Transcript ROBERT L. THOMPSON - University of Illinois at Urbana

Economic Outlook for
American Agriculture
Robert L. Thompson
Gardner Professor of Agricultural Policy
University of Illinois at Urbana-Champaign
January 16, 2007
2006 Farm Income
• Total value of farm production $279.5 billion:
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crops up $7.1 billion
livestock down $4.7 billion
government payments down $7.8 billion
forestry & services up $1.7 billion
• With input costs up $11 billion, net farm income
down from $73 bil. in 2005 to $58.9 bil. in 2006.
• Total direct government payments down from
$24.3 billion in 2005 to $16.5 billion in 2006
• With rapid increase in land prices, farm sector
equity increased 7% over 2005, with debt-toasset & debt-to-equity ratios down.
Source: ERS Jan. 12, 2007 report
Exports Are Critical to Ag Profitability
• American agriculture exports the production of
one out of three acres of cropland. These
exports generate 1/4 of farm sales revenue.
• In 2006 U.S. ag exports totaled $68 billion:
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Grains & oilseeds
Horticultural products
Animal protein
Cotton
$28.4 billion
$16.7 billion
$13.2 billion
$ 4.9 billion
• Most important markets:
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Canada
Mexico
Japan
China
E.U.
18%
16.5%
12%
11%
10%
General Economy
• Current economic expansion over 5 years old
• Deceleration in 2nd half of 2006 due to declines
in housing & motor vehicle sectors; the latter has
worked inventories down, but not housing
• Consumer spending holding up well despite
negative wealth effect of housing slowdown
– Drop in energy prices increased consumer
purchasing power
– Indices of consumer confidence rising
• Business profits have been high, lifting stock
prices & encouraging business expansion.
• Unemployment rate lowest in 5 years; job
creation strong; real wages rising
General Economy (contd)
• “Soft landing” may be over & growth accelerating
• “Core” inflation seems to be under control
– But Fed will be cautious in changing discount rate
– Risk of rise in energy & food prices
• Strong economic growth in other countries, e.g.
EU, Japan, China and India, providing strength
to U.S. exports
• Americans spending more than their incomes
– Build-up of consumer debt worrisome with higher
interest rates
– 100% of the U.S. Government debt associated with
Federal budget deficit is sold overseas, principally to
governments of China and Japan
• U.S. dollar sliding and likely will fall further
Ethanol Driving Ag Outlook
• Ethanol industry growing rapidly with large
subsidies, mandated use, tax exemptions, and
protection from imports from lower-cost suppliers
• This increased industrial demand for corn has
resulted in higher prices; exports will fall.
• Higher feed grains prices reducing profitability of
U.S. livestock and poultry industries.
• How long before we have technology for
producing ethanol from cellulosic feedstocks?
• Farmers and politicians are more enamored with
growth in ethanol and other biofuels than with
exports and WTO trade negotiations.
Growth in Ethanol Industry
• 2000: 1.6 billion gallons of ethanol produced;
used 6% of U.S. corn harvest
• 2006: 5 billion gal.; used 20% of corn harvest
• Now 110 ethanol plants are operating w/total
capacity of 5.4 billion gal.; 73 more are under
construction plus 8 more expanding
• This will bring capacity to 11.4 billion gal. by
2008-09
– Energy Bill of 2005 mandated 7.5 billion gal. of
biofuels by 2012
Corn & Feed Grains
• Rapid growth in use in ethanol production has
driven up price to record levels to bid corn away
from exports and livestock & poultry feeding and
to bid land away from soybeans, wheat, etc. in
2007.
– U.S. corn exports may go to zero within a few years
• Jan. 12 crop report reduced size of 2006 corn
crop by 210 million bu. when supply-demand
balance was already tight; implies stocks below
pipeline level; drove corn price even higher, and
took wheat and soybeans along with it.
• How many mill. acres will corn pull from other
crops? How fast can corn yields increase?
