1. APCA Crop Agriculture During and After the Euphoria Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Agrium 2007 Board Stategy Meeting Calgary, Alberta September 27, 2007

2. APCAIntroduction Are high crop prices the future? From farmers’ viewpoint, does it really matter? Even if prices collapse, self-correction happens, right? What’s the deal with exports? Are exports going to make crop agriculture prosperous or not? WTO implications of export situation Implications for Agrium and input suppliers in general

3. APCA Are High Prices the Future? The 2007 USDA Baseline projects: –Corn demand for ethanol 3.4 billion bushels for 2007—double 2005 3.7 billion bushels in 2008 (Brock says 4.1; American Farm Bureau Fed says 4.9) –Over 10 years, baseline prices are north of $3/bu – closer to $4 most years –Very low corn stock levels by historical standards

4. APCA Logical Implications US subsidies for program crops would: –Largely be replaced by market receipts –Cease to be a budgetary problem for the US Federal Government Could even transition the direct (AMTA) payments like Congress’ 1996 intentions –Cease to be a stumbling block in trade negotiations –Continued growth for input suppliers

5. APCA Short-Term Considerations US supply response—2007 crop –Acres were switched to corn 92.9 million acres 14 million more acres than 2006, highest since the 1940s –Meant 11 million acres less soybeans and millions of acres less cotton –Some land converted to cropland; more in long-run

6. APCA Short-Term Considerations International 2007 corn supply response –Increased international production Mexico: 4 million ac. increase Argentina: 20 percent increase in acreage Brazil: 230 million bushels more “second season corn—80 million to be exported Canada: 10-20 percent increase in acreage –Internationally there may be a decreased need for corn imports from the US and Canada (now faltering yields, however)

7. APCA Long-Term Considerations US supply response –Conversion of pasture and grassland— some in CRP?—to crop production –Acceleration of yield enhancing technology (continued seed advances, controlled release nutrients) Corn—300 bu./ac. on best land?? Soybeans—100 bu./ac. on best land?? –Conversion of land to cellulosic feedstocks, some of which will not be from current cropland

8. APCA Long-Term Considerations International supply response –Development and adoption of drought and saline resistant crops –Globalization of agribusiness: Near universal access to the new technologies world-wide Narrowing of technology, input-use, and thus yield differentials between US/Canada and the rest of the world

9. APCA Long-Term Considerations International supply response –Long-run land potentially available for major crops Savannah land in Brazil (250 mil. ac. -- USDA says 350) Savannah land in Venezuela, Guyana, and Peru (200 mil. ac.) Land in former Soviet Union (100 mil. ac.) Arid land in China’s west (100 mil. ac. GMO wheat) Savannah land in Sub-Saharan Africa (300 mil. ac. -- 10 percent of 3.1 bil. ac. of Savannah land) –Easy to underestimate supply growth

10. APCA Greatest Short-Term Risk Weather event –The 2007 USDA baseline shows a string of years in which corn carry-out stocks are projected to be below 6 percent of utilization Recent historic range has been 10% to 20% –In five of the last 10 years, we have seen production fall by 300 mil. bu. from the previous year –A shortfall of that magnitude in an era of tight supplies would trigger skyrocketing prices $6 or more per bushel

11. APCA Uncharted Territory Year ending commercial stocks-to-use ratio for US corn 1960-2005 (actual), 2006-2016 (2007 USDA Baseline) 1974 (7.4%)1983 (5.4%)1995 (4.6%)2009 (4.5%)

12. APCA Greatest Short-Term Risk Weather event –The 2007 USDA baseline shows a string of years in which corn carry-out stocks are projected to be below 6 percent of utilization Recent historic range has been 10% to 20% –In five of the last 10 years, we have seen corn production fall by 300 mil. bu. from the previous year but also 20% drop in earlier years (’83 ’88 ’93) –A shortfall of that magnitude in an era of tight supplies would trigger skyrocketing prices $6 to $8 or more per bushel (talkin’ season average)

13. APCA Short-Term Impact of $6 Corn Demanders –Outrage & economic pain by Livestock and ethanol producers Food processors and consumer groups –“Dependable supplier” issue returns Can the US really guarantee that export embargoes will never again be imposed? Suppliers – Switch more acres to corn; add cropland US (road-ditch to road-ditch?) Brazil, Argentina, Mexico, Canada, and elsewhere

