1. Crop and Policy Outlook Pat Westhoff Food and Agricultural Policy Research Institute (FAPRI) www.fapri.missouri.edu Presentation to the St. Louis AgriBusiness Club May 9, 2005

2. Agenda Crop market outlook Highlights from our DC briefing book Whats happened since we prepared the baseline Budget news and possible impacts WTO news and possible impacts

3. U.S. Crop Yields per Acre

4. Crop Prices

5. April USDA estimates for 2004/05 Soybeans: $5.25-$5.55 Wheat: $3.35-$3.45 Corn: $2.00-$2.10

6. Crop Prices: What Has Changed? Biggest change: stronger soybean prices Lower-than-expected Brazilian production (10 mmt less than we had assumed) Relatively strong demand Commodity fund behavior? Smaller upward revision in corn prices Mostly due to early season farm prices > market prices (because farmers contracted at high prices) Fundamentals have actually been weaker than anticipated for corn (exports down, stocks up)

7. Variable Production Expenses Actual 2005 corn costs will be higher

8. U.S. Land Use (p. 33) 2004 Actual2005 FAPRI2005 Intentions Corn80.981.081.4 Soybeans75.272.973.9 All Wheat59.758.158.6 Upland Cotton13.413.713.5 Sorghum 7.5 8.2 7.4 Rice 3.3 3.2 3.4 5 Other Crops*12.813.6 Hay Harvested61.962.762.9 Conservation Reserve34.935.835.8 (?) 11 Crops + Hay + CRP349.6349.1350.6 *Barley, oats, sunflowers, peanuts, and canola

9. Interest Rate on AAA Bonds

10. Government Outlays

11. Net Farm Income

12. Crop Outlook Summary Big 2004 crops led to lower prices for many crops and higher CCC outlays Outlook for 2005/06 hinges on size of this years crop and any demand surprises Farm income is likely to fall from record-breaking 2004 levels

13. Budget News Budget Resolution has been approved By Sept. 16, Ag. Committees to make cuts of $3.0 billion over 5 years (FY 2006-2010) Compares to $7.5 billion in agricultural program cuts in Presidents budget Cuts can come from variety of programs Farm commodity programs Crop insurance, export credits, conservation Food stamps NOT from discretionary programs like WIC, USDA salaries, most ag. research, PL 480

14. Farm Program Cuts Hard to predict where cuts will occur How much in farm program cuts vs. other? What will be mix of farm program cuts? For point of reference only: Presidents budget proposed withholding 5% of crop payments starting in 2006/07 CBO said that would save $2.7 billion over 5 years (close to the $3.0 billion target) FAPRI estimates that would cut Missouri payments by a total of $106 million over the 2006/07- 2009/10 crop years

15. Other Possible Farm Program Cuts Presidents budget proposed limiting availability of loan program benefits Only get loans on 85% of direct payment yield Would have been a big deal in years with high yields and low prices (e.g., 2004 corn yield: 160 bu/a.; 85% of DP yield: 87 bu/a.) USDA said would save only $1.1 billion (they assume relatively high prices, so few loan benefits to begin with) We estimated this would save $7.2 billion (by looking at range of 500 possible outcomes) CBO said $5.1 billion (their approach is more like ours) Appears unlikely to be considered by Ag. Committees

16. Other Possible Farm Program Cuts Payment limitations Presidents budget proposes $250,000 overall limit per person, tighter rules Sen. Grassley has similar bill Would affect cotton and rice far more than other crops Unlikely to be included in Ag. Committee bills But could be included in Senate bill by floor amendment Cuts in target prices, loan rates, direct payment rates, ???

17. Why Reconciliation Bills Are Special Reconciliation bill will include cuts in many programs (not just Ag.) and tax cuts as well balance of interests Unlike other legislation, cannot be filibustered in Senate Thus takes 51 votes to approve, not 60 required for most controversial bills Means it could pass with no Democratic support Makes moderate Senate Republicans key 3 Senate Rs (of 55) voted against resolution (Chafee, DeWine, Voinovich); no Ds supported

18. WTO Issues: Cotton Case U.S. has lost WTO case on cotton subsidies and the appeal, too Panel ruling suggests U.S. should Change Step 2 program and export credit guarantee program by July And make changes so marketing loans and CCPs dont increase U.S. cotton production Panel logic would suggest other programs are also vulnerable to WTO challenge

19. WTO Issues: Cotton Case What will U.S. do to respond? USDA looking at changes in Step 2 and export creditsbut no public decision yet Step 2 changes almost certain to require Congressional action And changes in marketing loans or CCPs would clearly require Congressional action Not at all clear that Congress will make changes even if Administration requests Could have major implications for WTO talks, etc.

20. WTO Issues: Doha Talks Doha Round is at critical phase (again) In Ag., main issues are increased market access (U.S. demand) and reduced farm subsidies (Brazil, India, etc. demand) If no breakthrough soon, may be tough to complete overall agreement in 2006 Trade Promotion Authority expires in 2007 Many see this as deadline for agreement Not clear Congress would extend authority

21. Additional Slides

22. Corn Returns (p. 10)

23. Soybean Returns (p. 20)

24. Upland Cotton Returns (p. 28)

25. Selected Government Payments (p. 50)

26. Prices Paid by Farmers (p. 52)

27. Net Farm Income and Government Payments (p. 54)