Exciting Times? The Outlook for U.S. Agriculture during a World Food Crisis

Dr. Vincent Smith

Professor of Agricultural Economics

Department of Agricultural Economics

Great Falls: May 6, 2008

Billings: May 8, 2008

Is There A World Food Crisis

• What is the Evidence?– Prices for staple foods are high throughout the

world– Food/Rice Riots have occurred in some poor and

relatively poor countries– Even low income families in wealthy countries

are feeling the pinch.

Monthly Average Winter, Spring and Durum Wheat Prices in Montana: 2001-2008

0

2

4

6

8

10

12

142

00

1

20

01

20

01

20

01

20

02

20

02

20

02

20

02

20

03

20

03

20

03

20

03

20

04

20

04

20

04

20

04

20

05

20

05

20

05

20

05

20

06

20

06

20

06

20

06

20

07

20

07

20

07

20

07

20

08

$ p

er

bu

sh

el

Winter wheat prices Spring Wheat Durum WHeat

Feed Barley Prices in Montana: 2005-2008

0

1

2

3

4

5

6

2005

2005

2005

2005

2005

2005

2006

2006

2006

2006

2006

2006

2007

2007

2007

2007

2007

2007

2008

2008

$ p

er

bu

sh

el

U.S. Monthly Soybean Prices: 2003-2008

0

2

4

6

8

10

12

14

2003

2003

2003

2003

2003

2003

2004

2004

2004

2004

2004

2004

2005

2005

2005

2005

2005

2005

2006

2006

2006

2006

2006

2006

2007

2007

2007

2007

2007

2007

2008

2008

Do

llars

per

Bu

shel

Rice Prices in Thailand: August 2004-November 2007

200

220

240

260

280

300

320

340

360

380

2004

2004

2004

2005

2005

2005

2005

2005

2005

2006

2006

2006

2006

2006

2006

2007

2007

2007

2007

2007

Do

llars

per

To

n

Why Are Food Prices So High

• Is it:

– World production of wheat and other staples in 2007?

– Answer is Yes (in part), at least for wheat.

World Production, Consumption, Trade and Year End Stocks: 1960/61 -2007/08

0

100

200

300

400

500

600

700

1960/61 1964/65 1968/69 1972/73 1976/77 1980/81 1984/85 1988/89 1992/93 1996/97 2000/01

Marketing Year

MM

T

Production Consumption Trade 1/ stocks 2/

Why Are Food Prices So High

• Why are prices for major food commodities so high, relative to average prices over the past thirty years? Is it:

– Low world stocks

– Answer is Yes (in part)

World Production, Consumption, Trade and Year End Stocks: 1960/61-2007/08

0

100

200

300

400

500

600

700

1960/61 1964/65 1968/69 1972/73 1976/77 1980/81 1984/85 1988/89 1992/93 1996/97 2000/01

Marketing Year

MM

T

Production Consumption Trade 1/ stocks 2/

Why Are Food Prices So High

• Is it:

– A Weak Dollar?

– Answer is Yes (in part)

Canada-US Exchange Rate: 1991-2008

0.6000

0.8000

1.0000

1.2000

1.4000

1.6000

1.8000

Canadian Dollars per US $

Why Are Food Prices So High

• Is it:

– Rising Energy Prices?

– Answer is Yes (perhaps)

U.S. Petroleum Prices: 1995-2008

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

Janu

ary-95

Janu

ary-96

Decem

ber-9

6

Decem

ber-9

7

Decem

ber-9

8

Decem

ber-9

9

Decem

ber-0

0

Decem

ber-0

1

Decem

ber-0

2

Decem

ber-0

3

Decem

ber-0

4

Decem

ber-0

5

Decem

ber-0

6

Decem

ber-0

7

Do

llar

s p

er g

allo

n

0

20

40

60

80

100

120

140

Do

llar

s p

er b

arre

l

Retail Gas Prices Retail Diesel Crude Oil

Why Are Food Prices So High

• Is it:

– U.S. Energy Policy (ethanol use mandates and ethanol production subsidies)

– Answer is Yes (in part)

Ethanol and Non ethanol Uses of the U.S. Corn Crop: 1992-2007

0

2000000000

4000000000

6000000000

8000000000

10000000000

12000000000

14000000000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Corn for all other uses Corn for Ethanol

Share of U.S. Corn Crop Allocated to Ethanol Production: 1992-2007

4.61%

7.29%

5.05%

7.20%

4.12%5.43% 5.47% 5.95% 6.23%

6.98%

8.90%10.29% 10.60%

12.84%

16.79%17.81%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Will Food Prices Remain High

• It depends on the commodity and farm policies:

– Wheat prices are likely to moderate (lots of supply response)

– Rice prices are likely to moderate as exporting countries remove export

taxes and hoarding decreases in third world countries

– Soybean prices may moderate because of supply response in the U.S. and

policy changes in exporting countries like Argentina

– Corn prices are likely to remain relatively strong for a while (planted acres in

the U.S. are down and ethanol plants remain major users of the U.S. corn

crop).

Futures Prices for Crops: May 2008-March 2009

0

200

400

600

800

1000

1200

1400

May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09

cen

ts p

er u

nit

Corn futures Wheat futures Soybean futures

Feeder Cattle Futures Prices: May 2008-January 2009

70

80

90

100

110

120

May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09

Cen

ts p

er p

ou

nd

Implications for the 2008 (?) Farm Bill

High prices raise intriguing issues:• Some argue that price support levels (i.e., loan

rates) need to be higher• Others argue that many farm subsidies should be

discontinued because U.S. farmers have entered a new golden age.

