1. APCA U.S. Farm Policy & World Ag Trade: Implications for U.S. Agriculture Daryll E. Ray University of Tennessee Agricultural Policy Analysis Center Midwest/Great Plains/Western Outlook Conference Radisson Airport Hotel, Indianapolis, IN Thursday August 14, 2003 Thursday August 14, 2003

2. APCAIntroduction Why does agriculture have chronic price and income problems? What are the implications of 2002 Farm Bill on: –Crop price possibilities –Winners/losers Expectations underlying the change in farm policy direction versus Experience What can we realistically expect from world trade

3. APCA What is the Problem? Technology expands output faster than population and exports expand demand Market failure: lower prices do not solve the problem No self-correction on the demand side –People will pay almost anything when food is short –Low prices do not induce people to eat more No self-correction on the supply side –Farmers tend to produce on all their acreage –Few alternate uses for most cropland

4. APCA Traditional Policy Levers Government Stock Management –Loan rate/support price to set a floor price. –Limit price increases by Gov’t & FOR released stocks Restrict supply –Short-term set-aside –Long-term Conservation Reserve Programs Expand demand –Domestic –Foreign Government payments –Coupled to production –Decoupled

5. APCA Implications of Current Farm Program No price floor – Since LDPs effectively replaced non- recourse loans No emergency reserves—Since no CCC or FOR buffer stock policy No price ceiling—Since Incomes are supported, not prices Primary beneficiaries: –Livestock producers, importers and other users are subsidized –Agribusiness input suppliers and output processors are subsidized Not crop farmers (land owners?)

6. APCA Expectations vs. Experience Expectation: Rapid growth in China imports, especially corn

7. APCA China Net Corn Trade China Net Corn Trade Comparison between 1996 FAPRI projections and PS&D actual with 2001-2005 using 1999 FAPRI projections 1996 FAPRI Projections of Net Corn Trade PS&D Actual Net Corn Trade with 2002 Projection 1999 FAPRI Projections of Net Corn Trade Corn Exports Corn Imports Mil. Bu.

8. APCA U.S. Corn Exports Comparison between 1995 FAPRI projection, 2001 CBO projection, 1994-2001 PS&D actual, and 2002-2011 APAC flat export projection

9. APCA Expectations vs. Experience Expectation: Rapid growth in China imports, especially corn Experience: China continues to be a net exporter—will export nearly 500 million bushels of corn this year

10. APCA Expectations vs. Experience Expectation: Export lead farm prosperity just around the corner (been saying this for over 25 years)

11. APCA 1986-95 Average: 6,188 1976-85 Average: 4,909 1986-95 Average: 1,831 28% EXPORTED 1976-85 Average: 1,923 1996-02 Average: 7,537 DOMESTIC EXPORT 20% EXPORTED 1996-02 Average: 1,868 Million Bu. U.S. Domestic and Export Demand Corn Source: USDA PS&D Database

12. APCA 1986-95 Average: 6,156 1976-85 Average: 4,935 1986-95 Average: 1,863 28% EXPORTED 1976-85 Average: 1,897 1996-02 Average: 7,281 DOMESTIC EXPORT 23% EXPORTED 1996-02 Average: 2,125 Million Bu. U.S. Net Domestic and Net Export Demand Adjusted for corn fed to import and export beef, pork, and broilersCorn Source: USDA PS&D Database

13. APCA DOMESTIC EXPORT Million Bu. U.S. Net Domestic and Net Export Demand With and without net livestock export adjustmentCorn Source: USDA PS&D Database Published Domestic Demand Domestic Demand with net livestock export adjustment Published Export Demand Export Demand with net livestock export adjustment

14. APCA Net U.S. Corn Exported in Livestock Corn

15. APCA Industrial, Alcohol and Food Demand Net Corn Exported as Beef, Pork and Broilers Million Bu. U.S. Net Corn Exported as Meat and Domestic Industrial, Alcohol and Food Demand Corn Source: USDA PS&D Database Average annual increase 1990-2002: 68 mil. bu. 1996-2002: 89 mil. bu. Average annual increase 1990-2002: 22 mil. bu. 1996-2002: 7 mil. bu.

