Transcript Market Outlook & Farm Policy

Patrick Westhoff ([email protected])
FAPRI (www.fapri.missouri.edu)
University of Missouri
National Farm Business Management
Conference, St. Louis, June 15, 2009

How we got here
 Why the boom and bust in commodity prices?
 What has it meant to the farm sector?

Where we might be going
 Macroeconomy
 Agricultural markets

FAPRI’s role in the farm policy process
Jun 08:
$7.08
Dec 08:
$3.64
Aug 08:
$95.80
Sep 08:
$62.60
Feb 09:
$78.80
Nov 08:
$40.70
Jul 08:
$19.40
Feb 09:
$11.60
Jul 08: 0.9%
Apr 09: -0.2%
WHY PRICES ROSE

Reduced grain production
in Europe, Australia
Decline in production from 2004-2007: 73 mmt
Increase in US exports, 2004/05-2007/08: 21 mmt
Source: USDA’s PSD
Online, January 2009
WHY PRICES ROSE

Reduced grain production
in Europe, Australia
WHY PRICES FELL

Sharp increase in global
grain production in 2008
Increase in production, 2007-2008: 81 mmt
Decline in US exports, 2007/08-2008/09: 25 mmt
Source: USDA’s PSD
Online, January 2009
WHY PRICES ROSE


Reduced grain production
in Europe, Australia
Economic growth in Asia
and elsewhere
WHY PRICES FELL

Sharp increase in global
grain production in 2008
WHY PRICES ROSE


Reduced grain production
in Europe, Australia
Economic growth in Asia
and elsewhere
WHY PRICES FELL


Sharp increase in global
grain production in 2008
Financial crisis and world
economic slowdown
WHY PRICES ROSE



Reduced grain production
in Europe, Australia
Economic growth in Asia
and elsewhere
Weaker dollar
WHY PRICES FELL


Sharp increase in global
grain production in 2008
Financial crisis and world
economic slowdown
WHY PRICES ROSE



Reduced grain production
in Europe, Australia
Economic growth in Asia
and elsewhere
Weaker dollar
WHY PRICES FELL



Sharp increase in global
grain production in 2008
Financial crisis and world
economic slowdown
Stronger dollar
WHY PRICES ROSE
WHY PRICES FELL
Reduced grain production
in Europe, Australia
 Economic growth in Asia
and elsewhere
 Weaker dollar
 Higher petroleum prices




Sharp increase in global
grain production in 2008
Financial crisis and world
economic slowdown
Stronger dollar
WHY PRICES ROSE
WHY PRICES FELL
Reduced grain production
in Europe, Australia
 Economic growth in Asia
and elsewhere
 Weaker dollar
 Higher petroleum prices


Sharp increase in global
grain production in 2008
 Financial crisis and world
economic slowdown
 Stronger dollar
 Lower petroleum prices
WHY PRICES ROSE
WHY PRICES FELL
Reduced grain production
in Europe, Australia
 Economic growth in Asia
and elsewhere
 Weaker dollar
 Higher petroleum prices
 Rapid biofuel expansion


Sharp increase in global
grain production in 2008
 Financial crisis and world
economic slowdown
 Stronger dollar
 Lower petroleum prices
WHY PRICES ROSE
WHY PRICES FELL
Reduced grain production
in Europe, Australia
 Economic growth in Asia
and elsewhere
 Weaker dollar
 Higher petroleum prices
 Rapid biofuel expansion


Sharp increase in global
grain production in 2008
 Financial crisis and world
economic slowdown
 Stronger dollar
 Lower petroleum prices
 Slower biofuel growth
Source: FAPRI-MU
projections, Jan. 2009
Note: Assumes current tax
credits and tariffs extended
Source: Renewable
Fuels Association.
Note: Idle
nameplate capacity
(1.8 billion gallons
on 6/9/09) was not
reported in 2007 or
2008.
WHY PRICES ROSE
WHY PRICES FELL
Reduced grain production
in Europe, Australia
 Economic growth in Asia
and elsewhere
 Weaker dollar
 Higher petroleum prices
 Rapid biofuel expansion
 Policy response
 Speculation


