August 20, 2007

Ag exports likely to increase $1 billion from previous forecast

"Much of that $1 billion will be wheat," said Phil Abbott, a Purdue agricultural economist who specializes in international trade and agricultural development. "In addition, these new forecasts show lower prices and decreased quantities for corn than the May forecast."

The expected increase in exports is mostly caused by the higher grain and oilseed prices, Abbott said.

So, how might this play out in the longer term?

A study done by Iowa State's Center for Agriculture and Rural Development, or CARD, shows that the United States may eventually use 75 percent of the corn it produces to make ethanol, Abbott said.

"If you read between the lines, their study shows that the United States will have to import corn to accommodate this demand for corn to make ethanol," he said. "We would flip from an exporting country to an importing country, if their study is correct."

These predictions raise questions, Abbott said, such as what's going to happen to the corn trade, what's going to happen to domestic demand, and are people are going to stop eating meat.

"If these kinds of projections of biofuels expansions are correct, then ultimately we are going to have to import corn to accommodate demand, or cut way back on consuming meat," he said.

However, Abbott said he doesn't think this will play out.

"The price of corn is going to have to increase dramatically more than the $4.05 per bushel the CARD model is predicting," he said. "The study assumes too much adjustment to price in foreign and domestic demand, and that's why their price doesn't go any higher than it does."

The most recent adjustment in trade forecasts shows that foreign demand doesn't fall rapidly in response to high prices, he said.

There are four things that can adjust to allow for increased use of corn for ethanol: traditional domestic demand, foreign trade, production and stocks.

"We have already observed an increase in production at the expense of other crops and a decrease in stocks, which cannot continue indefinitely," Abbott said. "We are going to continue on the ethanol bandwagon for the next several years. This will drastically drive the price of corn up. The livestock industry, specifically beef, pork and poultry, will struggle with prices. Foreigners will ultimately buy less."

The increase in corn and fuel prices means that a larger portion of consumers' pocket money will be going toward food and fuel, Abbott said.

For a short time, most of the price increase may be absorbed by food processing companies. But over time, the cost will be transferred to consumers, he said.

Writer:  Julie Douglas, (765) 496-1050, douglajk@purdue.edu

Source: Phil Abbott, (765) 494-4274, abbottpc@purdue.edu

Ag Communications: (765) 494-2722;
Beth Forbes, forbes@purdue.edu
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