.pdf

Estimates for 2009 Iowa Costs Non-land Cost Land Cost Total Cost Expected Yield Cost per Bushel ($/acre) (bu/acre) ($/bu) Corn 486.61 205.00 691.61 160 4.32 Soybean 285.60 490.60 50 9.81 December 2009 Corn Futures = $3.875 (2/18/09) November 2009 Soy Futures = $8.3575 (2/18/09) Source: Duffy and Smith, http://www.extension.iastate.edu/agdm/crops/pdf/a1-20.pdf

Exchange Rates (Jan. 2003 = 1) Source: USDA, ERS

Exchange Rates (Jan. 2003 = 1) Source: USDA, ERS

2007 World Corn Exports Drought issues for 2008 crops Source: USDA, FAS

2007 World Soybean Exports Drought issues for 2008 crops Source: USDA, FAS

Pace of Corn Export Sales Source: USDA, FAS

2008 U.S. Corn Exports Source: USDA, FAS

Pace of Soybean Export Sales Source: USDA, FAS

2008 U.S. Soybean Exports Source: USDA, FAS

U.S. Stocks-to-Use Ratios

World Stocks-to-Use Ratios But the world has higher than usual soybean stocks. Corn stocks have been tight worldwide for several years.

Finishing Out the 2008 Crop Year General economic conditions A lot of recent market trade has been tied to reaction to the financial crisis and the world’s response Economic slowdown raises concern about export and energy demand Most important ag. statistic: Exchange rates or South American production Current futures are indicating 2008 season-average prices of $3.75-4.25 for corn and $8.75-9.25 for soybeans Stress on South American crops has provided some support for prices

Thoughts for 2009 and Beyond Many of the storylines from 2008 will continue Tight stocks for corn (worldwide) and soybeans (U.S.) The competition for acreage Ethanol’s buildout & livestock’s adjustment Energy price & general economy concerns Market volatility will remain high Link to the energy markets More market players with different trading objectives Given current factors, the 2009 outlook is for crop prices around $3.75 for corn and $8.00-8.25 for soybeans Key factor: Economic growth returns by mid 2010

Average Crop Revenue Election (ACRE) ACRE is a revenue-based counter-cyclical payment program Based on state and farm-level yields per planted acre and national prices Producers choose between the current price-based counter-cyclical payment (CCP) program and ACRE There are still some details to be worked out about ACRE (stay tuned)

Farmer Choice Starting in 2009, producers will be given the option of choosing ACRE or not Can choose to start ACRE in 2009, 2010, or beyond Once you’re in ACRE, you stay in ACRE until the next farm bill If you sign up for ACRE, you must do so for all eligible crops Deadline for sign-up, June 1 of each year Producers choosing ACRE agree to 20% decline in direct payments and 30% decline in loan rates

ACRE Settings ACRE is based on planted acres Total acres eligible for ACRE payments limited to total number of base acres on the farm Farmers may choose which planted acres are enrolled in ACRE when total base area is exceeded

Loan Rates under ACRE Current Loan Rates Corn $1.365 Soybeans $3.50

Average Direct Payments Per Payment Acre for Iowa Crop Current Program ACRE Difference Corn 32.51 26.01 6.50 Soybeans 15.71 12.57 3.14 Please note the 83.3 or 85% rule has not been yet to these payments.

ACRE Program has state and farm trigger levels, both must be met before payments are made Expected state and farm yield based on 5 year Olympic average yields per planted acre ACRE price guarantee is the 2 year average of the national season-average price

ACRE Set-up for Iowa Soybeans Year Yield per Planted Acre (bu./acre) 2004 48.8 2005 52.2 2006 50.3 2007 51.9 2008 45.6 Olympic Average Year Season-average Price ($/bu.) 2007 10.10 2008 9.25 Average 9.68 The 2008 yield and price are USDA’s February 2009 estimates. So the expected state yield would be 50.3 bushels per acre and the ACRE price guarantee would be $9.68 per bushel.