Sharp increase in global
grain production in 2008
 Financial crisis and world
economic slowdown
 Stronger dollar
 Lower petroleum prices
 Slower biofuel growth
 Policy response
 Speculation
2007
2008
2009
2010
US real GDP growth (%)
2.0
1.1
-3.7
1.4
US inflation rate (%)
2.9
3.8
-1.9
1.5
US unemployment (%)
4.6
5.8
9.2
10.2
Federal funds rate (%)
5.0
1.9
0.1
0.2
30-yr. mortgage rate (%)
6.3
6.0
4.9
5.0
WTI oil price ($/barrel)
72
100
38
48
Federal budget deficit (bil. $)
162
455
1,905
1,678
Current account deficit (bil. $)
731
672
395
571
Exchange rate index (2000=100)
77
73
82
78
*NYMEX July
futures, 6/10/09
Source: FAPRI 2008 stochastic baseline.
Futures, 6/6/08, March 2009 contracts:
NYMEX petroleum: $136.93-$5.00 basis;
CBOT corn: $6.92-$0.40 basis
Source: FAPRI 2008 stochastic baseline.
Futures, 2/17/09, March 2009 contracts:
NYMEX petroleum: $34.97-$3.00 basis;
CBOT corn: $3.49-$0.25 basis
Source: FAPRI 2008 stochastic baseline.
Source: EISA 2007, Biodiesel RFS assumed constant after 2012
Notes: RFS adjusted for shortfall in cellulosic production relative to mandate; one
gallon of biodiesel assumed to count as 1.5 gallons of biofuel
Source: FAPRI
projections,
Jan. 2009.
Assumes tariffs
and tax credits
extended
Source: FAPRI
January 2009
baseline.
Note: Assumes no
intermediate (e.g.,
E-15) blends are
permitted.
Source: FAPRI
baseline projections,
Jan. 2009
Actual 2008/09
exports will be
higher, resulting
in lower stocks
Source: FAPRI
baseline projections,
Jan. 2009
*Futures line uses USDA
estimate for 2008/09.
For later years,
December Chicago
futures less $0.30/bu.
assumed basis.
*Futures line uses USDA
estimate for 2008/09.
For later years,
November Chicago
futures less $0.30/bu.
assumed basis.
Source: FAPRI
projections,
Jan. 2009.
Notes: Variable expenses exclude land and other fixed costs. Payments include loan program benefits and ACRE
payments (on a per-planted acre basis) and direct and countercyclical payments (on a per-base acre basis)
Source: FAPRI
projections,
Jan. 2009.
Notes: Variable expenses exclude land and other fixed costs. Payments include loan program benefits and ACRE
payments (on a per-planted acre basis) and direct and countercyclical payments (on a per-base acre basis)
Source: FAPRI
baseline projections,
Jan. 2009
Source: FAPRI
baseline projections,
Jan. 2009 and USDA
Prospective
Plantings, Mar. 2009
2006
2007
2008
2009
Corn
78.3
93.5
86.0
85.0
Soybeans
75.5
64.7
75.7
76.0
Wheat
57.3
60.5
63.1
58.6
9 other crops*
38.5
37.3
34.0
31.4
12 major crops
248.5
252.9
258.9
251.0
Hay
60.6
61.0
60.1
60.3
CRP
36.0
36.8
34.7
33.7
Double-crop soybeans
3.7
5.1
7.2
5.3
12 crops + hay + CRP –
double crop soybeans
341.5
345.7
346.4
339.7
*Upland cotton, sorghum, barley, oats, rice, sunflowers, peanuts, sugar beets and sugar cane
156 bu/a
41.8 bu/a
Source: FAPRI
baseline projections,
Jan. 2009. Current
conditions might
suggest lower 2009
corn yields are likely.
Source: FAPRI 2009 stochastic baseline.
2007/08
2008/09
2009/10
Comments
Production
13.04
12.10
11.94
Weather
Feed use
5.94
5.35
5.15
Weak livestock
sector, ethanol
coproduct feeds
Ethanol use
3.03
3.75
4.10
RFS & oil prices
Other domestic use
1.34
1.29
1.31
HFCS weak
Exports
2.44
1.75
1.90
Global demand,
foreign crops
Ending stocks
1.62
1.60
1.09
Projected decline
very important
Farm price
4.20
4.10-4.30
3.90-4.70
Actual uncertainty
even greater
2007/08
2008/09
2009/10
Comments
Production
2.68
2.96
3.20
Weather
Crush
1.80
1.65
1.68
Squeezed out by
export demand
Other domestic use
0.09
0.17
0.17
Exports
1.16
1.25
1.26
Argentine crop,
demand from China
Ending stocks
0.21
0.11
0.21
2008/09 stocks very
tight; 2009/10 very
uncertain
Farm price ($/bu.)
10.10
10.00
9.00-11.00 Actual uncertainty
even greater
2007/08
2008/09
2009/10
Comments
Production
2.05
2.50
2.02
Lower 2009 area
and yield
Food and seed use
1.04
1.00
1.03
Milling yields back
to normal in 2009/10
Feed use
0.02
0.25
0.22
Will be sensitive to
relative prices of
feed wheat and corn
Exports
1.26
1.01
0.90
Recovery of
competing supplies
Ending stocks
0.31
0.67
0.65
Stocks appear
adequate
Farm price ($/bu.)
6.48
6.85
4.90-5.90
Actual uncertain
even greater
2007/08
2008/09
2009/10
Comments
Production
19.21
12.82
13.25
Weather—assumes
less abandonment
in 2009 than 2008
Domestic use
4.59
3.55
3.50
Many mills shut this
year
Exports
13.65
12.70
10.80
World economy,
China decisions
Ending stocks
10.04
6.60
5.60
Stocks down, but
still high
Farm price (cents/lb.)
59.3
49.0
48-60
Actual uncertain
even greater
2008
2009
2010
Comments
Production
26.7
26.6
26.1
Reduced slaughter
in 2010
Imports
2.5
2.8
3.0
Recovers to 2007
level
Exports
1.9
1.7
1.9
World economy,
restrictions
Domestic use
27.3
27.7
27.3
Hard to push more
consumption in
weak economy
Nebraska fed steers
($/cwt)
92.27
84-87
87-94
Too much supply
this year for demand
2008
2009
2010
Comments
Production
23.4
22.8
22.4
Weak returns lower
production
Imports
0.8
0.8
0.8
Exports
4.7
4.2
4.5
World economy,
China production
Domestic use
19.4
19.4
18.8
Hard to push more
consumption in
weak economy
Barrows and gilts, 5152% lean ($/cwt)
47.84
43-45
48-51
Reduced supplies
eventually result in
some price recovery
2008
2009
2010
Comments
Production
36.5
35.0
35.5
Response to high
feed costs, weak
demand
Imports
0.1
0.1
0.1
Exports
7.0
6.4
6.3
World economy
Domestic use
29.6
28.8
29.3
Reduced
consumption makes
room for beef, pork
12-city wholesale price
(cents/lb.)
79.7
80-83
80-87
Reduced supplies
allow some recovery
2008
2009
2010
Comments
Production
190.0
187.5
186.4
Response to high
feed costs, lower
prices
Commercial exports
(skim solids basis)
26.6
19.9
23.1
Weak global
economy, renewed
competition
Net removals (skim
solids basis)
1.3
2.8
0.1
Some price support
activity this year
Commercial use (skim
solids basis)
163.7
167.8
166.8
Need low prices to
get big increase
All milk price
18.29
11.9512.35
15.1016.10
Recovery requires
less production,
stronger use

