1. Patrick Westhoff (westhoffp@missouri.edu)westhoffp@missouri.edu FAPRI (www.fapri.missouri.edu)www.fapri.missouri.edu University of Missouri National Farm Business Management Conference, St. Louis, June 15, 2009

2.  How we got here  Why the boom and bust in commodity prices?  What has it meant to the farm sector?  Where we might be going  Macroeconomy  Agricultural markets  FAPRI’s role in the farm policy process

3. Jun 08: $7.08 Dec 08: $3.64

4. Aug 08: $95.80 Nov 08: $40.70 Sep 08: $62.60 Feb 09: $78.80

5. Jul 08: $19.40 Feb 09: $11.60

6. Jul 08: 0.9% Apr 09: -0.2%

9. WHY PRICES ROSE  Reduced grain production in Europe, Australia

10. Source: USDA’s PSD Online, January 2009 Decline in production from 2004-2007: 73 mmt Increase in US exports, 2004/05-2007/08: 21 mmt

11. WHY PRICES ROSE  Reduced grain production in Europe, Australia WHY PRICES FELL  Sharp increase in global grain production in 2008

12. Source: USDA’s PSD Online, January 2009 Increase in production, 2007-2008: 81 mmt Decline in US exports, 2007/08-2008/09: 25 mmt

13. WHY PRICES ROSE  Reduced grain production in Europe, Australia  Economic growth in Asia and elsewhere WHY PRICES FELL  Sharp increase in global grain production in 2008

15. WHY PRICES ROSE  Reduced grain production in Europe, Australia  Economic growth in Asia and elsewhere WHY PRICES FELL  Sharp increase in global grain production in 2008  Financial crisis and world economic slowdown

17. WHY PRICES ROSE  Reduced grain production in Europe, Australia  Economic growth in Asia and elsewhere  Weaker dollar WHY PRICES FELL  Sharp increase in global grain production in 2008  Financial crisis and world economic slowdown

19. WHY PRICES ROSE  Reduced grain production in Europe, Australia  Economic growth in Asia and elsewhere  Weaker dollar WHY PRICES FELL  Sharp increase in global grain production in 2008  Financial crisis and world economic slowdown  Stronger dollar

21. WHY PRICES ROSE  Reduced grain production in Europe, Australia  Economic growth in Asia and elsewhere  Weaker dollar  Higher petroleum prices WHY PRICES FELL  Sharp increase in global grain production in 2008  Financial crisis and world economic slowdown  Stronger dollar

23. WHY PRICES ROSE  Reduced grain production in Europe, Australia  Economic growth in Asia and elsewhere  Weaker dollar  Higher petroleum prices WHY PRICES FELL  Sharp increase in global grain production in 2008  Financial crisis and world economic slowdown  Stronger dollar  Lower petroleum prices

25. WHY PRICES ROSE  Reduced grain production in Europe, Australia  Economic growth in Asia and elsewhere  Weaker dollar  Higher petroleum prices  Rapid biofuel expansion WHY PRICES FELL  Sharp increase in global grain production in 2008  Financial crisis and world economic slowdown  Stronger dollar  Lower petroleum prices

27. WHY PRICES ROSE  Reduced grain production in Europe, Australia  Economic growth in Asia and elsewhere  Weaker dollar  Higher petroleum prices  Rapid biofuel expansion WHY PRICES FELL  Sharp increase in global grain production in 2008  Financial crisis and world economic slowdown  Stronger dollar  Lower petroleum prices  Slower biofuel growth

28. Source: FAPRI-MU projections, Jan. 2009 Note: Assumes current tax credits and tariffs extended

29. Source: Renewable Fuels Association. Note: Idle nameplate capacity (1.8 billion gallons on 6/9/09) was not reported in 2007 or 2008.

