Potential Influence of Commodity
Policy on Iowa Agriculture
Bruce A. Babcock
Dermot J. Hayes
Center for Agricultural and Rural Development
Iowa State University
Background
• Can a change in commodity policy really
change
– types and quantities of crops and livestock
grown in Iowa?
– financial conditions on Iowa farms?
– number of Iowa farms?
• If so, then what policies will lead to what
we want Iowa to look like in the future?
Three “extreme” policies
• Liberalization
– Unilaterally remove all U.S. commodity subsidies,
import tariffs and quotas, export subsidies: keep crop
insurance
– Multilateral: Same as above but all other countries do
the same.
• New Europe: Decoupled payments and increase
protection for farmers to move “upscale” by
increasing and protecting brands.
• Old Europe: Raise domestic crop and livestock
prices. Adopt policies to remove resulting
surpluses from the market.
Multilateral Liberalization
• Elimination of
– Domestic subsidies in all countries
– Import restrictions on sugar, beef, and dairy
– Barriers faced by U.S. meat and grain exports
• Maintenance of
– Subsidized U.S. crop insurance
– CRP
– Energy policy
Impacts of Multilateral Liberalization
• Export demand for U.S. beef and pork exports increase
dramatically
• Iowa increases production of pork and beef
• Moderately more corn acres fewer soybean acres
• Drop in cash rents and Iowa land prices
• Moderate increase in grain prices and eventual improvement
in grain basis
• Continued consolidation in farm size, but very small change
from baseline
• Continued insurance-based safety net for U.S. producers
• More cattle in Iowa to take advantage of DDGs
• Extreme volatility in livestock markets due to increased export
dependence, that is compensated by a move to livestock
insurance programs
Meat Exports
• U.S. pork and beef exports have responded to previous
trade liberalizations
• The baseline assumes no additional liberalization,
therefore the rate of growth in exports is slower than
under the recent historical period.
• It makes more economic sense to ship boneless beef
and pork than it does to ship animal feed
• It only makes economic sense to ship feed when a
distortion exists
• For example, within the EU and the US internal markets,
bulk grains are seldom shipped because it is more
efficient to ship meat than grains.
Meat Exports (cont.)
• After liberalization beef and pork exports respond quickly. Pork
exports grow faster than beef exports because Asia consumes far
more pork than beef
• At some point about 10-12 years from liberalization, the U.S. uses
all its corn and soybean surplus internally when U.S yields are low.
• At this point the growth in meat exports begins to slow
• The removal of Canadian income guarantee programs cause the
U.S. sow herd to grow and the Canadian herd to shrink
• In the absence of environmental and social constraints the upside
maximum potential for meat exports is about 3.5 times current
levels.
• This allows an average residual export level of one billion bushels of
corn.
• In the scenario corn exports equal about two billion bushels
U.S Beef Exports 1960:2004, and Predicted to 2024
2000
1600
Free Trade Scenario
1400
1200
Baseline Scenario
1000
800
600
400
200
0
19
60
19
63
19
66
19
69
19
72
19
75
19
78
19
81
19
84
19
87
19
90
19
93
19
96
19
99
20
02
20
05
20
08
20
11
20
14
20
17
20
20
20
23
Thousand Metric Tons (CWE)
1800
Year
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
20
22
20
24
Thousand Metric Tons (CWE)
U.S. Pork Exports 1960:2004 and Projected to 2024
2500
2000
1500
Baseline Scenario
Free Trade Scenario
1000
500
0
Year
Iowa Share of U.S. Meat
Production
• Iowa is the principal source of grain exported
from the U.S, and as this grain begins to be fed
domestically Iowa gets a disproportionate share
of the additional production
• The availability of abundant DDG’s causes an
additional increase in beef feeding
• Iowa has borne the brunt of the expansion in the
Canadian sow herd and it experiences a
rebound in sow numbers when this program is
removed
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
20
19
20
21
20
23
Thousand Animals
January 1 Cattle on Feed Iowa, 1965:2004 and Projected to 2024
2500
2000
Free Trade Scenario
Baseline Scenario
1500
1000
500
0
Year
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
20
19
20
21
20
23
Percent
Iowa's Share of U.S. Cattle on Feed 1965:2003 and Projected to 2024
20
18
16
14
12
Baseline Scenario
Free Trade Scenario
10
8
6
4
2
0
Year
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
Thousand Head
Dec 1 Market Hog Inventory in Iowa 1960:2003 and Projected to 2024
25000
20000
Free Trade Scenario
Baseline Scenario
15000
10000
5000
0
Year
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
20
19
20
21
20
23
Thousand Head
Swine Breeding Herd in Iowa 1963:2003, and Projected to 2024
3000
2500
Free Trade Scenario
Baseline Scenario
2000
1500
1000
500
0
Year
Iowa's Share of U.S. Market hog and Swine Breeding Herd 1963:2003, and Projected to 2024
0.35
0.3
0.25
Percent
0.2
Market Hogs: Free Trade Scenario
0.15
Breeding Herd: Free Trade Scenario
Market Hogs: Baseline
0.1
Breeding Herd: Baseline
0.05
23
21
20
19
20
17
20
15
20
13
20
11
20
09
20
07
20
05
20
03
20
01
20
99
20
97
19
95
Year
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
77
19
75
19
73
19
71
19
69
19
67
19
65
19
19
19
63
0
Corn and Soybeans Baseline
• Corn supplies will increase by 1/3 over the next 25 years with
no change in acreage. Soybean supplies will increase by
18%.
