Risk Factors in Agriculture
Chad Hart
Center for Agricultural and Rural Development
Iowa State University
E-mail: chart@iastate.edu
June 9, 2008
Ag. Credit School
Iowa State University
Ames, Iowa
Brief List
• Food, feed, and energy demand
• Agricultural, energy, and trade policy
• Input and output pricing
• Production / crop progress
• General economic conditions
Population
2008
2020
2050
(billion)
(billion)
(billion)
World
6.678
World
7.601
World
9.393
China
1.330
China
1.431
India
1.808
India
1.148
India
1.362
China
1.424
U.S.
0.304
U.S.
0.336
U.S.
0.420
Indonesia
0.238
Indonesia
0.268
Nigeria
0.357
Brazil
0.192
Brazil
0.212
Indonesia
0.313
Pakistan
0.168
Pakistan
0.204
Bangladesh
0.280
Bangladesh
0.154
Bangladesh
0.190
Pakistan
0.278
Russia
0.141
Nigeria
0.184
Brazil
0.228
Nigeria
0.138
Russia
0.132
Congo
0.189
Japan
0.127
Mexico
0.125
Mexico
0.148
Source: U.S. Bureau of the Census, International Data Base
Real GDP
9
8
Percent Change
7
6
5
4
3
2
1
World
Developed Market Economies
Developing Market Economies
Sources: International Financial Statistics, Global Insight
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
Real GDP by Country
12
Percent Change
10
8
6
4
2
0
2008
2009
United States
Source: Global Insight
2010
China
2011
India
2012
2013
Indonesia
2014
2015
South Africa
2016
2017
Nigeria
270
Per Capita Meat Consumption
250
230
Pounds
210
190
170
150
130
110
90
2008
China
2009
EU
Source: FAPRI
2010
Mexico
2011
Russia
2012
2013
2014
South Africa
2015
2016
South Korea
2017
U.S.
800
Wheat Production and Stocks
700
Million Metric Tons
600
500
400
300
200
100
0
Production
Sources: USDA, FAPRI
Ending Stocks
1000
Corn Production and Stocks
900
Million Metric Tons
800
700
600
500
400
300
200
100
0
Production
Sources: USDA, FAPRI
Ending Stocks
Liquid Fuel Usage
2004
(Million Barrels Oil
Equivalent per
Day)
2010
2015
2020
2025
2030
United States
20.7
103%
109%
115%
121%
129%
Canada
2.3
100%
100%
104%
104%
104%
Mexico
2.0
110%
115%
130%
135%
145%
Europe
15.6
99%
99%
100%
101%
101%
Japan
5.4
96%
96%
96%
96%
96%
China
6.4
147%
164%
186%
213%
245%
India
2.5
108%
128%
144%
160%
176%
Africa
2.8
118%
139%
154%
164%
175%
Central and South America
5.4
120%
137%
152%
167%
180%
World
82.5
110%
118%
126%
134%
143%
(Percent of 2004 Value)
Source: U.S. Dept. of Energy, Energy Information Administration
Ja
n
Ja -19
n 8
Ja -19 6
n 8
Ja -19 7
n 8
Ja -19 8
n 8
Ja -19 9
n 9
Ja -19 0
n 9
Ja -19 1
n 9
Ja -19 2
n 9
Ja -19 3
n 9
Ja -19 4
n 9
Ja -19 5
n 9
Ja -19 6
n 9
Ja -19 7
n 9
Ja -19 8
n 9
Ja -20 9
n 0
Ja -20 0
n 0
Ja -20 1
n 0
Ja -20 2
n 0
Ja -20 3
n 0
Ja -20 4
n 0
Ja -20 5
n 0
Ja -20 6
n- 07
20
08
$ per barrel
140
Crude Oil Prices
120
100
80
60
40
20
0
Source: U.S. Dept. of Energy, Energy Information Administration
140
Crude Oil Futures Prices
138
$ per barrel
136
134
132
130
128
126
July Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec. Dec.