30. WHY PRICES ROSE  Reduced grain production in Europe, Australia  Economic growth in Asia and elsewhere  Weaker dollar  Higher petroleum prices  Rapid biofuel expansion  Policy response  Speculation WHY PRICES FELL  Sharp increase in global grain production in 2008  Financial crisis and world economic slowdown  Stronger dollar  Lower petroleum prices  Slower biofuel growth  Policy response  Speculation

31. 2007200820092010 US real GDP growth (%)2.01.1-3.71.4 US inflation rate (%)2.93.8-1.91.5 US unemployment (%)4.65.89.210.2 Federal funds rate (%)5.01.90.10.2 30-yr. mortgage rate (%)6.36.04.95.0 WTI oil price ($/barrel)721003848 Federal budget deficit (bil. $)1624551,9051,678 Current account deficit (bil. $)731672395571 Exchange rate index (2000=100)77738278

32. *NYMEX July futures, 6/10/09

33. Source: FAPRI 2008 stochastic baseline.

34. Futures, 6/6/08, March 2009 contracts: NYMEX petroleum: $136.93-$5.00 basis; CBOT corn: $6.92-$0.40 basis

35. Source: FAPRI 2008 stochastic baseline. Futures, 2/17/09, March 2009 contracts: NYMEX petroleum: $34.97-$3.00 basis; CBOT corn: $3.49-$0.25 basis

36. Source: EISA 2007, Biodiesel RFS assumed constant after 2012

37. Source: FAPRI projections, Jan. 2009. Assumes tariffs and tax credits extended Notes: RFS adjusted for shortfall in cellulosic production relative to mandate; one gallon of biodiesel assumed to count as 1.5 gallons of biofuel

38. Source: FAPRI January 2009 baseline. Note: Assumes no intermediate (e.g., E-15) blends are permitted.

39. Source: FAPRI baseline projections, Jan. 2009

40. Actual 2008/09 exports will be higher, resulting in lower stocks

41. *Futures line uses USDA estimate for 2008/09. For later years, December Chicago futures less $0.30/bu. assumed basis.

42. *Futures line uses USDA estimate for 2008/09. For later years, November Chicago futures less $0.30/bu. assumed basis.

43. Source: FAPRI projections, Jan. 2009. Notes: Variable expenses exclude land and other fixed costs. Payments include loan program benefits and ACRE payments (on a per-planted acre basis) and direct and countercyclical payments (on a per-base acre basis)

44. Source: FAPRI projections, Jan. 2009. Notes: Variable expenses exclude land and other fixed costs. Payments include loan program benefits and ACRE payments (on a per-planted acre basis) and direct and countercyclical payments (on a per-base acre basis)

45. Source: FAPRI baseline projections, Jan. 2009

46. Source: FAPRI baseline projections, Jan. 2009 and USDA Prospective Plantings, Mar. 2009

47. 2006200720082009 Corn78.393.586.085.0 Soybeans75.564.775.776.0 Wheat57.360.563.158.6 9 other crops*38.537.334.031.4 12 major crops248.5252.9258.9251.0 Hay60.661.060.160.3 CRP36.036.834.733.7 Double-crop soybeans3.75.17.25.3 12 crops + hay + CRP – double crop soybeans 341.5345.7346.4339.7 *Upland cotton, sorghum, barley, oats, rice, sunflowers, peanuts, sugar beets and sugar cane

48. Source: FAPRI baseline projections, Jan. 2009. Current conditions might suggest lower 2009 corn yields are likely. 156 bu/a 41.8 bu/a

49. Source: FAPRI 2009 stochastic baseline.

50. 2007/082008/092009/10Comments Production13.0412.1011.94Weather Feed use5.945.355.15Weak livestock sector, ethanol coproduct feeds Ethanol use3.033.754.10RFS & oil prices Other domestic use1.341.291.31HFCS weak Exports2.441.751.90Global demand, foreign crops Ending stocks1.621.601.09Projected decline very important Farm price4.204.10-4.303.90-4.70Actual uncertainty even greater

51. 2007/082008/092009/10Comments Production2.682.963.20Weather Crush1.801.651.68Squeezed out by export demand Other domestic use0.090.17 Exports1.161.251.26Argentine crop, demand from China Ending stocks0.210.110.212008/09 stocks very tight; 2009/10 very uncertain Farm price ($/bu.)10.1010.009.00-11.00Actual uncertainty even greater