Soybeans & Oilseeds
• Record 2006 U.S. soybean crop in 2006
• Strong export demand; China is importing half of
world soybean trade
• Growing use of soybean oil and other edible oils
in biodiesel (rapid growth in Europe) will
increase price of edible oils, raising value of oil
fraction.
• Meal fraction will confront competition from high
protein ethanol byproduct, distillers dried grain,
especially in ruminant feeding.
• Soybean price will have to rise enough to
stimulate expansion of South American soybean
acreage to compensate for loss of U.S. soybean
acreage to corn.
Livestock & Poultry
• Huge uncertainty from rising price of feed
• Likely severe drop in profitability of pork and
poultry operations due to much higher feed
costs
• Beef & dairy feed costs will also rise, but to the
extent that they can use significant amounts of
ethanol byproduct (DDGS) in rations, they’ll be
less severely impacted.
• Expect higher meat prices to consumers as
higher feed costs get passed through
• Immigration reform essential to meat packing
industry.
Exports Important to U.S. Meats
• U.S. exports 13% of its pork production (16th
consecutive record volume exported)
– U.S. 2nd largest exporter after EU
– Feed cost advantage; also weak dollar
• U.S. poultry exports (12-15% of production)
essential to profitability because U.S. exports
largely dark meat (leg quarters) which have low
value in U.S. domestic market
• Some recovery in beef exports after devastating
impact of BSE scare; shows need for a rulesbased international trading system with tough
SPS regulations grounded in sound science.
• World price of feed will be everywhere higher.
Net effect on U.S. competitiveness in meats?
Wheat
• Sharp reduction in U.S. and world wheat
production in 2006. (Australian drought)
• U.S. winter wheat seeding increased, but will
some be ripped out to plant corn?
• Expect recovery of world wheat production in
2007. Will prices drop again after recovery, or
will they have to stay high to keep land from
moving from wheat into corn?
– More drought-tolerant corn varieties are coming.
• Will we see more wheat feeding than previously
in the U.S.?
Dairy
• Global demand for dairy products growing
rapidly & world dairy prices at historic highs
• Lower U.S. price of milk in 2006
• Large increases occurring in production per cow
– Nat’l. ave. about to break through 20,000 lbs./cow/yr.!
• Rapid growth of large, low unit cost of production
herds that are internationally competitive
(w/some geographic shifts to states with less
onerous regulatory costs)
– What future for small, high cost producers?
– Whither MILC program?
Fruits & Vegetables
• Growing demand from increased consumer
health consciousness and 2005 revision of
USDA Dietary Guidelines
• Rapid increase in U.S. imports of fruits,
vegetables, wine & beer has reduced ag trade
balance almost to zero.
– Consumers want diversity and 365-day per year
availability in supermarkets.
• Many U.S. export successes, but also keen
competition from new exporters with lower labor
costs, e.g. China
– Immigration reform critical to future competitiveness
• Food safety concerns after incidents in 2006
Cotton & Rice
• Will high prices of corn and soybeans pull acres
out of rice and/or cotton?
• Profitability and ability to compete in export
market more dependent on government support
than other commodities (higher payments per
acre and per farmer).
– Will 2007 farm bill reduce this support? Will there be a
buy-out or buy-down?
– U.S. has not yet made all the changes mandated in
WTO Brazil cotton decision. Rice program also
vulnerable to challenge in WTO.
