1. APCA Global Protein Outlook and Other Stuff Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center The Purchasing and Ingredients Suppliers Conference Sandestin, Florida March 12, 2009

2. APCA What We’re Going To Do Global Protein Outlook (It’s my assignment!) Exports: Perpetual Promises Two Views of Commodity Policy –“Show Me the Money” –“Houston, We’ve Got a Problem” Policy for All Seasons WTO Implications

3. APCA The Calm After the Storm (Well, relatively anyway) Soybean meal prices are way down and likely will go lower in the months ahead Next year: –Large soybean crop probable –Protein prices could be considerably lower Soybean meal continues to dominate the U.S. protein market Will China gobble up our soybean supply?

4. APCA Weekly CBOT Soybean Meal Price February 2, 2007 – March 6, 2009

5. APCA The Calm After the Storm (Well, relatively anyway) Soybean meal prices are way down and likely will go lower in the months ahead Next year: –Large soybean crop probable –Protein prices could be considerably lower Soybean meal continues to dominate the U.S. protein market Will China gobble up our soybean supply?

6. APCA Rapeseed Meal – 7% US Domestic Consumption of Protein Meals - 2007 Soybean Meal – 88% Peanut Meal – <1% Fish Meal – 1% Cottonseed Meal – 1% Sunflowerseed Meal – 1% Imports are 5.8% of this total

7. APCA Rapeseed Meal – 92% US Imports of Protein Meals - 2007 Soybean Meal – 6%Fish Meal – 2%

8. APCA Rapeseed Meal – 12% World Production/Consumption of Protein Meals - 2007 Soybean Meal – 68% Peanut Meal – 3% Fish Meal – 2% Cottonseed Meal – 7% Sunflowerseed Meal – 5% Copra – 3% Palm Kernel Meal – 3%

9. APCA The Calm After the Storm (Well, relatively anyway) Soybean meal prices are way down and likely will go lower in the months ahead Next year: –Large soybean crop probable –Protein prices could be considerably lower Soybean meal continues to dominate the U.S. protein market Will China gobble up our soybean supply?

10. APCA China Soybeans Soybean Imports Soybean Production

11. APCA China Soybean Meal Soybean Meal Imports Soybean Meal Production

12. APCA Chinese Soybean Imports

13. APCA Soybean Exports Brazil United States Argentina

14. APCA Soybean Complex Exports

15. APCA Soybean Complex Trade

16. APCA Exports: Perpetual Promises Be a permanent source of ever increasing US agricultural prosperity Correct the long-term price and income problems in agriculture

17. APCA Data Show or “Survey Says...” 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

18. 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

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

20. APCA What Were We Thinking … Why would we expect trade to deliver crop agriculture to the Promised Land? 1970s Syndrome –Earl Butz said … –The outsized export share of the 1970s has been viewed as US property from then on –When exports slowed in the 1980s … Been on a quest to recapture the Golden Age of Agriculture (1970s) Lowered Loan Rates Moved from supply management to writing checks

21. APCA What Were We Thinking … Why would we expect trade to solve US price and income problems? Because we are confused! We implicitly think US agriculture would be just fine … –If only “such and such” were removed or different Complete access to all international markets Exchange rates were different Inflation were reduced Subsidies were eliminated Etc., etc. –After these “such and ‘suches’,” the importers would import more and our export competitors would export less And all would be fine in the world that is agriculture Ag prices and incomes would be stable and “high”

22. APCA So What’s Not Considered? FOOD IS DIFFERENT –Food is a national security issue—just like military security is to the US. So … Countries want to domestically produce as much of their food as possible Political considerations –Need to feed the population –Need to provide a living for millions in agriculture –Need an orderly exit of workers out of agriculture Suppose there had been total access to all international markets this past year –Vietnam, Thailand and scores of other countries…

