|
"At this stage of the 2007 growing season, there is certainly no
indication of a substantial shortfall in U.S. corn production,
nor are we predicting such an outcome," said Darrel Good, U of I
Extension marketing specialist who with his Department of
Agricultural and Consumer Economics colleague Scott Irwin
prepared a recent report on the topic. "Discussion of market and
policy implications of such a shortfall, then, may appear to be
premature, unrealistic or event alarmist. "However, it is
important to recognize potential worst-case scenarios and that
history indicates that production shortfalls as large as 30 or
40 percent, though unlikely, are possible. By thinking ahead,
market participants and policymakers can develop plans to manage
such shortfalls and consider appropriate policy responses."
Good and Irwin's report, "2007 U.S. Corn Production Risks:
What Does History Teach Us?" is the inaugural edition of a new
online newsletter, Marketing and Outlook Briefs (http://www.farmdoc.uiuc.edu/marketing/)
that appears on U of I Extension's Farmdoc website.
In their report, Good and Irwin outline the current
conditions in U.S. markets, where corn prices are especially
sensitive to the prospective size of the U.S. crop in years when
stocks are relatively low and in years of robust demand for
corn.
"During those periods, a substantial shortfall in production
would be very disruptive to the corn market, require significant
adjustments by end user and have the potential to increase food
prices," said Good. "Instances of substantial shortfalls in the
size of the U.S. crop when stocks were low and demand was strong
have been rare -- 1974 and 1995 are two examples -- but years
with the potential for such an occurrence have been more
numerous.
"The current year is one of those years."
Today's U.S. corn market is driven by four factors: rapidly
expanding consumption due primarily to more corn being used for
ethanol production; declining inventories; high prices; and
reported intentions to increase planted acreage.
The report outlines a number of production scenarios that
could occur in the 2007 crop year and estimates consumption and
price implications of those scenarios.
[to top of second column]
 |
 "Our study suggests that, based on historic production patterns,
there is an 80 percent probability that the 2007 crop will be
between 10 percent smaller than expected and 16.7 percent larger
than expected," said Good. "Production in this range would likely
have few, if any, policy implications.
"Larger shortfalls in production, however, might be more
problematic due to the small level of old-crop stocks on hand at the
beginning of the 2007-08 marketing year and the very robust demand
for corn expected from the ethanol sector. An important public
policy question, then, is: With an extreme shortfall in production,
would the market be allowed to allocate the crop among users, or
would such a shortfall in corn production induce government
intervention?"
Normally, the market has been allowed to sort out the problems,
with the largest adjustments taking place in the livestock sector.
"There has been one exception. Short supplies and high soybeans
prices in 1973 resulted in an embargo on U.S. exports," said Good.
"Such an embargo on corn exports might be considered, but the
potential negative impact on longer-term trade relationships would
make an embargo a very unpopular alternative."
Aside from the need for market participants and policymakers to
begin at least thinking about potential serious shortfalls in 2007
corn production, Good and Irwin conclude the present situation has
other policy implications.
"Corn prices are expected to remain generally high and extremely
volatile for an extended period of time," said Good. "The
combination of a low level of stocks and an increasing portion of
corn consumption occurring in the ethanol sector, where demand is
relatively price-insensitive, suggests that prices will be extremely
responsive to small changes in U.S. and world production prospects
or changes in demand for corn in any other sector. Prices of other
commodities will also be influenced.
"Provisions of the new 'farm bill' are expected to reflect this
changing environment. Careful consideration of potential market
impact should be given to policies encouraging additional biofuels
production. Other considerations might include provision for a corn
reserve in years of large production to provide a buffer for a
future shortfall in production."
[Text from file received from
the University of
Illinois Extension] |