52. 2007/082008/092009/10Comments Production2.052.502.02Lower 2009 area and yield Food and seed use1.041.001.03Milling yields back to normal in 2009/10 Feed use0.020.250.22Will be sensitive to relative prices of feed wheat and corn Exports1.261.010.90Recovery of competing supplies Ending stocks0.310.670.65Stocks appear adequate Farm price ($/bu.)6.486.854.90-5.90Actual uncertain even greater

53. 2007/082008/092009/10Comments Production19.2112.8213.25Weather—assumes less abandonment in 2009 than 2008 Domestic use4.593.553.50Many mills shut this year Exports13.6512.7010.80World economy, China decisions Ending stocks10.046.605.60Stocks down, but still high Farm price (cents/lb.)59.349.048-60Actual uncertain even greater

54. 200820092010Comments Production26.726.626.1Reduced slaughter in 2010 Imports2.52.83.0Recovers to 2007 level Exports1.91.71.9World economy, restrictions Domestic use27.327.727.3Hard to push more consumption in weak economy Nebraska fed steers ($/cwt) 92.2784-8787-94Too much supply this year for demand

55. 200820092010Comments Production23.422.822.4Weak returns lower production Imports0.8 Exports4.74.24.5World economy, China production Domestic use19.4 18.8Hard to push more consumption in weak economy Barrows and gilts, 51- 52% lean ($/cwt) 47.8443-4548-51Reduced supplies eventually result in some price recovery

56. 200820092010Comments Production36.535.035.5Response to high feed costs, weak demand Imports0.1 Exports7.06.46.3World economy Domestic use29.628.829.3Reduced consumption makes room for beef, pork 12-city wholesale price (cents/lb.) 79.780-8380-87Reduced supplies allow some recovery

57. 200820092010Comments Production190.0187.5186.4Response to high feed costs, lower prices Commercial exports (skim solids basis) 26.619.923.1Weak global economy, renewed competition Net removals (skim solids basis) 1.32.80.1Some price support activity this year Commercial use (skim solids basis) 163.7167.8166.8Need low prices to get big increase All milk price18.2911.95- 12.35 15.10- 16.10 Recovery requires less production, stronger use

58.  For 25 years, FAPRI has analyzed agricultural markets and policies for Congress and other decision makers  Our approach  Provide objective analysis  Don’t endorse or oppose policies  Address the questions decision makers care about  Make analysis available when it’s needed

59.  2008 Farm Bill work  Changes in target prices, loan rates, etc.  ACRE program  Biofuel policies (latest—May 2009)  International work  WTO-related issues  Policy issues in Europe, Korea, Mexico, S. Africa

60.  November: preliminary world baseline  December: DC baseline review  January: revised world baseline  February: stochastic baseline (500 futures)  March: release baseline in DC, Missouri  April-October: policy analysis, model work  July or August: baseline update if needed

61.  In response to Congressional request  First priority to Congressional Agriculture Committees (e.g., farm bill work)  Requests from other members and staffs (e.g., recent ethanol policy analysis)  As part of grant-funded projects  U.S. agencies (USDA, Dept. of Energy, EPA…)  International agencies (OECD, FAO, agencies in Ireland, UK, S. Africa, Mexico, and S. Korea)  And a few on our own initiative

62.  Be as objective and fair as possible  We’ve worked with Democrats and Republicans, House and Senate, aggies and urban members  Avoid partisanship, endorsing or opposing specific policies  Know how to be useful  Pay attention to what’s happening on the Hill  Deliver results when they’re needed  Recognize some important work will never show up in a public report—phone calls, e-mails matter

63.  Farm markets remain very volatile, but most likely case is that crop prices remain above pre-2007 levels but below 2008 peaks  Future depends on economic recovery, oil markets, weather, and much more  Analysis of policy, market alternatives likely to be of continued interest

64.  To contact me: westhoffp@missouri.eduwesthoffp@missouri.edu  FAPRI-Missouri website: www.fapri.missouri.edu www.fapri.missouri.edu