23. APCA So What’s Not Considered? Except for short periods, production outstrips demand –This is a good thing –Butz had it right except for one word Excess capacity in the future will be a worldwide problem –Increased acreage –Increased yields When prices decline, self-correction does not work (very quickly at least) –Quantities demanded and supplied change little (Stay tuned for “The Rest of the Story”

24. APCA Expecting Trade To … Deliver US agriculture to the promised land of unending prosperity with no government intervention is too much to ask –WTO or no WTO, US agriculture exports will be limited by The nature of agricultural importers’ demands The nature of US’s agricultural export competitors’ supply The US is the residual supplier –Therefore we should expect continuing periods of low prices when agriculture cannot self-correct on its own

25. APCA Two Views of Commodity Policy “Show Me the Money” “Houston, We’ve Got a Problem”

26. APCA “Show Me the Money” View that commodity programs exist because: –Farmers have inordinate political power –Farmers “milk” the government Corresponding Conclusion –Farm programs are a waste –They address no real problem –Taxpayer gift

27. APCA “Show Me the Money” So… –Get rid of them Conservative think tanks Editorial writers and syndicated columnists Those for which “free market” is not a concept but a religion plus much of the general public –Redistribute or “earn” payments Environmental/Wildlife Groups States with large vegetable/fruit/etc production Organic, small farms, land preservation, tourism Multi-functionality (all the above)

28. APCA “Houston, We Have A Problem” Chronic price and income problems Why? –Market correction does not occur in timely manner –Economist call this “Market Failure” –Sometimes in remission …but always comes back What does this mean, you say…

29. APCA In General… Econ 101 says that (except during melt-down periods) markets correct on their own In times of low prices or increased inventories: –Consumers buy more –Producers produce less –Viola! Self-correction.

30. 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

31. 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

32. APCA 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 taxpayers The growth in supply now is being additionally fueled by –increased acreages in Brazil, etc. –technological advance worldwide

33. APCA Early Policy Was Output Expanding 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 continues today

34. APCA Easy to Under Estimate Supply Growth US supply response –Conversion of Conservation Reserve Program Acreage and hay/pasture land to crop production –Investment in yield enhancing technology (300 bu./ac on best land in a few years— national average a decade or later?) –Conversion to cellulosic feedstocks for ethanol production

35. APCA Easy to Under Estimate Supply Growth International supply response—yield –Development and adoption of drought/saline/disease resistant crops –Globalization of agribusiness: Near universal access to the new technologies world-wide Narrowing of technology and yield differentials between the developed and developing world

36. APCA Easy to Under Estimate Supply Growth International supply response—acreage –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) Supply growth has always caught and then surpassed demand growth (and it does not take long)

37. APCA Policy for All Seasons Assume the unexpected will happen –Random policy and weather events do occur— Plan for them Establishment of International Grain and Oilseed Reserve –Moderate impacts of random policy and weather events by providing stable supply until production responds –Operated by an international commission— decision making/oversight –Stores strategically purchased/stored

38. APCA Policy for All Seasons Keep productive capacity well ahead of demand –Public investment in yield enhancing technologies and practices Provide means to hold arable land in rotating fallow during periods of overproduction –This land can then quickly be returned to production in the case of a crisis

39. APCA WTO … Does not account for the unique nature of food and agriculture Needs to understand the difference between DVD players and staple foods Needs to be reformulated or replaced with an organization that recognizes the need for… –Food reserves to address the inevitable shocks to the availability and price of food –Promoting increases in worldwide productive capacity, especially each country’s domestic production –Addressing Agriculture’s inability to gauge the use of productive capacity to match demand by creating methods to overcome –Agriculture’s inability to self-correct

40. APCA Finally … (Other) statements that lead farmers and others to erroneous conclusions: 95% of the world’s population is outside the US … Increases in per capita income and growth or the middle class in China and India … The value of the dollar has decreased this export season …. The value of US agricultural exports has increased substantially …

41. APCA Thank You

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