• Growth in per-acre yields fills all demand for corn from
expanded ethanol production, expanded meat exports, and
expanded meat production. Exports remain flat.
• Increased use of corn for ethanol will increase supply of
DDGs with a corresponding reduction in demand for U.S.
soybean meal.
• Brazil continues to displace U.S. in world soybean markets.
• Per-bushel costs of growing corn relative to soybeans will
allow some farmers to move away from a corn-soybean
rotation.
• Farm programs keep soybean acreage and corn acreage
stable in the baseline.
Land in Farms in Iowa: 1987 to 2002 Using Census of Ag Data
35000
30000
1000 acres
25000
20000
15000
10000
5000
0
1986
1988
1990
1992
1994
1996
Year
1998
2000
2002
2004
Corn and Soybean Yields Per Planted Acre in Iowa: Actual
and Trend
250
bu/ac
200
150
100
50
0
1980
1990
2000
2010
2020
Year
Corn Yields
Corn Trend
Soy Yields
Soy Trend
2030
U.S. Corn and Soybean Planted Acres:
History and Baseline Projection
90000
'000 acres
80000
70000
60000
50000
40000
30000
1980
1985
1990
1995
2000
2005
2010
2015
2020
Year
US corn acres - baseline
US soy acres- baseline
2025
2030
South America
• South America will continue its expansion in soybean
production.
• Acreage will not be a limiting factor for next 20 years.
• Yields will continue to grow but a bit more slowly.
• Costs will also grow as disease and insect pressure
increases.
• Infrastructure, capital costs, and perhaps government
stability will be the limiting factors in production.
• Brazil will continue to be infested with FMD.
South American Soybean Production Baseline
8000
7000
million bushels
6000
5000
4000
3000
2000
1000
0
1990
1995
2000
2005
2010
2015
Year
2020
2025
2030
2035
Liberalization’s Impact on Crops
• Total planted acres will stay fixed at 23 million.
• Expanded meat exports will increase the demand for corn
relative to soybeans.
• Elimination of U.S. farm programs will cause farmers to switch
to corn nationally..
• More acres holds down the basis improvement and price
increase that we would otherwise see for Iowa corn
production due to expanded utilization in Iowa.
• Drop in U.S. soybean production will increase South American
production allowing it to become the dominant player in
soybean and soymeal production.
• The expansion in soybean supply in South America will
increase payoff from domestic utilization of soymeal in a
domestic livestock industry with a concentration on poultry in
South America.
U.S. Corn and Soybean Planted Acres
90000
'000 acres
80000
70000
60000
50000
40000
30000
1970
1980
1990
2000
2010
2020
2030
Year
US corn acres - baseline
US soy acres- baseline
US corn acres - scenario
US soy acres - scenario
2040
Corn Used in Ethanol Production
4000
3500
Million Bushels
3000
2500
2000
1500
1000
500
0
1990
1995
2000
2005
2010
Year
2015
2020
2025
2030
• 3.5 bbu of corn in ethanol production produces
29.7 million tons of DDGs
• The U.S. produced 37.6 million tons of soybean
meal from the 2003 crop.
• An acre of corn grown for ethanol produces the
same tonnage of DDGs as the meal produced
on an acre of soybeans
• New technologies will develop to feed DDGs to
hogs and poultry
• Soybeans will be grown primarily for oil
Ratio of Corn to Soybean Acres in Iowa
2
1.75
Ratio
1.5
1.25
1
0.75
0.5
1980
1990
2000
2010
2020
Year
History
Baseline
Free-Trade Scenario
2030
Iowa Corn and Soybean Acres
16
14
Million acres
12
10
8
6
4
2
0
1970
1980
1990
2000
2010
2020
2030
2040
Year
Corn baseline
Soybeans baseline
Corn scenario
Soybeans scenario
South American Soybean Production under Free-Trade
8000
7000
million bushels
6000
5000
Baseline
4000
Scenario
3000
2000
1000
0
1990
2000
2010
2020
Year
2030
2040
Iowa's Share of U.S. Corn and Soybean Planted Acres
0.18
0.17
'000 acres
0.16
0.15
0.14
0.13
0.12
0.11
0.1
1980
1990
2000
2010
2020
2030
Year
IA corn share - baseline
IA soy share - baseline
IA corn share - scenario
IA soy share - scenario
2040
Acreage effects
• Iowa baseline corn acres will increase by a small amount
to reflect the relatively greater local demand growth for
corn compared to soybeans.
• Under free trade this trend will be accelerated as Iowa
and U.S. farmers respond to relatively lower production
costs and higher demand for corn. Corn acreage
increases by 5 million acres by 2030 while U.S. soybean
acreage declines by 5 million acres .