Changing World Ag Trade
• Stagnant food demand in high income
countries; rapid growth in developing
countries as middle class grows
– more through supermarkets (with global
supply chain)
• Larger percent of world production traded
• Trade in high value & processed products
growing faster than in commodities
• Explosion of commodity exports from
South America; expect more from Eastern
Europe and Former USSR, esp. Ukraine
European Union
• Shrinking population
• Has as rapid growth of biodiesel as U.S. ethanol
• Ag policy reforms underway are real
– even sugar
• Eliminating all export subsidies will force further
reform of domestic ag policy
– e.g. dairy (already planning to get rid of quotas)
• Tough environmental and animal welfare
regulations significantly raise costs
– All battery cages to be banned from 2007
• Rejection of ag biotech setting back its
competitiveness
• Aggressive use of SPS barriers to ag imports
Eastern Europe & Former Soviet Union
• Severely declining populations
• Excellent soils in Ukraine and parts of FSU
mean great ag productive potential
• Weak applied research
• Inadequate property rights (especially farm
land), contact sanctity, & rule of law
• Slow development of necessary ag input
and product markets
East and South Asia
• Huge population with large numbers of
people at very low income levels mean
huge future food demand growth
• Has much larger percent of world’s
population than arable land, so food
demand likely to outrun supply potential
China
• The 800-pound gorilla in all ag and mineral
commodity markets today
• Rapid economic growth has generated rapid
growth in meat consumption, but half of
population still earns less than $2/day.
• Average farm size less than 1 acre leads to
extensive rural poverty
• To reduce rural poverty (and associated political
stresses), government abandoned grain selfsufficiency objective; letting farmers grow laborintensive higher value per acre crops; e.g. fruits,
vegetables; animal agriculture. Exporting them.
• Has largest number of pigs in world.
India
• Projected to have 250 million more people than
China by 2050.
• Economy is starting to move; already 250 million
middle-class consumers, but also 500 million
living on less than $1 per day!
• Huge dairy product consumption; has more dairy
cows than any other country
• Huge and growing poultry product consumption
• Most people who don’t eat meat don’t by reason
of poverty, not religion.
New Zealand & Australia
• After New Zealand went cold turkey on ag
subsidies, agriculture never more profitable nor
more entrepreneurial
• Reform also in Australia, but more gradual with
buyouts
• Dairy sectors of both have thrived; both have
been extremely successful in penetrating Asian
markets
• Fonterra even markets US dairy products in
world market
• Neither is very big, so will never be marginal
agricultural exporter (Australia has large land
area, but most is desert.)
Canada
• North-South integration of North American
markets
– NAFTA
– Reform of rail freight rates
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Dairy and poultry marketing quotas
Attracting sugar-using industries from U.S.
Canadian Wheat Board reform?
WTO case against U.S. corn program?
Revenue insurance programs possible
model for US ag policy reform?
Middle East & North Africa
• Can never be self-sufficient in food due to
water scarcity
• Israeli R&D “provides” state of the art
technology in horticultural crops and
efficient water use for entire
Mediterranean Basin
– Can only afford to use water on highest value
crops
– What future role of Mediterranean countries in
world fruit and vegetable trade?
South America
• One of only 2 regions with more land that can be
brought into production
• Brazilian agricultural export miracle
– Soybeans & frozen concentrated orange juice
– Now pork and broilers gaining fast
• Key role of Brazil’s own ag research (EMBRAPA)
• Argentina’s negative producer support (export
taxation)
• Brazil is world leader in ethanol to power
automobiles (made from sugar cane)
• How much shift into corn now likely?
Sub-Saharan Africa
• Many countries are “basket cases” with declining
per capita food production
• Corruption & bad governance are main reasons
for agriculture’s general underperformance
• Underinvestment in rural infrastructure and
education and agricultural research
• There are a few success stories of global supply
chains, e.g. vegetables & cut flowers to Europe
• South Africa providing regional leadership
• China active in Africa locking up access to both
agricultural and mineral commodities
• Could Southern Cone become the “next Brazil?”
Larger Fraction of World Food
Production to Move Through Trade
• The world’s arable land and fresh water are not
distributed around in the world in the same
proportions as population.
– No way for Asia or Middle East to be self-sufficient in
food
• With population growth, urbanization and broadbased economic development, many LDCs’ food
consumption to outstrip their production capacity
and they will become larger net importers.
• Efficient producers of feed grains and soybeans,
wherever they are, will benefit significantly.