ACRE Structure ACRE revenue guarantee = 90% * ACRE price guarantee * Expected state yield For our example, the ACRE revenue guarantee is 90% * $9.68/bu. * 50.3 bu./acre $438.21/acre ACRE actual revenue = Max(Season-average price, Loan rate) * Actual state yield per planted acre

ACRE Structure ACRE Farm revenue trigger = Expected farm yield * ACRE price guarantee + Producer-paid crop insurance premium Let’s assume farm yields equal to state yields and use the average producer-paid crop insurance premium for 2008 50.3 bu./acre * $9.68/bu. + $17.58/acre $504.48/acre

ACRE Payment Triggers ACRE actual farm revenue = Max(Season-average price, Loan rate) * Actual farm yield per planted acre Given our example, ACRE payments are triggered when ACRE actual revenue is below $438.21/acre and ACRE actual farm revenue is below $504.48/acre

ACRE Payments Payment rate = Min(ACRE revenue guarantee – ACRE actual revenue, 25% * ACRE revenue guarantee) Payments made on 83.3% of planted/base acres in 2009-11, 85% in 2012 ACRE payment adjustment: Payment multiplied by ratio of Expected farm yield to Expected state yield

ACRE Payment Timing Payments can begin as soon as practicable possible after the end of the marketing year So 2009 ACRE payments could start to be paid out in October 2010 There are no provisions for advance payments

ACRE vs. CCP CCP pays out No CCP payments No ACRE payments ACRE pays out

An Example for 2009 To start, we need the expected state and farm yields and the ACRE price guarantee Expected state yield 50.3 bu/acre Expected farm yield 55.0 bu/acre 2004-08 Olympic average of yields per planted acre ACRE price guarantee $9.68/bu Average of 2007 and 2008 season-average prices ACRE Revenue Guarantee $438.21 90% * $9.68/bu * 50.3 bu/acre ACRE Farm Revenue Guarantee $552.40 $9.68 * 55 bu/acre + $20/acre

Example (continued) For 2009, we need the actual state yield, the actual farm yield , and the season-average price Actual state yield 45 bu/acre Actual farm yield 55 bu/acre Season-Average Price $9.00/bu ACRE Actual Revenue $405.00 $9.00/bu * 45 bu/acre ACRE Farm Actual Revenue $495.00 $9.00/bu * 55 bu/acre

Example (continued) State Trigger So we’ve met the state trigger ACRE Revenue Guarantee $438.21 ACRE Actual Revenue $405.00 So we’ve met the state trigger Farm Trigger ACRE Farm Revenue Guarantee $552.40 ACRE Farm Actual Revenue $495.00 So we’ve met the farm trigger

Example (continued) ACRE Payment $30.25 Min(25%*$438.21, $438.21 – $405.00) * (55 bu/acre / 50.3 bu/acre) * 83.3%

Looking Beyond 2009 The ACRE revenue guarantee is updated each year using the same rules 5 year Olympic average for yields 2 year average for prices But the ACRE revenue guarantee can not change by more than 10 percent (up or down) from year to year So if the 2009 ACRE revenue guarantee is $438.21, then the 2010 ACRE revenue guarantee must be between $394.39 and $482.03

Farmer’s Choice In deciding about ACRE, farmers must weigh: The loss of 20% of their direct payments, a 30% drop in the marketing loan rate, and no access to CCP payments versus The potential for payments under ACRE

Comparing Program Parameters For Iowa Soybeans Under the current CCP program CCP Yield Average = 38.5 bushels per acre CCP Effective Target Price = $5.36/bushel In our example, for ACRE ACRE Yield Guarantee = 50.3 bushels per acre ACRE Price Guarantee = $9.68/bushel 20% of average Iowa soybean direct payment = $3.14 per acre

You Don’t Have to Decide Today ACRE signup will not be for a while, probably starting in April Once the ACRE rules are finalized, there will be a number of decision tools available to help producers Preliminary ACRE information and tools are available at: http://www.extension.iastate.edu/agdm/crops/html/a1-45.html http://www.card.iastate.edu/ag_risk_tools/acre/

Thank you for your time. Any questions. My web site: http://www. econ Thank you for your time! Any questions? My web site: http://www.econ.iastate.edu/faculty/hart/ Iowa Farm Outlook: http://www.econ.iastate.edu/outreach/agriculture/periodicals/ifo/ Ag Decision Maker: http://www.extension.iastate.edu/agdm/