Agricultural input costs and uncertaintities LSU ANNUAL AGRICULTURAL OUTLOOK CONFERENCE ALEXANDRIA, LA JANUARY 21, 2010 William H. Meyers

I Survived 2009!

Introduction The risky economic environment continues Need best management and perhaps good luck Too easy to get on the wrong side of a cost- price cycle Will review input cost drivers and cost outlook Will focus on unknowns and unknowables Markets AND policies

Annual Crude Oil Average Prices

Petroleum price forecasts from IHS Global Insight *NYMEX June futures, 10/22/09

Monthly Natural Gas Futures

Monthly Heating Oil Prices

Monthly Unleaded Gas Prices

US Dollar Index: Monthly

Source: USDA prior to 2009, FAPRI-MU =100

Source: USDA prior to 2009, FAPRI-MU =100

Source: USDA

Source: USDA prior to 2009, FAPRI-MU =100

Source: USDA prior to 2009, FAPRI-MU =100

US Corn Production Cost, 2009

US Rice Production Cost, 2009

US Cotton Production Cost, 2009

Murky Areas True impact on energy prices –EPA, EIA, others –Nuclear power implications Most analysts agree that energy prices will increase, But do not on the magnitude or the specific impact per energy sector What about the policy factor?

Some estimates of impacts on energy costs (change from baseline) EIA basic HR 2454 EIA high offset EIA high cost EPA HR Diesel fuel 8.3%4.6% 9.0%4.0% Electricity 3.8%3.6% 5.4%12.7% Industrial natural gas14.4%8.3%20.2%8.5% 2030 Diesel fuel15.0%8.0%17.5%5.6% Electricity22.3%11.8%32.7%13.3% Industrial natural gas25.9%10.2%39.9%10.4% Source: EIA and EPA analysis of HR 2454, the House climate change bill. These costs include the value of allowances.

Uncertainties in estimating crop production cost impacts How much will energy costs change? How does a given change in energy costs affect prices for fertilizer, chemicals, etc.? How will provisions to benefit energy-intensive, trade-exposed (EITE) industries work? What changes will farmers make in production practices?

Estimated impacts on corn operating costs (change from baseline) EIA basic HR 2454 EIA high offset EIA high cost EPA HR With free EITE allowances1.8%0.9% 2.5%1.6% Without EITE allowances3.9%2.3% 4.8%2.7% 2030 With free EITE allowances*5.7%2.3% 8.4%2.5% Without EITE allowances7.9%3.8%10.9%3.3% *Free allowances are phased out between 2025 and 2035 under HR Source: FAPRI-MU estimates. These preliminary estimates may be modified after further review of assumed relationships between energy costs and crop production expenses. Note: Earlier FAPRI estimates using different energy price assumptions showed a 3.2% increase in MO dryland corn costs in 2020 and 3.8% in 2030.

Cropland shifts to forestry FASOM model (McCarl, Texas A&M) results: much crop and pasture land will shift to forestry Reduction in crop production results in higher crop prices This increases per-acre revenues for remaining crop producers Means crop producers might be beneficiaries even if –They face higher production costs and –They do not earn any offset income

Murky Areas, cont. EITE – Energy Intensive Trade Exposed to 2025 –Nitrogen fertilizer is presumptively eligible What agency will ultimately be responsible? Revenue potential for carbon offsets Land-use and acreage shifts How will EPA regulate carbon dioxide emissions despite passage of this leg?

A more uncertain future 1.Road to economic recovery? 2.Timing and size of oil price volatility? 3.Will biofuel policies change? 4.Will other policies be unstable? 5.Climate change and policy impacts? 6.Will DDA be completed in near term? 7.Wider range of possible outcomes 8.Complex decision making and planning

Guiding Indicators What to look for that makes a difference? –Oil prices –Interest rates –Exchange rates –Unemployment and other macro indicators –Policy changes – national and international, energy and biofuels

Thank you and Questions?