For 25 years, FAPRI has analyzed agricultural
markets and policies for Congress and other
decision makers

Our approach
 Provide objective analysis
 Don’t endorse or oppose policies
 Address the questions decision makers care about
 Make analysis available when it’s needed

2008 Farm Bill work
 Changes in target prices, loan rates, etc.
 ACRE program

Biofuel policies (latest—May 2009)

International work
 WTO-related issues
 Policy issues in Europe, Korea, Mexico, S. Africa







November: preliminary world baseline
December: DC baseline review
January: revised world baseline
February: stochastic baseline (500 futures)
March: release baseline in DC, Missouri
April-October: policy analysis, model work
July or August: baseline update if needed

In response to Congressional request
 First priority to Congressional Agriculture
Committees (e.g., farm bill work)
 Requests from other members and staffs (e.g.,
recent ethanol policy analysis)

As part of grant-funded projects
 U.S. agencies (USDA, Dept. of Energy, EPA…)
 International agencies (OECD, FAO, agencies in
Ireland, UK, S. Africa, Mexico, and S. Korea)

And a few on our own initiative

Be as objective and fair as possible
 We’ve worked with Democrats and Republicans,
House and Senate, aggies and urban members
 Avoid partisanship, endorsing or opposing specific
policies

Know how to be useful
 Pay attention to what’s happening on the Hill
 Deliver results when they’re needed
 Recognize some important work will never show
up in a public report—phone calls, e-mails matter

Farm markets remain very volatile, but most
likely case is that crop prices remain above
pre-2007 levels but below 2008 peaks

Future depends on economic recovery, oil
markets, weather, and much more

Analysis of policy, market alternatives likely
to be of continued interest

To contact me: [email protected]

FAPRI-Missouri website:
www.fapri.missouri.edu