APCA High Agricultural Prices: Current Reasons and Prospects for the Future Daryll E. Ray University...
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Transcript of APCA High Agricultural Prices: Current Reasons and Prospects for the Future Daryll E. Ray University...
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High Agricultural High Agricultural Prices: Current Reasons Prices: Current Reasons and Prospects for the and Prospects for the
FutureFutureDaryll E. Ray
University of TennesseeAgricultural Policy Analysis Center
FDIC’s US-China Rural Finance SeminarDallas, TexasMay 22, 2008
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Recent Corn PricesRecent Corn Prices
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
2005 2005-07 2006 2006-07 2007 2007-07 2008
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What are the Most Often What are the Most Often Stated Triggers?Stated Triggers?
• Ethanol– US corn-based ethanol production is
booming– Federal mandates for biofuels
• Increasing meat consumption in China and India– Middle class shift from grain-based to
meat-based diets
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We Have Seen This BeforeWe Have Seen This Before
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
1965 1970 1975 1980 1985 1990 1995 2000 2005
7-74 $3.907
5
7-72 $1.267
5
10-05 $1.962
5
4-08 $6.26
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What Were the Triggers Then?What Were the Triggers Then?
• Russian grain imports– Crop failure– Decision not to liquidate cattle herds
• Petrodollar driven exports– Loans to developing countries– Used to import food to feed people
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Laying the Blame: Then & NowLaying the Blame: Then & Now
• Then– Food vs. feed—Western grain-based-meat
diets– Eat less meat so the poor of the world can
have grain to eat
• Now– Food vs. fuel—US ethanol mandates– Eliminate grain-based biofuels to the poor
or the world can have grain to eat
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Looking More CloselyLooking More Closely
• Low price regimen
• Dismantling of government stocks
• Random weather events
• Reduced world-wide grain stocks
• Increased demand for meat in China – But has this put significant upward
pressure on international grain prices?
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Looking More CloselyLooking More Closely
• Low price regimen– US farm program design suppressed
prices– Leaving little incentive to invest and
expand production• This was also true for corn production in China
beginning in 1999(?)
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Looking More CloselyLooking More Closely
• Dismantling of government stocks– Expectation that commercials would hold
any needed stocks– Concerns about cost of government stocks
programs– Stocks discouraged by trade policies that
put decisions in the hands of markets
• Random weather events– Australia and Ukraine
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World Ending-Year World Ending-Year StocksStocks
Grains: Ending Crop Year Stock Levels
Source: USDA PS&D
0
100
200
300
400
500
600
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
World
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Looking More CloselyLooking More Closely
• Low price regimen
• Dismantling of government stocks
• Random weather events
• Reduced world-wide grain stocks
• Increased demand for meat in China – But has this put significant upward
pressure on international grain prices?
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China MeatChina Meat
25
30
35
40
45
50
55
60
65
70
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
sProduction
Consumption
Production and Consumption of Beef, Pork, and Broilers
Source: USDA PS&D
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China Meat and CornChina Meat and Corn
Indexed Meat Production (Pork, Broilers, Beef) and Corn Feed
Source: USDA PS&D
0.5
1.0
1.5
2.0
2.5
3.0
1990 1992 1994 1996 1998 2000 2002 2004 2006
Ind
exed
199
0=1
Meat Production
Corn Feed
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China GrainsChina Grains
Grains: Production and Consumption
Source: USDA PS&D
300
310
320
330
340
350
360
370
380
390
400
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
Production
Consumption
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China GrainsChina Grains
Grains: Imports
Source: USDA PS&D
-20
-15
-10
-5
0
5
10
15
20
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
Imports
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China GrainsChina Grains
Grains: Exports
Source: USDA PS&D
-20
-15
-10
-5
0
5
10
15
20
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
Exports
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China GrainsChina Grains
Grains: Exports, Imports
Source: USDA PS&D
-20
-15
-10
-5
0
5
10
15
20
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
Exports
Imports
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China GrainsChina Grains
Grains: Exports, Net Exports, Imports
Source: USDA PS&D
-20
-15
-10
-5
0
5
10
15
20
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
Net Exports
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China GrainsChina Grains
Grains: Ending Crop Year Stock Levels
Source: USDA PS&D
0
100
200
300
400
500
600
1990 1992 1994 1996 1998 2000 2002 2004 2006
Mil
lio
n M
etri
c T
on
s
China
World
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China ConnectionChina Connection• Yes, meat consumption per person is increasing
relatively rapidly in China• Yes, this has caused increased use of corn and
other grain (also protein meals) in China• So are China’s diet changes causing high
corn/grain prices in the US and internationally?• No! (No? Why not?)• Because China has used its own grain (production
and stocks) to produce meat• Meat and grain markets are walled within China
and have virtually no affect on outside prices
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Greatest RisksGreatest Risks• Short-term
– Weather, weather, weather: US, Brazil, China, India, elsewhere
• For example, US annual corn yields have dropped by 20 percent in years past (’83 ’88 ’93)
– High input prices• Long-term
– Acreage and yields greatly increase worldwide (not if with current prices)
– Low prices will return– Reduced farm asset values, especially land
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On Knife’s EdgeOn Knife’s Edge
• Short-term object lesson?– Need strategic reserves
• A properly managed stocks 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 suggesting need for global supply management
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Long-Term ConsiderationsLong-Term Considerations
• International supply response—yield
– 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
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Long-Term ConsiderationsLong-Term Considerations
• International supply response—acreage
– Long-run land potentially availability for major crops
• Savannah land in Brazil (250 mil. ac. -- USDA says 350)
• Savannah land in Venezuela, Guyana, and Peru (200 mil. ac.)
• Land in former Soviet Union (100 mil. ac.)
• Arid land in China’s west (100 mil. ac. GMO wheat)
• Savannah land in Sub-Saharan Africa (300 mil. ac. -- 10 percent of 3.1 bil. ac. of Savannah land)
– Easy to underestimate supply growth
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Policy for All SeasonsPolicy for All Seasons
• Assume the unexpected will happen– Random policy and weather events do
occur—Plan for them
• Establishment of International Grain and Oilseed Reserve– Moderate impacts of random policy and
weather events by providing stable supply until production responds
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Policy for All SeasonsPolicy for All Seasons
• Keep productive capacity well ahead of demand– Public investment in yield enhancing
technologies and practices
• Provide means to hold arable land in rotating fallow during periods of overproduction– This land can then quickly be returned to
production in the case of a crisis
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Agricultural Policy Analysis Center The University of Tennessee 310 Morgan Hall 2621 Morgan Circle Knoxville, TN 37996-4519
www.agpolicy.org
Thank YouThank You
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