16. APCA 1976-85 Average: 22.829 1986-95 Average: 29.289 1986-95 Average: 25.513 54% EXPORTED 1976-85 Average: 26.824 1996-02 Average: 38.129 DOMESTIC EXPORT 47% EXPORTED 1996-02 Average: 34.480 Million Metric Tons SOYBEAN COMPLEX Source: USDA PS&D Database U.S. Net Domestic and Net Export Demand Adjusted for soy fed to import and export beef, pork, and broilers

17. APCA Net Export and Domestic Demand for 8 Major Crops million Metric Tons 205 mmt 76-85 Average 249 mmt 86-95 Average 291 mmt 96-02 Average 122 mmt 76-85 Average 115 mmt 76-85 Average 113 mmt 76-85 Average Guess which is exports and which is domestic demand

18. APCA Indexed Growth in U.S. Population, Domestic Demand for 8 Crops, and Exports of 8 Crops, 1961-2002 1979=100

19. APCA Net Export Acreage for 8 Major Crops Million Acres 103.6 76-85 Average 86.8 86-95 Average 77.0 96-02 Average

20. APCA Expectations vs. Experience Expectation: Export lead farm prosperity just around the corner (been saying this for over 25 years) Experience: Crop exports have been flat for years. Exports have not been the driving force of crop utilization

21. APCA Expectations vs. Experience Expectation: Export competitors will reduce production in response to lower prices

22. APCA Argentine Soybean Complex Exports and Surplus Production

23. APCA Brazilian Soybean Complex Exports and Surplus Production

24. APCA U.S. Soybean Complex Exports and Surplus Production

25. APCA Expectations vs. Experience Expectation: Export competitors will reduce production in response to lower prices Experience: Export competitors export all production above domestic demand Eliminating set-asides and lower commodity prices did not cause export competitors to reduce acreage

26. APCA Expectations vs. Experience Expectation: With Planting Flexibility & Decoupled Payments Farmers Would Plant for the Market – Reduce Production When Needed Eliminating set-asides and lower commodity prices did not cause export competitors to reduce acreage

27. APCA Indexed Four Crop Acreage, Price and Price Adjusted for LDP and Contract Payments Four Crop Acreage Four Crop Price Adjusted for LDP, AMTA, and MLA Four Crop Price Adjusted for LDP Four Crop Price

28. APCA Foreign Crop Acreage Change in Foreign Acreage Million Acres

29. APCA Change in Foreign Crop Acreage

30. APCA Points to Ponder Since 1985 farm policy has been driven by: –Exports, exports, exports (Those are OUR exports! And we’ll do ANYTHING to get them back and to make them grow.) –Agribusinesses’ lobbying ability (We MUST lower prices and maximize output. “If we build it, they will come.”) Exports have not delivered after two decades of promises Agribusiness got everything they wanted (except elimination of the CRP) –No bottoms or tops on prices (Increases the value of superior information.) –Elimination of annual acreage reduction programs (Volume is everything.) Farmers relinquish the farm policy agenda to agribusiness and those that believe agriculture will self-correct with unfettered free markets

31. APCA Policy Premises U.S. and world output will continue to outpace demand Aggregate crop agriculture does not self-correct on its own in a timely manner (assuming otherwise is denying the obvious) –Total acreage changes too slowly to be of help –Consumers will never oscillate between 1 and 5 meals a day depending on prices Exports –Competitors are as committed to producing for international markets as we are –Import customers view food as a national security issue and abhor increased dependence

32. APCA Policy Implications? Farmers have been sold a bill of goods on the elimination of acreage reduction programs –Trends in competitors’ acreage and production were unaffected by U.S. elimination of set aside –Elimination of set-aside was good for agribusiness but not good for farmers’ market income –EVERY other non-farm industry watches demand when deciding output levels –Not having supply management is the real reason we are in the current mess

33. APCA To receive an electronic version of our weekly ag policy column send an email to: dray@utk.edu requesting to be added to APAC’s Policy Pennings listserv Weekly Policy Column

34. APCA For More Information … For More Information … www.agpolicy.org Agricultural Policy Analysis Center The University of Tennessee Dept. of Agricultural Economics 310 Morgan Hall Knoxville, TN 37996-4519 dray@utk.edu (865) 974-7407 phone (865) 974-7298 fax