Adams, Gary M.

English

Research Papers in Economics

Agricultural Outlook Forum 2000     Presented: Thursday, February 24, 2000
COMMENTS ON THE LONG-TERM PROJECTIONS FOR U.S. AGRICULTURE
Gary M. Adams
Program Director, Food & Agricultural Policy Research Institute (FAPRI)
University of Missouri
The Food and Agricultural Policy Research Institute (FAPRI), located at the University of Missouri and
Iowa State University, develops long-term projections for world agriculture.  The 10-year baseline
results from a process that lasts several months.  Initially, analysts from universities involved in the
FAPRI consortium meet to determine the key assumptions that underlie the baseline.  Based on these
assumptions, preliminary projections are developed and then subjected to outside review.  The last step
is to incorporate comments from the reviewers, as well as any other changes into the final baseline
projections.  FAPRI has just recently completed its global baseline for 2000, and these projections will
serve as the “yardstick” against which alternative scenarios are analyzed.
This paper will cover three areas.  First, a brief overview of the FAPRI baseline for U.S. agriculture will
be given.  Second, several key indicators from the FAPRI and USDA baselines will be compared and
contrasted. Finally, as with any projections, there are always critical uncertainties surrounding the
numbers.  The paper concludes by examining some of these uncertainties.
Summary of the FAPRI Baseline for U.S. Agriculture
Baseline projections are not forecasts of the most likely outcome, but rather just one plausible scenario
highly dependent on the underlying assumptions.  FAPRI relies on the WEFA Group, a private
forecasting firm, for the macroeconomic variables included in the projections.  In general, the
macroeconomic projections suggest a reasonably optimistic outlook.  By 2001, real GDP growth in
developing economies recovers to an annual rate of 5 percent, similar to levels observed in the early
1990’s.  Developed economies maintain growth between 2 and 3 percent.  In the U.S., overall price
inflation, as measured by the CPI, is projected at a modest level of 2.5 percent.
As is customary in a FAPRI baseline, current agricultural policies are assumed to hold for the life of the
baseline.  By assuming constant policies, the baseline provides the “yardstick” against which alternative
policies are measured.  For the U.S., the FAIR Act is continued with provisions for 2002 extended
indefinitely.  FAPRI does not assume any new legislation or changes to current legislation beyond what
has already been agreed upon.  The current baseline does not assume expansion of the European Union
or a new WTO agreement, nor does it incorporate China’s accession into the WTO.
Assumptions must also be made regarding rates of technological change, both for crop yields and
livestock productivity.  For the baseline, technological change is generally assumed to continue at rates
consistent with recent history, unless there are overriding reasons to assume otherwise.  Longer term,
these assumptions become critical.  For example, yield assumptions have a direct impact on the number
of acres that are required for crop production.  Likewise, gains in feed efficiency impact the amount of
grain necessary to produce a pound of meat.For the U.S. crops sector, the short-term projections suggest continued pressure on prices, with the long-
range outlook characterized by guarded optimism.  Since 1996, the crops sector has generally seen
favorable yields and higher acreage levels at the same time that demand has been rather sluggish.  The
result has been that production has exceeded disappearance and stock levels have recovered.
Subsequently, prices have fallen, and in some cases, reaching the lowest levels since the mid-1980s.
Looking forward, under the assumption of trend yields, prices for wheat and feed grains are expected to
show modest recovery in 2000, but still remain below historical averages.  Domestic and export demand
are both expected to continue to strengthen.  For soybeans and cotton, little if any price recovery is
expected for 2000.  Despite low prices in 1999, acreage devoted to these two crops is expected to
increase in 2000.  For soybeans, the loan rate is partially responsible for the increased acreage.
Looking toward the end of the baseline, crop prices are projected to recover to levels in line with
historical averages.  For example, corn prices reach $2.50 per bushel, and wheat prices top $3.50 by
2008.  Income growth fuels the demand for food on a global basis, allowing U.S. exports to expand.  In
addition, domestic demand expands as the U.S. livestock sector increases production levels.  With
demand growth outpacing supply, stock levels of the major grains and oilseeds decline from their recent
highs.
The outlook for U.S. livestock shows more favorable times than what has been observed in recent years,
particularly with regards to the output price.  The beef cycle is in a liquidation phase of the herd,
continuing to tighten the supply of feeder calves.  The result is projected strengthening in prices through
2003, with feeder steer prices averaging above $90 per hundredweight.  For beef, the long-term outlook
depends on relatively stable domestic demand and continued growth in exports.
