While the farm bill is the foremost legislative concern among Southern farmers, Abner Womack says the recently passed energy bill is more likely to have the bigger impact. In fact, the Food and Agriculture Policy Research Institute (FAPRI) senior economist says the effect of energy needs on agriculture already has been huge.
Womack, speaking at the LSU AgCenter-sponsored AgOutlook 2008 conference in Monroe, La., pointed out several things about the figures and predictions to follow:
• Estimates were made in mid-November.
“When you hear an economist giving a (predictive) presentation you need to be careful of the assumptions that underlie it. I will carry on as if the forecast made in November still holds and then moderate it in the end.”
• Current policy is assumed.
The models used by FAPRI (www.fapri.missouri.edu) are global in nature and designed primarily to help Congress understand the agricultural landscape.
“We have to put a 10-year forecast together. We freeze policies around the world so that, when we deal with Congress and they change policies, there will be a base of reference. A lot of work has been done on the current farm bill and we’re involved in that very heavily.”
Fossil fuels/cheap dollars
In 2004, the best guess was the country would be heavily dependent on fossil fuels through 2030. That’s even if “we could increase (renewable nuclear and hydro power sources). At that time, 83 percent of the energy demand came from fossil fuels.”
One of the concerns associated with this was the drop in availability of easy oil.
“You can drill in the ground and get easy oil. We’ve all been using that and it’s cheaper. But it begins to run out around 2025.”
Where to turn after that? Besides a 300-year supply of U.S. coal, Canada has a huge reserve of oil. It just costs a lot more to get it.
Canada’s tar sand pit area “is as big Florida and one company recently invested $7 billion in it. So, there’s plenty of energy in front of us. But it’ll cost a lot more to get it.”
Regarding the economy, Womack says the country has backed into a tough situation. And, whether we like it or not, the current situation reflects, “how we’re tied together with the world.
“We had a cheap dollar policy in 2002 to get us out of recession. We kept it and the value of the dollar on the world market (dropped).”
A few years ago, 8 percent interest rates dropped to around 5 percent and many loans were refinanced.
“A lot of us took equity in our homes and rebuilt or bought. That helped fire the economy. But it won’t happen this time.”
The United States has a lot of world debt — debt invested in a lot of American securities. When the interest rate is lowered, the value of the security is lowered and the exchange rate goes down.
“Now, we’re kind of trapped and the (Federal Reserve) is in a tough position. When we lower the interest to get out of the prime rate problem, it tends to lower the exchange rate. A lower exchange rate is good because products sell on the world market cheaper. The bad news is what’s bought off the world market goes up.”
Walking such a path means oil prices increase. Since early 2007, what’s occurred with the exchange rate “has probably added $10 to the oil price alone. You can’t have it both ways.”
A lot of farmers are telling Womack they’re looking at the volatility of the oil market. “They aren’t refilling tanks when they buy fuel — (preferring) to go shorter periods of time waiting for a (price) downturn. Should a downturn occur, they’d fill the tanks. It’s bad news when we’re going into a planting season and sitting on $100 per barrel.”
And, so far, OPEC is holding firm on oil prices. “Global security is a huge issue. Three-quarters of the countries we buy oil from have unstable governments, terrorist problems, or both.”
Standing before a series of charts to support his points, Womack said about every 10 years “we have a correction. We seem to grow (economically) the majority of the time. But every decade there’s a downturn that lasts two or three years. A correction seems to be in the making at the moment.”
Farm bill/energy bill
While Congress and the White House joust over a new farm bill, Womack says, in the larger picture, the reported $13 billion holding up a deal isn’t much.
“The fact is, we just passed a $3 trillion federal budget and we’re debating over $13 billion in agriculture. I expect we’ll have negotiators strong enough to find a way to make that work.”
Meanwhile, the energy bill “is more important than any farm bill we’ll ever pass. Because what we’ve just done is put a stake in the ground and said, ‘We will use 15 billion gallons of ethanol coming from corn. We will use it, it’s mandatory.’”
Even if the ethanol price gets to $1.5 per gallon, “the blender will simply get a price when ethanol is blended with unleaded. You and I, the consumers, will pick up the difference. The ethanol plants will crank out ethanol until we hit 15 billion gallons.”
Likewise, built into the bill is a mandatory use of 1 billion gallons of biomass-based diesel (primarily soybean oil, currently).
The federally-mandated 21 billion gallons of cellulosic fuel by 2022 “is huge. It took 15 million acres of corn to provide the 15 billion gallons of ethanol. Imagine the kind of land we’ll have to find to fill the (cellulosic fuel requirements).”
Womack said the feed demand in corn will go down over time. Predictions through 2014 say exports will remain around 2 billion bushels annually. But the amount of corn going to ethanol will rise from about 3 billion bushels in 2007-08 to about 5 billion bushels by around 2010. That means about a third, or better, of the U.S. total corn production will go to ethanol.
What does that mean land-wise? “It’ll be one of the biggest shifts we’ve ever seen in a short period of time in the history of agriculture. “
Several years ago, corn was on about 80 million acres and soybeans were on some 75 million acres. The very next year, “we went (up in corn acres) about 14 million acres (and lost 11 million soybean acres). We thought it would take two years to get there.”
With recent prices, the markets may back off a bit on corn to favor soybeans and wheat. Looking forward, “patterns begin to show up. Next November, the net estimated return for corn, per acre, over out-of-pocket costs is about $300. Soybeans are at about $250. Unfortunately, cotton doesn’t keep up — the price hasn’t outrun this increase as much as the other commodities.
“Rice hangs in there with corn and soybeans… reflecting a fairly tight situation in the world market.”
When running models, “it’s very interesting we don’t get the corn stock levels to increase in front of us. That leads to prices moving up to about $3.50 and level out at about $4. Those are very high prices but nothing like where the futures market is right now.
“On soybeans, we’re giving up the soybean export market to South America. We’ll just stay flat on our export path. That means soybean prices will run about $9 or $10.”