Crop and Policy Outlook

Pat WesthoffFood and Agricultural Policy Research Institute

(FAPRI)www.fapri.missouri.edu

Presentation to the St. Louis AgriBusiness ClubMay 9, 2005

Agenda

Crop market outlook Highlights from our DC briefing book What’s happened since we prepared the

baseline Budget news and possible impacts WTO news and possible impacts

U.S. Crop Yields per Acre

667072344.2

33.9

14243.2

160

42.5

835

6942

70

80

90

100

110

120

130

Corn (bu) Soybean (bu) Wheat (bu) Cotton (lb) Rice (lb)

Per

cent

of

pre-

2004

Rec

ord

2003 2004

Crop Prices

2.32 2.42 2.13 2.19

5.53

7.34

5.104.72 4.99

3.56 3.40 3.35 3.21 3.24

1.94

0

1

2

3

4

5

6

7

8

2002/03 2003/04 2004/05 2005/06 2006/07

Marketing Year

Dol

lars

per

Bus

hel

Corn Soybeans Wheat

Crop Prices

2.32 2.42 2.13 2.19

5.53

7.34

5.104.72 4.99

3.56 3.40 3.35 3.21 3.24

1.94

0

1

2

3

4

5

6

7

8

2002/03 2003/04 2004/05 2005/06 2006/07

Marketing Year

Dol

lars

per

Bus

hel

Corn Soybeans Wheat

April USDA estimates for 2004/05

Soybeans: $5.25-$5.55

Wheat: $3.35-$3.45

Corn: $2.00-$2.10

Crop Prices: What Has Changed?

Biggest change: stronger soybean prices Lower-than-expected Brazilian production (10

mmt less than we had assumed) Relatively strong demand Commodity fund behavior?

Smaller upward revision in corn prices Mostly due to early season farm prices >

market prices (because farmers contracted at high prices)

Fundamentals have actually been weaker than anticipated for corn (exports down, stocks up)

Variable Production Expenses

144160 166 170

75 80 82100 100

6070 74 77 77

172

0

50

100

150

200

2002/03 2003/04 2004/05 2005/06 2006/07

Marketing Year

Dol

lars

per

Acr

e

Corn Soybeans Wheat

Actual 2005 corn costs will be higher

U.S. Land Use (p. 33)2004 Actual

2005 FAPRI

2005 Intentions

Corn 80.9 81.0 81.4

Soybeans 75.2 72.9 73.9

All Wheat 59.7 58.1 58.6

Upland Cotton 13.4 13.7 13.5

Sorghum 7.5 8.2 7.4

Rice 3.3 3.2 3.4

5 Other Crops* 12.8 13.6 13.6

Hay Harvested 61.9 62.7 62.9

Conservation Reserve

34.9 35.8 35.8 (?)

11 Crops + Hay + CRP

349.6 349.1 350.6*Barley, oats, sunflowers, peanuts, and canola

Interest Rate on AAA Bonds

5.0

5.5

6.0

6.5

7.0

7.5

8.0

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Per

cent

Government Outlays

0

5

10

15

20

25

30

35

40

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Fiscal Year

Bill

ion

Dol

lars

Total Mandatory Net CCC

Net Farm Income

30

40

50

60

70

80

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Calendar Year

Bill

ion

Dol

lars

Crop Outlook Summary

Big 2004 crops led to lower prices for many crops and higher CCC outlays

Outlook for 2005/06 hinges on size of this year’s crop and any demand surprises

Farm income is likely to fall from record-breaking 2004 levels

Budget News

Budget Resolution has been approved By Sept. 16, Ag. Committees to make cuts

of $3.0 billion over 5 years (FY 2006-2010) Compares to $7.5 billion in agricultural

program cuts in President’s budget Cuts can come from variety of programs

Farm commodity programs Crop insurance, export credits, conservation Food stamps NOT from discretionary programs like WIC, USDA

salaries, most ag. research, PL 480

Farm Program Cuts Hard to predict where cuts will occur

How much in farm program cuts vs. other? What will be mix of farm program cuts?