The U.S. pork sector has just completed two of the worst years, in terms of profitability.  The result has
been to downsize the breeding herd, leading to projected declines in production for the 2000-02 period.
While still below the levels observed in the mid-1990s, pork prices are expected to recover and average
above $40 per hundredweight for much of the projection period.  Despite a relatively stable breeding
inventory, production approaches 21 billion pounds by 2009 based on gains in productivity.
The projections for broilers and dairy are both characterized by a continuation of recent trends.  Broiler
production is expected to grow at an annual rate of 3 percent, with the additional production finding a
home in both the domestic and export markets.  Milk production is also projected to continue its growth,
as the increase in productivity more than offsets a declining herd size.
When looking at the sector as a whole, U.S. net farm income in 1998 and 1999 has held up reasonably
well despite the low prices.  To a large extent, this is due to the increased government payments
resulting from the assistance packages.  Assuming no additional assistance packages and the declining
payments under the FAIR Act, significant pressure on farm income is projected for 2000.  In fact, little
recovery in aggregate farm income is expected before 2007 as rising output prices are generally offset
by increased production expenses.
Comparison of FAPRI and USDA’s Long-Term Projections
Before examining the outcomes of the two sets of projections, it is important to first look at the key
assumptions.  In general, it appears that there are more similarities than differences between the
underlying assumptions.  Macroeconomic projections in both baselines assume recovery in the Asian
economies will continue and income growth in developing economies approach historical levels.  The
FAPRI baseline does assume slightly stronger growth in the developing economies than USDA. For2004-2009, FAPRI has annual growth of about 5.5 percent with USDA assuming a slightly lower rate of
5 percent.  Policy assumptions are also very similar with both baselines assuming a continuation of
current policies.  The only differences are areas where the Secretary has discretion to set the exact
levels.  For example, FAPRI assumes loan rates will be held constant for both 2000 and 2001 and then
adjust for the 2000 crop based on the formulas of the FAIR Act.  USDA allows the adjustment
beginning with the 2001 crop.  Perhaps, the most noticeable difference that could impact the resulting
price and quantity projections is the Export Enhancement Program (EEP).  USDA assumes that EEP
expenditures resume in FY 2001 while FAPRI assumes no EEP expenditures throughout the baseline.
Regarding technology, crop yield assumptions are also quite similar with only modest differences
occurring by 2009.
Turning attention to the projections themselves, do similar assumptions and input data generate similar
output data?  The answer is a definitive maybe (or maybe not).  Baseline projections are the result of
combining mathematical models with the judgment of analysts.  There are a number of areas where
differences and divergence of opinions can arise.  The challenge becomes identifying those differences
and the reasons for them.  Table 1 gives a comparison of some the major indicators from the U.S.
baselines generated by FAPRI and USDA.  While there are many similarities in the numbers, there are
also a few key differences worth exploring.
Looking at price projections for the major crops, FAPRI is noticeably stronger in the near-term with
USDA being much more bullish on the long-term price outlook.  By 2007-09, USDA corn prices exceed
those of FAPRI by about 20%.  The short-range differences appear to be associated with export markets.
FAPRI has a stronger export demand for U.S. crops in the early years.  By the end of the projections, the
situation appears to be reversed with USDA’s crop exports exceeding those of FAPRI even at a
substantially higher price.
On the supply side, there appear to be substantial differences regarding the responsiveness of U.S.
acreage as well as constraints on U.S. acres.  In the early years, USDA has fewer acres in production of
the 8 major crops than FAPRI, even though overall returns are comparable.  By the end, acreage levels
in USDA’s projections are roughly the same as in the FAPRI baseline, but at much higher prices and
returns.
With nearly identical supply and demand quantities, yet much higher prices, it appears that USDA’s
basic supply curve for the crops sector lies to the left of the one assumed by FAPRI.  The resulting
prices in the USDA baseline increase to levels that are substantially above the per-unit variable costs,
suggesting incentives for additional acres both in the U.S. and globally.
