Outlook for Agriculture:
Does a Downturn Loom?
Bruce A. Babcock
Center for Agricultural and Rural Development
Iowa State University
Presented at the Pro-Ag Meeting in Fort Dodge, Iowa
November 12, 2008
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
Dec-06
Nov-06
Nearby CBOT Corn Prices
8.00
7.00
6.00
5.00
4.00
3.00
2.00
1.00
0.00
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
Dec-06
Nov-06
Nearby CBOT Soybean Prices
18.00
16.00
14.00
12.00
10.00
8.00
6.00
4.00
2.00
0.00
World Demand
• Likely a severe downturn in income growth
– U.S., EU, China, India, Japan, S. Asia
• Drop in income growth will hold down growth
in demand for meat, wheat and feed grains
• Food demand is income inelastic, but demand
for meat and dairy products income elastic in
many areas of the world
Net Feed Grains Supplies
1300
1250
30% of U.S. Corn Crop
14% of U.S. Corn Crop
1200
M
M
T
1150
1100
1050
1000
2005
2006
Feed Grains
2007
Feed Grains Less US Ethanol
2008
Wheat Production Has Rebounded
820
800
Size of the US Crop
780
M
M
T
760
740
720
700
2005
2006
2007
2008
Wheat Production Increases
•
•
•
•
•
Ukraine up by more than 50%
Australia up by more than 70%
EU up by 23%
Canada up by 20%
US up by 12%
Commodity Economics
• High prices encourage investment in
production capacity
• Increased capacity is semi-irreversible
• No real limits on production capacity if
investment occurs
R
D
ng
ol
a
Su
Ta dan
M nz
oz an
am ia
bi
qu
Za e
m
bi
a
C
Ca AR
m
er
oo
n
M Ch
ad ad
ag
as
Et car
hi
op
N ia
Co ige
te ria
d'I
Co voi
ng re
o
Re
G p
ab
on
Zi Ma
m li
Bu bab
rk we
in
aF
as
o
A
ng
o
Co
Million ha
Potentially Arable Land by Country in Sub Saharan Africa
120
100
80
60
40
20
0
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
Dec-06
Nov-06
The Value of the Dollar
90.00
85.00
80.00
75.00
70.00
65.00
60.00
55.00
50.00
Why is the Dollar Stronger?
• Relative safety against turbulent times
• Reduction in demand for commodities
Impact of a Stronger Dollar
•
•
•
•
Lower crude oil prices
Lower ethanol prices
Reduced demand for corn from ethanol
Reduced export demand for U.S. agricultural
commodities
Supply and Demand Outlook
• Commodity bust bad news for U.S. agriculture
– Lower overall food demand growth will lead to
lower agricultural prices
• Bright side of the bust
– Credit constraints and lower prices will reduce
capacity-increasing investment
– Lower input costs will partly cushion blow
– Ethanol RFS
Impact of the RFS
• Renewable Fuels Standard requires 9 billion gallons of biofuels
in 2008, 10.5 billion gallons in 2009
• Gasoline producers must either blend their share of ethanol
or buy a RIN (Renewable Identification Number) from another
producer
• If ethanol becomes scarce, RIN price will increase, thereby
increasing the price of ethanol
• Ethanol producers have to be induced through a high price to
produce required ethanol
• Increases in ethanol price will keep corn prices high
Break-Even Corn Price
• Ability to pay for one bushel of corn:
Price of ethanol * 2.8 gals/bu minus
per bushel processing and capital costs plus
per bushel value of byproducts
Table 2. Predictions of corn prices for alternative crude oil prices
Price of:
Crude
Gasoline Ethanol Corn
$/barrel
$/gallon
$/gallon $/bu
50
1.26
1.20
2.18
60
1.52
1.36
2.71
70
1.77
1.52
3.24
80
2.02
1.67
3.77
90
2.27
1.83
4.30
100
2.53
1.99
4.82
110
2.78
2.15
5.35
120
3.03
2.30
5.88
Relationship Between Ethanol's Ability to Pay for Corn and the Price of
Corn
12.00
10.00
Break-even corn prices
$/bu
8.00
6.00
4.00
Actual corn prices
2.00
0.00
Ethanol Plants are Setting
the Price of Corn
• Changes in the ability to pay for corn very
closely related to the actual price of corn
• Relationship should continue to hold so long
as there are idle ethanol plants
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Sep-07
Aug-07
Jul-07
Jun-07
May-07
Apr-07
Mar-07
Feb-07
Jan-07
Dec-06
Nov-06
Nearby Gasoline and Ethanol Prices
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00
Recent Price History
7.00
6.00
$/bu
5.00
Actual corn prices
4.00
3.00
2.00
1.00
0.00
Corn prices if ethanol had
followed gasoline down
Why Hasn’t Ethanol Followed
Gasoline Lower?
• RFS is binding
• Resolution of transportation bottlenecks
– Should be willing to pay $0.51 above the price of
gasoline for ethanol if one for one substitute
– Right now, ethanol is $0.40 above gasoline
Longer-Run Outlook
• Corn will follow crude higher, but not lower if
ethanol plants do not produce enough
ethanol
• For 2009, we need about 87 million acres of
corn to produce the mandate
• Corn prices relative to soybean prices will
need to be high enough to buy the acres
– If not, then corn prices will increase significantly
next year
Outlook continued
• Credit constraints should work to hold world
supplies down
• Need to produce corn should help keep corn
margins at a decent level
– Key importance is to keep the RFS and import
tariff in place if corn margins are to be maintained
for a year of two