2008 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: NYMEX, June 6, 2008
26
4/
9/
20
Corn
Soybeans
08
6/
4/
20
8
08
8
/2
00
21
5/
5/
7/
20
/2
00
08
8
8
8
/2
00
23
4/
3/
Crude Oil
/2
00
12
3/
8
/2
00
27
2/
8
/2
00
13
2/
8
/2
00
30
1/
08
/2
00
16
1/
1/
2/
20
Price Movements in 2008
1.5
1.4
1.3
1.2
1.1
1
0.9
0.8
Ethanol Gross Margin
Net Cost of Corn
Cost of Nat. Gas
5/21/2008
3/21/2008
1/21/2008
11/21/2007
9/21/2007
7/21/2007
5/21/2007
3/21/2007
1/21/2007
11/21/2006
9/21/2006
7/21/2006
5/21/2006
3/21/2006
1/21/2006
11/21/2005
9/21/2005
7/21/2005
5/21/2005
3/21/2005
$ per Gallon
4.50
Historical Ethanol Margins
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Renewable Fuels Standard
40
35
Billion gallons
30
25
20
15
10
5
0
2009
2012
Conventional Biofuels
Biodiesel
2015
2018
2021
Cellulosic Biofuels
Additional Advanced Biofuels
Target Price Changes
Crop
Unit
2008-09
2010-12
Corn
$/bu.
2.63
2.63
Soybeans
$/bu.
5.80
6.00
Barley
$/bu.
2.24
2.63
Wheat
$/bu.
3.92
4.17
Oats
$/bu.
1.44
1.79
Cotton
$/lb.
0.724
0.7125
Sorghum
$/bu.
2.57
2.63
Loan Rate Changes
Crop
Unit
2008-09
2010-12
Corn
$/bu.
1.95
1.95
Soybeans
$/bu.
5.00
5.00
Barley
$/bu.
1.85
1.95
Wheat
$/bu.
2.75
2.94
Oats
$/bu.
1.33
1.39
Cotton
$/lb.
0.52
0.52
Sorghum
$/bu.
1.95
1.95
Average Crop Revenue Election
(ACRE)
• Gives producers a one-time option to
choose a revenue-based counter-cyclical
payment program, starting in 2009
• Producers choose between the current
stable of programs or ACRE
• Producers choosing ACRE agree to 20%
decline in direct payments and 30% decline
in loan rates
ACRE
• Program has state and farm trigger levels,
both must be met before payments are
made
• Expected state and farm yield based on 5
year Olympic average yields per planted
acre
• ACRE price guarantee is the 2 year
average of the national season-average
price
ACRE Structure
• ACRE revenue guarantee = 90% of ACRE
price guarantee * Expected state yield
• ACRE actual revenue = Max(Seasonaverage price, Loan rate) * Actual state
yield per planted acre
• Farm revenue trigger = Expected farm yield
* ACRE price guarantee + Producer-paid
crop insurance premium
ACRE Payments
• Payment rate = Min(ACRE revenue
guarantee – ACRE actual revenue, 25% *
ACRE revenue guarantee)
• Payments made on 83.3% of planted/base
acres in 2009-11, 85% in 2012
• ACRE payment adjustment: Payment
multiplied by ratio of Expected farm yield to
Expected state yield
Countries Pursuing Biofuels
US
Brazil
Argentina
Colombia
Paraguay
Canada
Uruguay
Mexico
Thailand
New Zealand
South Africa
South Korea
Philippines
Indonesia
Pakistan
China
India
Malaysia
Australia
Japan
EU
Russia
Not a
complete list
World Trade Organization
• Ongoing negotiations for WTO agriculture
agreement
• Targeting changes in domestic support,
tariffs, tariff quotas, and export subsidies
• Both general and product-specific
guidelines for agricultural policy changes
Weather
For Iowa
Percent Planted
Corn
Soybeans
6/1/08
97
82
6/1/07
99
91
Average
100
92
Percent Emerged
Corn
Soybeans
6/1/08
77
37
6/1/07
91
66
Average
93
64
Crop Condition
Corn
V. P.
1
Poor Fair
4
29
Source: USDA, Crop Progress, June 2, 2008
Good Excellent
55
11
GM Crops
Input Costs
Source: USDA, Agricultural Prices, May 30, 2008
Changing Basis Patterns
Current Basis
2.00
2.40
2.80
3.20
3.60
4.00
4.40
4.80
5.20
5.60
6.00
6.40
6.80
7.20
7.60
8.00
8.40
8.80
9.20
9.60
10.00
10.40
10.80
11.20
11.60
12.00
12.40
12.80
Implied Price Volatilities
Looking at July Corn futures in May:
2005
2006
2007
2008
26%
30%
38%
40%
Corn Price Distributions
Based on May 2008 USDA mid-point
price of $5.50 per bushel
Implied Volatility = 25%
2.00
2.40
2.80
3.20
3.60
4.00
4.40
4.80
5.20
5.60
6.00
6.40
6.80
7.20
7.60
8.00
8.40
8.80
9.20
9.60
10.00
10.40
10.80
11.20
11.60
12.00
12.40
12.80
Implied Volatility = 15%
$ per bushel
Thanks for your time!
Any questions?