When comparing the projections for the U.S. livestock sector, the long-term price differences also
become evident.  USDA prices exceed FAPRI prices for beef, broilers, and milk.  Pork is the one
exception.  Higher livestock prices are to be expected given the higher feed costs between the two
projections.  However, it appears that for beef and dairy, output prices are strong enough to support
returns and offer incentives to increase production.  In the middle of the projection period, FAPRI’s beef
cow numbers exceed those of USDA’s by about 10 percent.  As is the case in the crops sector, more
pessimism regarding supply potential is evident in the USDA projections.
One final point on the livestock projections regards the price outlook across the various enterprises.  By
the end of the baseline, beef, broiler, and milk prices recover to levels higher than what was observed in
the 1980’s ad 1990’s.  However, pork prices remain below historical levels throughout the projection
period.  Is the new price level reflecting a new cost structure that resulted from the structural changes ofthe 1990’s?  Or is it an indication that the Iowa-Southern Minnesota price may not be accurately
reflecting the true output price?
Regarding the sector as a whole, net farm income projections mirror the differences in the price
projections.  USDA shows substantial weakness in the early years, before recovering longer term.
FAPRI’s income projections are generally more stable throughout the period.
Concerns and Uncertainties
As with any projections, there are always a number of concerns and uncertainties around the projections.
In fact, the only certainty is that just about everything is uncertain.  The FAPRI projections are no
different.  As mentioned earlier, a baseline is just one plausible scenario dependent on the underlying
assumptions.  Changing any of those assumptions regarding the economy, policy, or technology will
alter the results.  In addition to these unknowns, projections regarding the agricultural sector must be
concerned with a host of other issues.
What impacts will recent and future developments in GMO’s have on the sector?  Are there long-run
impacts on the supply and demand for crops?  As the production of crops with specialized traits
continues to grow, it may no longer be relevant to just look at a corn supply and use table, but instead
projections for different types of corn.  The degree that this becomes necessary in the next 10 years may
ultimately depend on the consumer.
A long-run view of agriculture must also come to grips with the implications of structural change and
consolidation.  To what extent will these changes impact some of the basic relationships that have held
in the past?
Finally, with so much uncertainty and risk surrounding the long-term projections, it is important to
provide some indication as to the variability around the deterministic baseline.  This is critical in the
current environment where so much of the focus is on managing risk.  In addition, the pros and cons of
many policy options under consideration become evident only in situations where supply, demand and
prices are not at average levels but rather near the extremes.Table 1. Comparison of FAPRI and USDA Baseline Projections
2000-02 Average 2007-09 Average
FAPRI USDA Diff. FAPRI USDA Diff.
Planted Area (Million Acres)
  Wheat 63.5 61.7 -1.8 66.4 67.8 1.4
  Corn 78.4 76.5 -1.9 80.6 79.8 -0.8
  Soybeans 72.9 73.9 1.0 73.0 71.5 -1.4
  Upland Cotton 14.4 13.7 -0.7 13.7 13.4 -0.3
  Rice 3.5 3.3 -0.1 3.3 3.2 -0.1
  8-Crop 249.6 246.1 -3.5 253.1 253.4 0.3
Crop Exports (Million Units)
  Wheat, bu 1,150 1,158 8 1,239 1,475 236
  Corn, bu 2,083 1,967 -116 2,562 2,408 -154
  Soybeans, bu 1,017 1,023 6 1,053 1,012 -41
  Up Cotton, bales 7.96 7.07 -0.89 7.59 7.70 0.11
  Rice, cwt 94.2 87.2 -7.1 81.6 73.3 -8.3
 Crop Prices (Dollars per Unit)
  Wheat 3.00 2.60 -0.40 3.54 4.18 0.65
  Corn 2.13 2.00 -0.13 2.42 2.90 0.48
  Soybeans 4.55 4.25 -0.30 5.61 6.43 0.82
  Upland Cotton 0.48 NA NA 0.61 NA NA
  Rice 6.92 5.72 -1.20 8.26 8.20 -0.06
Livestock Prod. (Billion Pounds)
  Beef 25.1 24.2 -0.9 27.5 24.3 -3.1
  Pork 18.5 18.7 0.2 20.4 20.5 0.1
  Broilers 31.8 32.1 0.3 38.5 37.6 -0.9
  Milk 168.0 168.6 0.6 184.0 182.7 -1.3
Livestock Prices (Dollars per Cwt)
  Beef 73.11 69.43 -3.69 68.03 80.87 12.84
  Pork 41.37 37.71 -3.66 42.89 39.86 -3.03
  Broilers 57.17 56.33 -0.84 55.82 64.10 8.28
  Milk 12.68 13.42 0.74 13.05 15.80 2.75
(Billion Dollars)
Net Farm Income 40.21 36.97 -3.25 43.11 54.63 11.52Comments on the Long-Term Projections
for U.S. Agriculture
Presented at
USDA’s Agricultural Outlook Forum 2000
February 24, 2000
Gary M. Adams
Food and Agricultural Policy Research Institute
FAPRIWhat I’ll Cover
• Comparison of major results from the
FAPRI and USDA projections
• Key uncertainties around the projectionsComparing Baseline Projections
• Baseline projections are not forecasts of the most
likely outcome, yet one plausible scenario
dependent on the underlying assumptions.
