1. APCA Corn, Ethanol, & Tortillas Short-Term vs Long-Term Realities Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Global Agri-Food Forum 2007 National Agricultural Council Mexico City, Mexico June 15, 2007

2. APCAIntroduction Commodity policy under “high” price expectations Demand euphoria but what about grain supply in the short-run and long-run? What is the greatest risk for agriculture in the short-run; in the long run Commodity policy implications

3. APCA Are High Prices the Future? The 2007 USDA Baseline projects: –Corn demand for ethanol 3.4 billion bushels (83 million metric tonnes) for 2007—double 2005 3.7 to 4.9 billion bushels (90 to 120 million metric tonnes) in 2008 –Over 10 years, baseline prices range from $3.30 to $3.75 per bushel –Very low corn stock levels by historical standards

4. APCA Logical Implications 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

5. APCA Short-Term Considerations US supply response –Arbitrage of crop acres in US to corn 90.5 million acres (36.6 million hectares) 12 million more acres (4.9 million hectares) than 2006, highest since the 1940s –Means less 7 mil. ac. (2.8 mil. ha.) less soybeans and 3 mil. ac. (1.2 mil. ha.) less cotton –Some land converted to cropland; more of such conversion in long-run

6. APCA Short-Term Considerations International corn supply response –Increased international production Mexico: 1.6 million ha. increase Argentina: 30 percent increase in acreage Brazil: 5.6 million metric tonnes more “second season” corn—2 million to be exported Canada: 20-25 percent increase in acreage? –The US will be exporting less corn

7. APCA Long-Term Considerations US supply response –Conversion of pasture and grassland— some in CRP?—to crop production –Investment in yield enhancing technology –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 and yield differentials between US and the rest of the world

9. APCA Long-Term Considerations International supply response –Long-run land potentially availability for major crops Savannah land in Brazil (100 mil. ha. -- USDA says 140) Savannah land in Venezuela, Guyana, and Peru (80 mil. ha.) Land in former Soviet Union (40 mil. ha.) Arid land in China’s west (40 mil. ha. GMO wheat) Savannah land in Sub-Saharan Africa (120 mil. ha. -- 10 percent of 1.25 bil. ha. of Savannah land) –Easy to underestimate supply growth

10. APCA Greatest Short-Term Risk Weather event –2007 US corn carry-out projected to be 5.3% of utilization (in 2005 it was 17.5%) –For full 10 year USDA baseline, the projected range is 4.5 and 5.7 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 –2007 US corn carry-out projected to be 5.3% of utilization (in 2005 it was 17.5%) –For full 10 year USDA baseline, the projected range is 4.5 and 5.7 Recent historic range has been 10% to 20% –In five of the last 10 years, we have seen production fall by 7.35 million metric tonnes from the previous year –A shortfall of that magnitude in an era of tight supplies would trigger skyrocketing prices $6 or more per bushel

13. APCA Short-Term Impact of $6 Corn Demanders –Outrage & economic pain by Livestock and ethanol producers; importers 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 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 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 Need a “Policy for All Seasons”

16. APCA Why Chronic Problems In Ag? 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 not consume significantly more food –Little self-correction on the supply side Farmers do not produce significantly less output

17. APCA In Times of Exploding Demand –Crop farmers prosper; Consumers suffer But times of exploding demand always come to an end And crop agriculture is no better at adjusting to low prices now than decades ago Again—need a “Policy for all Seasons”

18. APCA Thank You