For point of reference only: President’s budget proposed withholding 5%

of crop payments starting in 2006/07 CBO said that would save $2.7 billion over 5

years (close to the $3.0 billion target) FAPRI estimates that would cut Missouri

payments by a total of $106 million over the 2006/07-2009/10 crop years

Other Possible Farm Program Cuts

President’s budget proposed limiting availability of loan program benefits

Only get loans on 85% of direct payment yield Would have been a big deal in years with high yields

and low prices (e.g., 2004 corn yield: 160 bu/a.; 85% of DP yield: 87 bu/a.)

USDA said would save only $1.1 billion (they assume relatively high prices, so few loan benefits to begin with)

We estimated this would save $7.2 billion (by looking at range of 500 possible outcomes)

CBO said $5.1 billion (their approach is more like ours) Appears unlikely to be considered by Ag. Committees

Other Possible Farm Program Cuts

Payment limitations President’s budget proposes $250,000

overall limit per person, tighter rules Sen. Grassley has similar bill Would affect cotton and rice far more than

other crops Unlikely to be included in Ag. Committee

bills But could be included in Senate bill by floor

amendment Cuts in target prices, loan rates, direct

payment rates, ???

Why Reconciliation Bills Are Special Reconciliation bill will include cuts in

many programs (not just Ag.) and tax cuts as well—balance of interests

Unlike other legislation, cannot be filibustered in Senate Thus takes 51 votes to approve, not 60

required for most controversial bills Means it could pass with no Democratic

support Makes moderate Senate Republicans key 3 Senate R’s (of 55) voted against resolution

(Chafee, DeWine, Voinovich); no D’s supported

WTO Issues: Cotton Case U.S. has lost WTO case on cotton

subsidies—and the appeal, too Panel ruling suggests U.S. should

Change Step 2 program and export credit guarantee program by July

And make changes so marketing loans and CCPs don’t increase U.S. cotton production

Panel logic would suggest other programs are also vulnerable to WTO challenge

WTO Issues: Cotton Case What will U.S. do to respond?

USDA looking at changes in Step 2 and export credits—but no public decision yet

Step 2 changes almost certain to require Congressional action

And changes in marketing loans or CCPs would clearly require Congressional action

Not at all clear that Congress will make changes even if Administration requests

Could have major implications for WTO talks, etc.

WTO Issues: Doha Talks

Doha Round is at critical phase (again) In Ag., main issues are increased market

access (U.S. demand) and reduced farm subsidies (Brazil, India, etc. demand)

If no breakthrough soon, may be tough to complete overall agreement in 2006

Trade Promotion Authority expires in 2007 Many see this as deadline for agreement Not clear Congress would extend authority

Additional Slides

Corn Returns (p. 10)

0

50

100

150

200

250

300

350

400

450

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Year Crop Harveted

Dol

lars

per

Acr

e

Market LDP Other Payments Variable Expenses

Soybean Returns (p. 20)

0

50

100

150

200

250

300

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Year Crop Harvested

Dol

lars

per

Acr

e

Market LDP Other Payments Variable Expenses

Upland Cotton Returns (p. 28)

0

100

200

300

400

500

600

700

800

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Year Crop Harvested

Dol

lars

per

Acr

e

Market LDP Other Payments Variable Expenses

Selected Government Payments (p. 50)

0

5

10

15

20

25

1998 2000 2002 2004 2006 2008 2010 2012 2014

Year Crop Harvested

Bill

ion

Dol

lars

AMTA/Direct Payments Marketing Loans CCPs Market Loss

Prices Paid by Farmers (p. 52)

80

90100

110

120130

140

150

160170

180

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Calendar Year

Inde

x, 1

990-

1992

=10

0

Fertilizer Fuel

Net Farm Income and Government Payments (p. 54)

0

10

20

30

40

50

60

70

80

1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Calendar Year

Bill

ion

Dol

lars

Net Farm Income Government Payments