Transcript FarmEcon LLC

FarmEcon LLC
A source of information on
global farming and food systems
Comments for Texas Ag Forum
Date: June 9, 2008
The information contained herein has been taken from
trade and statistical services and other sources believed
to be reliable. FarmEcon LLC makes no warranty,
express or implied, that such information is accurate or
complete and it should not be relied upon as such.
FarmEcon LLC
3825 Constitution Dr.
Carmel, IN 46032
317-873-9949
[email protected]
www.farmecon.com
Thomas E. Elam, PhD
President
[email protected]
3825 Constitution Dr.
Carmel, IN 46032
FarmEcon LLC
317-873-9949
317-414-7026 (cell)
www.farmecon.com
A source of information on
global farming and food systems
FarmEcon LLC
A source of information on
global farming and food systems
Points to be addressed





Subsidies, taxes and tariffs
Policy-induced demand structure of biofuel
feedstocks
Effects of commodities on retail food prices
Effects of ethanol on energy prices
Proposal for an economically healthy and
sustainable biofuels industry
FarmEcon LLC
A source of information on
global farming and food systems
What do subsidies do?




Subsidy programs do not create added income
They do redistribute income
Subsidies also shift costs
Economists generally agree that subsidies
–
–
–

Increase the welfare of recipients
Reduce the welfare of everyone else
Welfare losses generally outweigh the gains
Subsidies are engines of redistribution and
inefficiency, not creation
FarmEcon LLC
A source of information on
global farming and food systems
What do tariffs do?





Tariffs drive a wedge between domestic and
global prices
Tariffs reduce efficient producer market access
Welfare of inefficient domestic producers is
increased
Welfare of efficient foreign producers is reduced
Welfare of consumers in the country imposing
the tariff is reduced by having to buy from
inefficient local producers
FarmEcon LLC
A source of information on
global farming and food systems
Is ethanol from corn efficient?



At $5.50 per bushel corn is priced at a 40%
premium to natural gas per combustible BTU
Only 47% of the combustible BTU content of
corn is produced as ethanol
Brazil - 85-90% energy conversion from
sugarcane
FarmEcon LLC
A source of information on
global farming and food systems
Policy changes demand for
biofuel feedstocks

RFS
–
–
–

Tax credits
–
–

Creates a large, price inelastic, feedstock demand
Creates enormous price risk for the market
Likely increases feedstock prices by demand certainty
Make biofuels more affordable for blenders
Increase demand for biofuels vs. market forces
Ethanol tariff
–
Keeps more efficiently produced ethanol out
FarmEcon LLC
A source of information on
global farming and food systems
Feed, food, export demand
Price
De
ma
n
PE
ly
p
p
Su
d
A
QE
Quantity Demanded and Supplied
FarmEcon LLC
A source of information on
global farming and food systems
Biofuel feedstock demand is different

Biofuels account for only a small percent of
potential fuel demand
–

Total world grain supply converted to ethanol is less
than 10% of global petroleum use
Biofuel demand is highly price elastic
–
–
–
–
Assume biofuels produced for energy, not additives
As production increases, biofuels easily substituted
Therefore, prices not very responsive to supply
Can see short run issues from bottlenecks
FarmEcon LLC
A source of information on
global farming and food systems
Price
Additives Markets
Biofuel demand/supply with additive
niches and RFS < Qe, no tax credit
P
A
Demand
E
Petroleum Substitute
RFS
QE
Quantity Demanded and Supplied
FarmEcon LLC
A source of information on
global farming and food systems
Price
Additives Markets
Biofuel demand/supply with additive
niches and RFS < Qe, with tax credit
B
PE
A
Demand
Petroleum Substitute
RFS
QE
Quantity Demanded and Supplied
FarmEcon LLC
A source of information on
global farming and food systems
Effect on feedstocks markets


Feedstock demand derived from biofuels
If no binding RFS price becomes the higher of:
–
–


Combined food, feed, export market value
Or biofuel value if biofuel value>food/feed/export
If RFS is binding upper price limit is increased
If biofuel value is high relative to food value
–
–
–
Biofuel prices are major determinate of feedstock prices
Limited acreage implies prices will never decline from increased
feedstock production alone
Higher prices ration food, feed and exports
FarmEcon LLC
A source of information on
global farming and food systems
Does ethanol increase corn prices?

