Via a special arrangement with Informa Economics, Inc.
NOTE: This column is copyrighted material, therefore reproduction or retransmission is prohibited under U.S. copyright laws.
Continuation of 2008 Farm Bill, no change in RFS mandates key underlying assumptions in updated analysis.
Severe drought has sharply reduced 2012 U.S. production of corn, soybeans and hay, resulting in record prices for many agricultural commodities, and has also prompted the Food and Agricultural Policy Research Institute (FAPRI) to update their 2012 FAPRI-MU longterm baseline (link) to reflect information available in mid-August 2012.
Following is a summary of their update:
The baseline update uses 2012 acreage, yield and production estimates included in USDA's August 2012 Crop Production report. These estimates reflect the first objective yield estimates of the year, and will be subject to revision. Final market outcomes are certain to differ from these projections, perhaps in important ways, as weather and other factors will contribute to continued market volatility.
The baseline update assumes a continuation of current agricultural and biofuel policies. For example, it is assumed that provisions of the 2008 farm bill will be extended into the future and that the Renewable Fuel Standard (RFS) remains in place with the cellulosic mandate waived. A new farm bill or waiving more of the RFS could lead to important markets effects. This baseline update will be used as a point of reference to examine the possible impacts of proposed policy changes.
Macroeconomic assumptions underlying these projections are based on July 2012 forecasts by IHS Global Insight. The US economy is forecast to grow at a 2 percent annual rate in 2012 and 2013 and a slightly faster rate in later years. Inflation remains moderate and oil prices vary but remain below $100 per barrel.
Given all of the assumptions of the analysis, here are a few highlights of the results:
- Corn prices average $8.10 per bushel for the crop harvested in 2012, exceeding last year's record by about 30 percent. Higher corn prices contribute to steep reductions in corn domestic use, exports and carryover stocks.
- Soybean prices average $16.27 per bushel for this year's crop, also about 30 percent above last year's record. This results in sharply reduced levels of soybean crush and exports.
- Higher prices for corn and soybeans support prices for other grains and oilseeds. Wheat prices, for example, increase to $8.42 per bushel, in spite of record 2012 U.S. wheat yields.
- Ethanol production declines by 10 percent for the 2012/13 corn marketing year. Higher ethanol prices contribute to sharply reduced ethanol exports and increased imports, but domestic ethanol consumption declines by just 2 percent.
- The increase in feed prices results in reduced production of meat and milk, pushing up prices for those products. Consumer food prices increase by more than 4 percent in 2013.
- High prices keep 2013 corn acreage near the 2012 peak, and soybean and wheat acreage both increase. Cotton acreage declines in 2013, due to weak cotton returns relative to competing crops.
- If weather conditions allow a return to more normal growing conditions and trend yields in 2013, the result could be a sharp reduction in crop prices.