• Before examining the outcomes, it is important to
first look at the key assumptions.
– Macroeconomic
– Policy
– TechnologyMacroeconomic Assumptions,
FAPRI has Stronger Real GDP Growth
in Developing Countries
0
1
2
3
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1998-2003 2004-2009
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APolicy Assumptions,
(Similar but there are some differences)
• Same (or close to it)
– FAIR Act (flexibility, loan rates)
– Step 2 for cotton
– CRP
– Int’l Policy (EU, WTO)
– Dairy
• Different
– Export Enhancement ProgramTechnology
• Similar Crop Yields
– By 2009, 1.5 bu difference in corn and 0.5 bu
difference in soybeans. In wheat, USDA is 2 bu
higher.
• Livestock Productivity
– USDA - Stronger milk yields consistent with
smaller herd.What About Baseline Results?
Does Similar Input Generate Similar
Output?
Input Data
Econometric Model
OutputComparing Price Projections
• In most cases,
FAPRI prices are
stronger in the near
term.
• Prices in the USDA
baseline are well
above FAPRI
levels by the end of
the projection
period.
U.S. Corn Price
1.50
2.00
2.50
3.00
3.50
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ASupply & Demand for the Crops Sector
• Longer term,
projections from
FAPRI and USDA
show similar
quantities, but at
much different price
levels.
Q
P
Q*
S
FAPRI
D
FAPRI
D
USDA
S
USDA
P
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FU.S. Crop Exports (Corn, Food Grains, Soy Sector)
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60
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100
110
120
130
140
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FAPRI (Volume) USDA (Volume) FAPRI (Value) USDA (Value)8-Crop Planted Area
235
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255
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1996 1998 2000 2002 2004 2006 2008
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)Question about Crop Sector Projections
• Given the strong
prices longer term,
is there enough
supply response,
either in the U.S. or
globally?
U.S. Wheat Price vs Costs
0.00
1.00
2.00
3.00
4.00
5.00
1986 1990 1994 1998 2002 2006
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sSupply & Demand for Beef and Dairy
• USDA projections
have lower supplies
and higher prices
– Feed costs play a
role in the
differences.
– There still appear to
be incentives to
increase production. Q
P
Q
F
S
FAPRI
D
FAPRI
S
USDA
P
U
P
F
Q
UBeef Cows vs. NE Steer Price
30
31
32
33
34
35
36
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
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FAPRI (Cows) USDA (Cows) FAPRI (Price) USDA (Price)Question about Livestock Sector
Projections
• Relative to historical
averages, pork prices
are quite a bit lower.
• Other sectors show
stronger prices
relative to history.
U.S. Livestock Prices
0
10
20
30
40
50
60
70
80
90
'86-90 '91-95 '96-00  '01-05  '06-09   
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U.S. Net Farm Income
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10
20
30
40
50
60
70
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
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FAPRI USDAIn Conclusion,
Certainties & Uncertainties?
• Certainties
– Just about everything is uncertain.
• Uncertainties
– Usual concerns about assumptions for macro,
policy, and technology
– In addition, there are others:
• GMOs (or GEOs)
• Structural Change
• Variability and RiskVariability Around the Projections
• Many of the
current policy
questions can’t
be analyzed
against a
deterministic
baseline.
• We must look at
variability
around supply,
demand and
price.
U.S. Corn Farm Price
1.50
1.70
1.90
2.10
2.30
2.50
2.70
2.90
3.10
2000 2002 2004 2006 2008
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Baseline 25th Percentile 75th Percentile

COMMENTS ON THE LONG-TERM PROJECTIONS FOR U.S. AGRICULTURE

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