14. APCA Greatest Long-Term Risk Acreage and yields greatly increase worldwide—just a question of how fast –With $6 to $8 per bushel corn Acreage shifts in the short-run Longer-run investments that increase acreage and yields –With $3 to $4 corn or somewhat lower Increases in acreage & yields but at slower rate Lower prices return –Recreate problems for farmers worldwide and for the US treasury

15. APCA On Knife’s Edge Short-term object lesson? –Need strategic reserves Like a properly managed Farmer-Owned-Reserve Reduce economic dislocation Long-term reality? –“New Era?” (fourth “New Era” in my lifetime) –Supply growth has always caught and then surpassed demand growth (and it does not take long ) This time, surge in productive capacity will be global

16. APCA Can’t the Market Take-ith Away The Production It Brought Forth? Lower prices should automatically correct itself –Consumers buy more –Producers produce less –Prices recover—problem 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

17. APCA Characteristics of Ag Sector Agriculture is different from other economic sectors. On the demand side: –With low food prices— People don’t eat more meals a day They may change mix of foods Aggregate intake remains relatively stable

18. APCA 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 don’t and “can’t afford to” reduce their application of fertilizer and other major yield-determining inputs Who farms land may change Essential resource—land—remains in production in short- to medium-run

19. APCA Why Chronic Problems In Ag? Supply and demand characteristics of aggregate agriculture cause chronic price and income problems –On average supply grows faster than demand (Yes, even “after the lovin” of the ethanol craze) –Agriculture cannot right itself when capsized by low prices. Self-correction does not readily occur. Why? Well because: You won’t eat more meals each day Farmers won’t quit growing so much –(Always year-to-year random variability)

20. APCA Exports, Exports, Exports For the last quarter century, exports have been heralded—and continue to be by some—as crop agriculture’s 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?”

21. APCA China Net Corn Trade China Net Corn Trade What We Expected During Debate of 1996 FB: 1996 FAPRI Projections of Net Corn Trade Corn Exports Corn Imports Mil. Bu. 1996 FAPRI Projections

22. APCA China Net Corn Trade China Net Corn Trade What We Got: 1996 FAPRI Projections of Net Corn Trade PS&D Actual Net Corn Trade with 2004 Projection Corn Exports Corn Imports Mil. Bu.

23. APCA China Net Corn Trade China Net Corn Trade Comparison between 1996 and 1999 FAPRI projections, 2007 USDA projections and USDA PS&D actual 1996 FAPRI Projections of Net Corn Trade Actual Net Corn Trade 1999 FAPRI Projections of Net Corn Trade Corn Exports Corn Imports Mil. Bu. Overtime, the expectation remains—just further into the future. 2007 USDA Projections of Net Corn Trade

24. APCA What About Exports? Billion Dollars Bulk Exports Total Agricultural Exports

25. APCA What About Exports Index of US Population, US Demand for 8 Crops and US Exports* of 8 Crops 1979=1.0 US Population US Exports US Domestic Demand *Adjusted for grain exported in meat

26. APCA 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

27. APCA Implications for the WTO Market access may not be sufficient –May benefit beef and Anjou pears –What about crops covered by the Farm Bill?

28. APCA What About 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 Thousand Metric Tons US Exports Developing Competitors’ Exports

29. APCA Implications for WTO WTO negotiations drastically limit the ability to set domestic farm policy in the US, Canada and other countries –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 Agribusiness will benefit but not necessarily major-crop farmers in the US or Canada –With increased/complete access achieved, international commodity markets may greatly/significantly increase trade –But access—while necessary—may not be sufficient to generate the expected benefits to grain producers in the US and Canada

30. APCA Historically—there have been Two 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

31. APCA Implications for Agrium Profitable economic environment ahead Short-run: Growth in grain demand will keep prices at profitable levels for crop farmers –Extreme volatility (Demanders truly living on the edge) Longer-term: Grain supply growth WILL catch and surpass demand growth—“It’s just a matter of time” Presumptuous comment section: –Input market is saturated in US/Canada (increase retail share??) –Mammoth opportunities internationally long-to-longer term (but tread carefully)

32. APCA Thank You

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