“Demand created by ethanol production
increases the price a farmer receives for
grain.” RFA Website
FarmEcon LLC
A source of information on
global farming and food systems
Why no rationing to date?




Large corn/soybean stocks of 2006-2007
Long lags in feed use response
Weak dollar boosting export demand
Price inelastic food demand
FarmEcon LLC
A source of information on
global farming and food systems
Rationing starts now






Stocks are depleted, or soon will be
Reduced 2008 corn crop
USDA already forecasts major reductions in corn feeding
and exports based on trend yields
Unfavorable May/June weather – yields declining
Reductions in soybean yields are likely
Wheat acreage expansion limited by corn
–
–
–
Major reduction in wheat exports
Wheat feeding almost eliminated
Wheat stocks stay at pipeline levels
FarmEcon LLC
A source of information on
global farming and food systems
Why rationing now? July 09 Corn
12-19-07: House and Senate agree to take
4 billion bushels of 2008-crop corn off the market
FarmEcon LLC
A source of information on
global farming and food systems
Why rationing now? July 09 Beans
FarmEcon LLC
A source of information on
global farming and food systems
Why rationing now? July 09 Wheat
FarmEcon LLC
A source of information on
global farming and food systems
Policy benefits and costs

Crop farmers and suppliers benefit from policy
–

Higher crop prices = higher costs to the system
–
–
–


Higher prices = higher incomes
Corn and soybeans are food inputs, not food
Real food producers see higher costs, lower profits
Food prices increase, but with important lags
Rest of economy sees lower spending/demand
Net effect is higher food expenditures, less
spending available for other sectors
–
April Food CPI = ~$100 billion in discretionary income
FarmEcon LLC
A source of information on
global farming and food systems
Quotes from RFA Web Site

Ethanol production does not reduce the
amount of food available for human
consumption.
–
Ethanol is produced from field corn fed to
livestock, not sweet corn fed to humans.
Importantly, ethanol production utilizes only the
starch portion of the corn kernel, which is
abundant and of low value.
FarmEcon LLC
A source of information on
global farming and food systems
Typical food producer headline
June 5, 2008
“Smithfield Foods today reported a significantly
lower profit for its fourth quarter due to the
increasing cost for grain and falling prices for
hogs. The Virginia-based meat producer
reported income from continuing operations of
$1.8 million compared with $51.8 million from
the year prior.”
FarmEcon LLC
A source of information on
global farming and food systems
Do corn prices matter?





Informa and Texas A&M studies used pre-2008 data.
1985-2007 food commodity prices showed almost no
trend
Corn prices could not correlate to upward trending retail
food prices
Labor costs did trend up, correlating with food prices
This DOES NOT prove that corn and commodity prices
are not important.
FarmEcon LLC
A source of information on
global farming and food systems
Figure 7 from Informa study
FarmEcon LLC
A source of information on
global farming and food systems
150%
125%
100%
75%
50%
25%
0%
Consumer Price Index, Food at Home
Jan-80
Jan-79
Jan-78
Jan-77
Jan-76
Jan-75
Jan-74
Jan-73
Jan-72
Jan-71
-25%
Jan-70
% Increase From Jan. 1970
Food at Home CPI and All Farm Products
PPI, 1970-1980
Producer Price Index, All Farm Products
Regression: R2 = 91%, ß=1.148, t=36.46
FarmEcon LLC
A source of information on
global farming and food systems
Food at Home CPI and All Farm Products PPI,
500%
400%
300%
200%
100%
Consumer Price Index, Food at Home
Jan-07
Jan-05
Jan-03
Jan-01
Jan-99
Jan-97
Jan-95
Jan-93
Jan-91
Jan-89
Jan-87
Jan-85
Jan-83
0%
Jan-81
% Increase From Jan. 1970
1981-April 2008
Producer Price Index, All Farm Products
You cannot correlate what is not changing with something that is changing.
If it is not changing it does not mean it is not important when it does change.
FarmEcon LLC
A source of information on
global farming and food systems
It’s not just corn!

