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The 2012 Corn Predicament. Daryll E. Ray and Harwood D. Schaffer University of Tennessee Institute of Agriculture Agricultural Policy Analysis Center. National Packing Meeting United Food and Commercial Workers Chicago, Illinois August 15, 2012. The Situation.

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the 2012 corn predicament

The 2012 Corn Predicament

Daryll E. Ray and Harwood D. Schaffer

University of Tennessee Institute of Agriculture

Agricultural Policy Analysis Center

National Packing Meeting

United Food and Commercial Workers

Chicago, Illinois

August 15, 2012

the situation
The Situation

Most wide-reaching drought since 1956

Hottest July on record dating back to 1895

Corn yield by USDA as of Aug. 10

Down 16% from last year’s reduced yield

Down 25% from more normal yield three years ago, 2009

Corn production projected to be lowest since 2006

want to do three things
Want to do Three Things

Visually put the corn “The Situation” into historical perspective

No Reserve? What is the deal with that?

Haven’t we, and other countries, had reserves programs in the past?

What if commodity programs between 1998 and 2010 had been replaced with a “reserve program?” (NFU study)

corn yield
Corn Yield

Bushels/Acre

-41 Bu.

-25%

-24 Bu.

-16%

-35 Bu.

-29%

-32 Bu.

-28%

corn yield and production
Corn Yield and Production

Bushels/Acre

Mil. Bu.

88

12

83

Yield

-16%

-13%

-28%

-49%

-29%

-31%

Production

corn production utilization and reserves
Corn ProductionUtilization and Reserves

Mil. Bu.

Utilization

Production

Reserves

(CCC and FOR)

corn price reserves
Corn Price & Reserves

Mil. Bu.

71

77

96

Price

Reserves

reserves are not a new idea
Reserves Are Not a New Idea
  • Egypt
    • 1750 BC
    • Biblical story of Joseph and Pharaoh
    • 7 fat years followed by 7 lean years
  • China
    • Beginning in 54 BC
    • Had its ups and downs over period of 2,000 years
    • “Constant Normal Granary”
    • China currently holds large stocks for domestic needs
us experience
US Experience
  • United States
    • 1929-1996 AD
    • Federal Farm Board – stock holding in attempt to stabilize price
    • Commodity Credit Corporation
      • Stabilize price
      • Ever Normal Granary
      • Manage supply
    • Factors that brought reserves into disrepute
      • Inconsistent management or mismanagement by those who did not believe in rationale for reserves and price stabilization
      • Dumping of excess on world market
arguments against reserves
Arguments Against Reserves
  • Commercials argued they would provide reserves
    • Government “interference” not needed
  • Not to worry
    • Free trade will guarantee availability from one country or another
  • Too expensive
    • Procurement and storage costs are too costly
  • Requires a large physical stock
argument analysis
Argument Analysis

Assertions not always true

Commercials have no incentive to hold stocks

Supply disruptions can affect more than one supplier in a given year

One has to compare costs of storage against a no-reserve alternative

Presence of reserve stocks calms market behavior

Overriding Issue: Countries view food as a national security issue

reserve objectives
Reserve Objectives
  • Prevent crises:
    • Consumer price and availability crises
    • Producer crises (livestock producers when prices are “high;” followed by extraordinary low crop prices for crop farmers)
  • The objective is NOT to fix prices
  • But to work with the market to ameliorate impacts of extreme price fluctuations
    • Food availability/food prices
    • Severe economic disruptions
    • Environmental damages
a market directed inventory system mdis

A Market Directed Inventory System(MDIS)

Daryll E. Ray and Harwood D. Schaffer

Agricultural Policy Analysis Center

University of Tennessee Institute of Agriculture

National Farmers Union

February 29, 2012

policy description
Policy Description

Objectives

  • Bulk of revenue from market receipts
  • Reduce government payments while maintaining farm income
  • Reduce price volatility
policy description1
Policy Description

MDIS Specifications for 1998-2010 Study Period

  • Initial corn loan rate set at midpoint between variable and full cost of production
  • Indexed with a prices paid by farmers index
  • Other crop loan rates set to historic ratios with corn
  • Release price is set at 160% of loan rate
policy description2
Policy Description

MDIS Specifications for 1998-2010 Study Period

  • MDIS maximums
    • Corn – 3 billion bushels
    • Wheat – 800 million bushels
    • Soybeans – 400 million bushels
  • Farmer storage payment rate 40¢/bu./yr
  • Set-aside available if needed
  • Eliminate Direct Payments, LDPs, & CCPs
8 crops government payments
8 Crops - Government Payments

$ Billion

Historic Baseline

$152 Billion

(Total 1998-2010)

MDIS

$56 Billion

8 crops government payments average per year over each period
8 Crops – Government PaymentsAverage Per Year Over Each Period

$ Billion

Historic

Baseline

$14.8

$11.7

MDIS

$6.8

$4.8

$4.3

$3.6

corn prices
Corn Prices

Release Price

MDIS

Historic Baseline

Loan Rate

corn prices average per year over each period
Corn PricesAverage Per Year Over Each Period

$4.02

$3.71

MDIS

Historic

Baseline

$3.07

$2.81

$2.68

$2.05

corn exports quantity
Corn Exports - Quantity

Million Bu.

Historic Baseline

MDIS

corn exports value
Corn Exports - Value

$ Billion

MDIS

Historic Baseline

corn value of exports average per year over each period
Corn Value of ExportsAverage Per Year Over Each Period

$ Billion

$8.3

$7.7

MDIS

Historic

Baseline

$5.9

$5.6

$4.8

$3.9

mdis stocks
MDIS Stocks

Million Bu.

Corn

Wheat

Soybeans

corn value of production plus government payments average per year over each period
Corn – Value of Production plus Government PaymentsAverage Per Year Over Each Period

$ Billion

$51.5

MDIS

$46.5

Historic

Baseline

$36.1

$35.2

$28.2

$26.4

realized net farm income average per year over each period
Realized Net Farm IncomeAverage Per Year Over Each Period

$ Billion

Historic

Baseline

MDIS

$55.8

$51.1

$50.8

$51.5

$49.8

$52.1

summary of findings
Summary of Findings

Over the Study Period, 1998-2010, with MDIS in Place:

  • Government payments 60% lower
  • Increased reliance on market receipts
  • Value of exports $4.9 billion higher
  • Lower price volatility benefitting:
    • Consumers
    • Crop farmers
    • Livestock producers and industrial users
weekly policy column
Weekly Policy Column

To receive an electronic version of our weekly ag policy column send an email to:

dray@utk.edu

requesting to be added to APAC’s Policy Pennings listserv

corn feed fsi exp
Corn Feed FSI Exp

1,000 Bu.

Feed

Food, Seed, Industrial

Exports