APCA

The 2012 Corn Predicament

Daryll E. Ray and Harwood D. SchafferUniversity of Tennessee Institute of Agriculture

Agricultural Policy Analysis Center

National Packing MeetingUnited Food and Commercial Workers

Chicago, IllinoisAugust 15, 2012

APCA

The Situation• Most wide-reaching drought since 1956• Hottest July on record dating back to

1895• Corn yield by USDA as of Aug. 10

– Down 16% from last year’s reduced yield– Down 25% from more normal yield three

years ago, 2009• Corn production projected to be lowest

since 2006

APCA

Want to do Three Things• Visually put the corn “The Situation” into

historical perspective • No Reserve? What is the deal with that?

– Haven’t we, and other countries, had reserves programs in the past?

• What if commodity programs between 1998 and 2010 had been replaced with a “reserve program?” (NFU study)

APCA

Corn Yield

19601963

19661969

19721975

19781981

19841987

19901993

19961999

20022005

20082011

0.0

25.0

50.0

75.0

100.0

125.0

150.0

175.083 88

09

Bushels/Acre

-32 Bu.-28%

-35 Bu.-29%

-41 Bu.-25%

-24 Bu.-16%

APCA

Corn Yield and Production

19601963

19661969

19721975

19781981

19841987

19901993

19961999

20022005

20082011

0.0

25.0

50.0

75.0

100.0

125.0

150.0

175.0

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Bushels/Acre Mil. Bu.

Yield

Production

-28%-49%

-29%-31%

8883

-16%-13%

12

APCA

Corn ProductionUtilization and Reserves

19601963

19661969

19721975

19781981

19841987

19901993

19961999

20022005

20082011

0.0

2,000.0

4,000.0

6,000.0

8,000.0

10,000.0

12,000.0

14,000.0Mil. Bu.

Utilization

Production

Reserves(CCC and FOR)

APCA

Corn Price & Reserves

19601963

19661969

19721975

19781981

19841987

19901993

19961999

20022005

20082011

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00Mil. Bu.

Reserves

71 77 96

Price

APCA

Corn Price and Feed Demand

19601963

19661969

19721975

19781981

19841987

19901993

19961999

20022005

20082011

0

2,000

4,000

6,000

8,000

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

$9.00Mil. Bu.

PriceFeed

APCA

Reserves Are Not a New Idea• Egypt

– 1750 BC– Biblical story of Joseph and Pharaoh– 7 fat years followed by 7 lean years

• China– Beginning in 54 BC– Had its ups and downs over period of 2,000

years– “Constant Normal Granary”– China currently holds large stocks for domestic

needs

APCA

US Experience• United States

– 1929-1996 AD– Federal Farm Board – stock holding in attempt to

stabilize price– Commodity Credit Corporation

• Stabilize price• Ever Normal Granary• Manage supply

– Factors that brought reserves into disrepute• Inconsistent management or mismanagement by those

who did not believe in rationale for reserves and price stabilization

• Dumping of excess on world market

APCA

Arguments Against Reserves• Commercials argued they would provide

reserves– Government “interference” not needed

• Not to worry– Free trade will guarantee availability from one

country or another• Too expensive

– Procurement and storage costs are too costly• Requires a large physical stock

APCA

Argument Analysis• Assertions not always true

– Commercials have no incentive to hold stocks– Supply disruptions can affect more than one

supplier in a given year– One has to compare costs of storage against a

no-reserve alternative– Presence of reserve stocks calms market

behavior• Overriding Issue: Countries view food as

a national security issue

APCA

Reserve Objectives• Prevent crises:

• Consumer price and availability crises• Producer crises (livestock producers when prices

are “high;” followed by extraordinary low crop prices for crop farmers)

• The objective is NOT to fix prices• But to work with the market to ameliorate

impacts of extreme price fluctuations• Food availability/food prices• Severe economic disruptions • Environmental damages

APCA

Hypothetical Price Band for Corn

APCA

A Market Directed Inventory System

(MDIS)

National Farmers UnionFebruary 29, 2012

Daryll E. Ray and Harwood D. SchafferAgricultural Policy Analysis Center

University of Tennessee Institute of Agriculture

APCA

Policy DescriptionObjectives

– Bulk of revenue from market receipts– Reduce government payments while

maintaining farm income– Reduce price volatility

APCA

Policy DescriptionMDIS Specifications for 1998-2010 Study Period

– Initial corn loan rate set at midpoint between variable and full cost of production

– Indexed with a prices paid by farmers index

– Other crop loan rates set to historic ratios with corn

– Release price is set at 160% of loan rate

APCA

Policy DescriptionMDIS Specifications for 1998-2010 Study Period

– MDIS maximums• Corn – 3 billion bushels• Wheat – 800 million bushels• Soybeans – 400 million bushels

– Farmer storage payment rate 40¢/bu./yr– Set-aside available if needed– Eliminate Direct Payments, LDPs, & CCPs

APCA

8 Crops - Government Payments

$0

$5

$10

$15

$20

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Historic Baseline$152 Billion

(Total 1998-2010)MDIS

$56 Billion

$ Billion

APCA

8 Crops – Government PaymentsAverage Per Year Over Each Period

$0

$2

$4

$6

$8

$10

$12

$14

$16

1998-2005 2006-2010 1998-2010

Historic Baseline

MDIS

$ Billion

$14.8

$4.8

$6.8

$3.6

$11.7

$4.3

APCA

Corn Prices

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Historic Baseline

MDIS

Release Price

Loan Rate

APCA

Corn PricesAverage Per Year Over Each Period

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

1998-2005 2006-2010 1998-2010

Historic Baseline

MDIS

$2.05

$2.68

$4.02$3.71

$2.81$3.07

APCA

Corn Exports - Quantity

0

500

1000

1500

2000

2500

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Historic Baseline

MDIS

Million Bu.

APCA

Corn Exports - Value

Historic Baseline

MDIS

$ Billion

APCA

Corn Value of ExportsAverage Per Year Over Each Period

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

1998-2005 2006-2010 1998-2010

Historic Baseline

MDIS

$ Billion

$3.9

$4.8

$8.3$7.7

$5.6 $5.9

APCA

MDIS StocksCorn

Wheat

Million Bu.

Soybeans

APCA

Corn – Value of Production plus Government Payments

Average Per Year Over Each Period

$0

$10

$20

$30

$40

$50

$60

1998-2005 2006-2010 1998-2010

Historic Baseline

MDIS

$ Billion

$26.4$28.2

$51.5$46.5

$36.1 $35.2

APCA

Realized Net Farm IncomeAverage Per Year Over Each Period

$0

$10

$20

$30

$40

$50

$60

1998-2005 2006-2010 1998-2010

Historic Baseline MDIS

$ Billion

$49.8 $50.8$55.8

$51.5 $52.1 $51.1

APCA

Summary of FindingsOver the Study Period, 1998-2010, with MDIS in Place:

– Government payments 60% lower– Increased reliance on market receipts – Value of exports $4.9 billion higher– Lower price volatility benefitting:

• Consumers• Crop farmers• Livestock producers and industrial users

APCA

Agricultural Policy Analysis Center The University of Tennessee 310 Morgan Hall 2621 Morgan Circle Knoxville, TN 37996-4519

www.agpolicy.org

Thank You

APCA

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Weekly Policy Column

APCA

Corn Feed FSI Exp

19601963

19661969

19721975

19781981

19841987

19901993

19961999

20022005

20082011

0

2,000

4,000

6,000

8,0001,000 Bu.

Food, Seed, Industrial

Feed

Exports