Corn prices have an effect on a broad range
of farm products
–
–
–

Substitution price effects (competing feeds/foods)
Acreage competition effects (all major crops)
Cost effects (downstream foods)
It takes 2-5 years for the effects to move
through the food system
FarmEcon LLC
A source of information on
global farming and food systems
Biofuels policy macroeconomic effects





No net addition to real income or GDP
No net gain in jobs
Higher spending on biofuels and foods
Lower spending on everything else
Higher farm production costs
–
–


Variable inputs
Land prices and rents
Increased biofuels prices and costs
No net benefit to society
FarmEcon LLC
A source of information on
global farming and food systems
Effects on energy costs



Increased ethanol production may be
depressing gasoline prices
However, gap between gasoline and other
petroleum prices has widened to record levels
Evidence suggests, and theory supports, a
transfer of cost burden:
–
–
From gasoline users (personal transportation)
To other products (goods transport, home heating &
aviation)
FarmEcon LLC
A source of information on
global farming and food systems
20,000
18,000
60
16,000
14,000
40
12,000
20
10,000
8,000
-
6,000
4,000
(20)
2,000
Jan-08
Jul-07
Jan-07
Jul-06
Jan-06
Jul-05
Jan-05
Jul-04
Jan-04
Jul-03
Jan-03
Jul-02
Jan-02
Jul-01
Jan-01
Jul-00
(40)
New York Harbor No. 2 Heating Oil Spot Price FOB (Cents per Gallon)
New York Harbor No 2 Diesel Low Sulfur Spot Price FOB (Cents per Gallon)
New York Harbor Kerosene-Type Jet Fuel Spot Price FOB (Cents per Gallon)
Ethanol Production
Ethanol Production, 000 Barrels
80
Jan-00
Cents/Gallon Premium/(Discount)
Heating Oil, Diesel and Jet Fuel Price
Premiums and (Discounts) to Gasoline
FarmEcon LLC
A source of information on
global farming and food systems
Regression of ethanol production on
diesel/gasoline premium




12 MMA, Feb. 1995 to May, 2008
Diesel premium positively related to ethanol
production
Each 100,000 bbl of added monthly ethanol
production increases premium by 14.6 cents
R2 = 47%, t statistic = 11.8
FarmEcon LLC
A source of information on
global farming and food systems
Does the Hayes study* refute?





Hayes data were from 1995-2007
Page 8: “Our hypothesis is that this additional (ethanol)
production has had a negative impact on gasoline prices
and on the margins of crude oil refiners.”
Page 13: “The results suggest that this reduction in
gasoline prices came at the expense of refiners’ profits.”
If margins and profits are depressed, cost recovery will
be pushed from gasoline to other product prices
Prior graph shows this is happening in 2007/2008
*Xiaodong Du and Dermot J. Hayes. “The Impact of Ethanol Production on U.S. and Regional
Gasoline Prices and on the Profitability of the U.S. Oil Refinery Industry”. Iowa State. Working
Paper 08-WP 467. April 2008
FarmEcon LLC
A source of information on
global farming and food systems
Lower gasoline prices are also





Raising the cost of goods transport
Increasing cost pressures on the food system
Adding to airline fares
Increasing home heating costs
No net gain to the economy, possibly a loss
FarmEcon LLC
A source of information on
global farming and food systems
Rx for a healthy biofuels industry





Eliminate/phase out RFS, tax credits and tariffs
Compete for feedstocks on a level playing field,
and based on real economic value
Compete with efficient foreign producers
Add real value, not artificial cost inflation
Continue federal support for basic research