• Several environmental groups are advocating more funding for environmental programs and the removal of subsidies for ethanol production

The 2008 Farm Bill: The Details

We are all waiting, as of May 3, for Congress and the White House to come to an

agreement. Hopefully, we will know more by next week!!!!!!!!

Here are some things we do know from last week’s Senate/House conference committee

discussions

The 2008 Farm Bill: Conference Committee Agreements

1. Loan Rates and Target Prices will be changed a little: details are not yet available but the House and Senate Bills, passed in July 2007 and January 2008, differ a little.

Proposed Changes to Selected Loan Rates

Crop Old (2002)New

(2007 Senate)New

(2007 House)

Wheat (bu) $2.75 $2.94 $2.94

Corn (bu) $1.95 $1.95 $1.95

Barley (bu) $1.85 $1.95 $1.90

Soybeans (cwt) $5.00 $5.00 $5.00

Other Oilseeds (cwt)

$9.30 $10.09 $10.70

Oats (bu) $1.33 $1.39 $1.46

The 2008 Farm Bill: Conference Committee Agreements

2. Funding for direct payments will be cut by about 2% for three years (a reduction of about $100 million a year among all crops receiving direct payments). The direct payment for wheat is currently 52 cents per eligible bushel. For corn it is 28 cents and for barley it is 24 cents. The proposed change would result in about a 1 cent reduction in that amount.

The 2008 Farm Bill: Conference Committee Agreements

3. Some changes will be made in target prices, with implications for counter-cyclical payments. Increases for wheat, soybeans, oats and minor oilseeds, but not for corn or barley.

Proposed Changes to Selected Target Prices

Crop Old (2002)New

(2007 Senate)New

(2007 House)

Wheat (bu) $3.92 $4.20 $4.15

Corn (bu) $2.63 $2.63 2.63

Barley (bu) $2.24 $2.24 $2.74

Soybeans (cwt) $5.80 $6.00 $6.10

Other Oilseeds (cwt)

$10.10 $12.74 $11.50

Oats (bu) $1.44 $1.83 $1.50

Monthly Average Corn Prices Received by Farmers: 1997-2007

0

0.5

1

1.5

2

2.5

3

3.5

4

$ p

er

bu

sh

el

Loan Rate

Target Price

Market Price

Market Price plus Direct Payment

The 2008 Farm Bill: Conference Committee Agreements

4. The Bill creates a new, optional Average Crop Revenue commodity program, available in 2010, that, if selected by a producer, would make them ineligible for direct payments, countercyclical payments, and participation in the loan rate program

The alternative Average Crop Revenue program provides a fixed per acre payment plus an additional payment when the average crop revenue for the crop of interest in a state (or nationally) falls below a certain percentage (90 percent in the senate bill) of its long run average.

The 2008 Farm Bill: Conference Committee Agreements

5. New payment limitations will be introduced

No direct payments or stewardship payments for non-farmers with Adjusted Gross Incomes in excess of $500,000.

Reduced payments to farmers and ranchers with AGI’s in excess of $950,000.

The 2008 Farm Bill: Conference Committee Agreements

6. A Standing Disaster Relief Program will be established for crops (called the Supplemental Revenue Assistance of SURE program in the Senate Bill). Funding is at approximately $1 billion per year.

The conference committee has also added in a Livestock Forage Program, funded at $75 million per year. Payments will be triggered by a drought index for each county

The SURE Program

1. The new standing disaster program is called the Supplemental Revenue Assistance

Program (SURE)

2. It is a “whole farm” revenue guarantee program.

3. Payments will be made only to counties that are declared to be disaster counties by the

Secretary and other counties that are adjacent to them.

4. At the farm level, average revenue is estimated for each crop or forage and the revenue

guarantee no more than 90% of that whole farm average revenue.

5. Farms receiving disaster payments that also receive crop insurance indemnities will

have those indemnities reduced by the amount of the disaster payments

6. Farms must have crop insurance or NAP for all crops and forages covered by those

programs.

7. The goal is to end ad hoc disaster payments.

The 2008 Farm Bill: Conference Committee Agreements

7. The Federal Crop Insurance program will remain largely unchanged, at least from the perspective of agricultural producer.

Funding is being cut by approximately $570 million per year, mainly through reductions in reimbursement payments to insurance companies for their administration and operations expenses.

The 2008 Farm Bill: Conference Committee Agreements

8. Conservation programs continue including:

a. Conservation Reserve Program (with total acres reduced to 32 million acres, but with annual funding at $2.5 billion)

b. Conservation Security (now Stewardship) Program (with additional funding of about $250 million per year).

The 2008 Farm Bill: Conference Committee Agreements

9. Energy Policy:

a. A reduction in the feedstock subsidy from 51 cents to 45 cents per gallon (but the key issue is total funding for the program)

b. Funding for new subsidies for the construction of cellulosic based (switchgrass, corn stalks, etc.) ethanol plants.

The 2008 Farm Bill: Conference Committee Agreements

10. Organic and Specialty Crops:

a. $78 million over four years for organic crop research and extension education

b. $230 million over four years for specialty crop research (including genetics, plant breeding, mechanization, food safety and pests and diseases).

Some Take Away Messages

1. The Senate and the House still want to subsidize farmers and ranchers and there is little change in the total level of direct subsidies.

2. Payment limits are becoming tighter but are not yet Draconian

3. Conservation is still a focus of the Farm Bill

4. The White House would like to see deeper cuts in subsidies, especially to higher income producers

5. Research funding for “world crisis food crops” is not yet a major priority