• Iowa’s share of U.S. corn acreage will increase to 16%
while its share of soybean acreage will drop to 13%. This
change reflects Iowa’s comparative advantage in
producing corn, strong local demand for corn from a
growing livestock sector feed and ethanol plants, and
some weakness in demand for soybean meal because of
increased supply of DDGs and relatively weak overseas
demands for U.S. soybeans.
Impact of free trade on farm
income for a corn farmer
• Liberalization removes approximately $70 per acre in
payments; subsidized crop insurance program remains.
• Impacts on farm finances are shown by comparing
distributions of total cash revenue less variable cash costs of
production for a corn farmer who a) cash rents and b) who
farms their own land.
• Expected yield is 150 bu/ac. Expected price on the CBOT is
$2.40 for the baseline and $2.45 under liberalization.
Expected basis is $0.25 in the baseline and trends down to
$0.15 in the scenario. The standard deviation of basis risk is
$0.15. The farmer buys 75% RA with the harvest price
option. Variable costs are set at assumed equal to $200 per
acre.
• Land rent is $193 per acre under the baseline and $145 under
the free-trade scenario.
Distribution of Total Revenue Less Variable Costs from Corn
for a Farmer Who Owns their Land
0.12
0.08
Baseline
0.06
Scenario
0.04
0.02
90
13
0
17
0
21
0
25
0
29
0
33
0
37
0
41
0
45
0
50
10
-3
0
-7
0
0
-1
50
-1
10
probability
0.1
$ per acre
Distribution of Total Revenue Less Variable Costs from Corn
for a Land Renter
0.12
0.08
Baseline
0.06
Scenario
0.04
0.02
90
13
0
17
0
21
0
25
0
29
0
33
0
37
0
41
0
45
0
50
10
-3
0
-7
0
0
-1
50
-1
10
probability
0.1
$ per acre
Impact of Liberalization on Crop
Income
• The land owner is unambiguously worse off from
the end of farm programs. The probability of low
revenue is higher and the probability of high
revenue is lower. Expected returns decline by
approximately $48 per acre from $193 per acre
to $145 per acre. This results in approximately a
25% decline in land values.
• The land renter is perhaps better off under the
scenario. The decline in government payments
is offset by a decline in land rent.
Impact on Farm Size
• No convincing evidence that farm
programs have led to larger farm size
– Ability and desire to work more land have
increased.
– Technological changes have facilitated
specialization in crops or livestock.
• With lower cash rents and lower land
values the pace of farm size expansion
picks up slightly
Year
2024
2022
2020
2018
2016
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
400
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
Number of Acres
Average Farm Size in Iowa 1960:2004 and Projected to 2024
500
450
Baseline Scenario
Free Trade Scenario
350
300
250
200
150
100
50
0
Number of Farms In Iowa 1960:2004 and Projected to 2024
200000
180000
160000
Baseline Scenario
Free Trade Scenario
120000
100000
80000
60000
40000
20000
0
19
60
19
62
19
64
19
66
19
68
19
70
19
72
19
74
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
20
18
20
20
20
22
20
24
Number of Farms
140000
Year
Demographics
• The expansion in the numbers of very
large farms and very small farms
continues to crowd out medium sized
farms
• A very large share of total production
comes from very large farms
• These two trends are not impacted by this
particular scenario
Percentage of Iowa Farms by Value of Sales 1987 to 2002, and Projected to
2022
100%
90%
80%
Percentage of Farms (%)
70%
60%
50%
40%
30%
20%
10%
0%
1987
1992
1997
2002
2007
Year
2012
2017
2022
Large
Small To Medium
Hobby
Percent of Iowa Agricultural Receipts by Value of Sales 1987-2002 and Projected to 2022
100%
90%
Large > $500,000 sales in 2002 Dollars
80%
Small to Medium
Percentage of Receipts (%)
70%
Hobby < 10,000 in Sales in 2002 Dollars
60%
50%
40%
30%
20%
10%
0%
1987
1992
1997
2002
2007
Year
2012
2017
2022
2027
New and Old Europe Scenarios
• New Europe would mean that U.S. follows
Europe lead on
– Facilitating development of farmer-owned brands
– Payments for environmental stewardship
– Movement to decoupled payments
• Old Europe would mean
–
–
–
–
–
Legislated higher grain and meat prices
Supply restrictions
Violation of WTO agreement
Drop in ethanol production
Exports controlled by government policy
Old Europe Impacts
• Taxpayers and consumer costs rise as
production expands (i.e. current U.S.
sugar program)
– Likely path same as the transition Europe
took from Old Europe to New Europe
• Production levels as well as farm prices
and profitability are determined by policy
and not by markets, this makes it
impossible to make justifiable projections
New Europe Impacts
• U.S. grain prices rise as U.S. production falls.
• Meat and grain exports are lower than in the multilateral
liberalization scenario because crop prices are higher.
• Land owners may win or lose depending on the level of
decoupled payments
• More producers remain in production as branded products
succeed
• The share of total receipts from medium sized farms falls at a
much slower pace
• Iowa brands emerge and are successful to the extent that meat
quality (and or the perception of meat quality) can be improved
by meat producers