The World’s Arable Land (left)
Is Distributed Very Differently
than Its Population (right)
OECD Countries
26%
Africa
11%
OECD Countries
14%
East Asia and the
Pacific
14%
South Asia
22%
South Asia
15%
Middle East and
North Africa
4%
Africa
11%
Europe and
Central Asia
20%
Latin America
and Caribbean
10%
Middle East and
North Africa
5%
Latin America
and Caribbean
9%
East Asia and the
Pacific
31%
Europe and
Central Asia
8%
Projected World Food Demand
• World food demand could double by 2050
– 50% increase from world population growth – all
in developing countries
– 50% increase possible if low income countries
achieve broad-based economic growth
• How many presently low income consumers
are lifted out of poverty will be the most
important determinant of the future size of
world food and agricultural product markets.
• The ability of low income countries to export
the products in which they have a
comparative advantage will constrain their
ability to reduce poverty.
Projected Population Growth
(U.N. medium projections)
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Region
World
High Income
Low Income
Africa
Asia
Latin America
North America
Europe
2005
6,465
1,211
5,253
906
3,905
561
331
728
2050
9,076
1,236
7,840
1,937
5,217
783
438
653
+ 40%
+ 2%
+ 49%
+114%
+ 33%
+ 40%
+ 32%
- 10%
Dynamics of World Food Demand
• 1.25 billion people live on less than $1 per day,
of whom 840 million suffer under-nutrition or
hunger
• 3 billion (almost half of the world’s population)
live on less than $2 per day.
• By $2 per day, most hunger (calorie) problem is
solved
• Between $2 and $10 per day people eat more
animal protein, fruits, vegetables & edible oils,
causing rapid growth in raw ag commodity
demand
• After $10 per day, people buy more processing,
services, packaging, variety, and luxury forms,
but not more raw ag commodities
Huge Market Growth Potential
from Poverty Reduction
Country
Pop’n (000) % < $1/day % < $2/day
China
1299
16.6
46.7
India
1065
34.7
79.9
Indonesia
239
7.5
52.4
Brazil
184
8.2
22.4
Pakistan
159
13.4
65.6
Russia
144
6.1
23.8
Bangladesh
141
36.0
82.8
Nigeria
126
70.2
90.8
Mexico
105
9.9
26.3
Source: World Bank. World Development Indicators database
Doha Round Agricultural
Agreement: What Is Possible?
• Eliminate all forms of ag export subsidies
• Reduce trade-distorting domestic
subsidies (highest the most, but
exceptions possible)
• Reduce tariffs (highest the most, but
exceptions allowed if increase minimum
market access)
• Accelerate economic growth in low income
countries.
Prospects for Doha Round
• U.S. farm organizations will support a Doha Round
Agreement that significantly reduces trade-distorting
domestic subsidies only if the Agreement includes
significant increases in market access.
• They put too much emphasis on increasing access
into shrinking markets of the past and not enough
on growing the total size of the world market.
• Key sticking points:
– Will the E.U. be able to offer more agricultural market
access than heretofore?
– Will the U.S. be able to increase its offer?
– Will Brazil and India offer more market access for services
and non-ag manufactured goods?
• If not, the end of the Doha Round will not likely
come during the Bush Presidency.
Remember
• The Uruguay Round Agreement on Agriculture will
continue to set the rules of the road for international
agricultural trade until some future round of negotiations
changes them.
• If this round fails or is delayed, expect more cases to be
filed with WTO against U.S. commodity programs. (No
Peace Clause)
• The U.S. risks losing marketing loans, LDPs and CCPs
though litigation and get nothing for giving them up. If we
give them up in the round, we get something for giving
them up.
• The round is not so much about reducing farm subsidies
as it is about moving them from trade-distorting to nontrade-distorting mechanisms.
• The big potential payoff is faster economic growth in
LDCs and, in turn, larger world demand for ag products.
Thank you.