Global Agricultural Supply and Demand: Factors contributing to - - PowerPoint PPT Presentation

Global Agricultural Supply and Demand:

Factors contributing to recent increases in food commodity prices

Ron Trostle

Economic Research Service U.S. Department of Agriculture Agricultural Markets and Food Price Inflation Federal Reserve Bank of Chicago

October 2, 2008

50 100 150 200 250

1 9 8 M 1 1 9 8 2 M 1 1 9 8 4 M 1 1 9 8 6 M 1 1 9 8 8 M 1 1 9 9 M 1 1 9 9 2 M 1 1 9 9 4 M 1 1 9 9 6 M 1 1 9 9 8 M 1 2 M 1 2 2 M 1 2 4 M 1 2 6 M 1 2 8 M 1

Food commodity price index

Index: January 2002 = 100

Source: International Monetary Fund: International Financial Statistics 2

Food commodity prices have risen 130 % since January 2002 (>70% in last two years )

50 100 150 200 250 300 350 400 450 500 550 600 650 700 Jan 1992 Jan 1996 Jan 2000 Jan 2004 Jan 2008

Crude oil Average of all comodities Food commodity index

Index: January 2002 = 100

Prices of many commodities rose even more

Source: International Monetary Fund: International Financial Statistics

+ 130 % + 330 % + 585 %

50 100 150 200 250 300 350 400 450 500 550 Jan 1970 Jan 75 Jan 80 Jan 85 Jan 90 Jan 95 Jan 2000 Jan 05

Corn Soybeans Wheat Rice Food commodity index

Index: January 2002 = 100

Source: International Monetary Fund: International Financial Statistics

Food commodity prices:

Indices for selected crops and total food

100 200 300 400 500 600 700 800

Jan 1970 Jan 75 Jan 80 Jan 85 Jan 90 Jan 95 Jan 2000 Jan 05

Index: January 2002 = 100

Source: International Monetary Fund: International Financial Statistics 5

Crop price increases: real vs. nominal

Average of 4 crops (wheat, soybeans, corn & rice)

Real prices Nominal prices

Factors contributing to higher food commodity prices

6

1996 1998 2000 2002 2004 2006 2007 2008

Strong growth in demand, based on: Increasing population + Rapid economic growth + Rising per capita meat consumption Slowing growth in agricultural production Increased biofuels production Dollar devaluation Large foreign exchange reserves Adverse weather Exporter policies Importer policies Aggressive purchases by importers Declining demand for stocks of food commodities Escalating crude oil price Rising farm production costs Supply factors in green Demand factors in brown

1,500 2,000 2,500 3,000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Production Total use Million metric tons

World grain & oilseeds

Total production and use

Source: USDA PS&D Database 7

200 400 600 800 1970 1975 1980 1985 1990 1995 2000 2005 0% 5% 10% 15% 20% 25% 30% 35% 40%

Ending stocks Stocks / Use Million metric ons Stocks / Use (%)

Total world grain & oilseeds

Stocks and stocks-to-use ratio

Source: USDA PS&D Database 8

Long-term trends contributing to higher prices:

• 1. Supply-side factors

Slower growth rate in yields

• 2. Demand-side factors

Population growth Income growth Increased per capita meat consumption

9

80 100 120 140 160 180 200 220

1970 1975 1980 1985 1990 1995 2000 2005

Production Yield Population Percap production Area harvested

Total world grain & oilseeds1

Production, yield, area harvested, population & percap production

Exponential trend growth rates: 1970-90 90-07 Production 2.2 1.3 Yields 2.0 1.1 Area 0.15 0.14 Population 1.7 1.4 Per capita use 0.56 0.11

Source: Compiled from USDA’s PS&D Database 10

Index: 1970 = 100

1 Total oilseeds = soybeans + rapeseed + sunflowers

1 2 3 4

World Developed Developing Middle East Africa Latin America USA 1975-1990 1990-2000 2000-07 2009-17

Population growth rates decline

(Percent by period)

Percent

Source: USDA Agricultural Baseline Projections to 2017. 11

• 2

2 4 6 8 10 12 World Developed Developing China India United States 1975-90 1990-2000 2000-07 2009-17

Strong economic growth

Average Real GDP growth rates

Percent

Source: USDA Agricultural Baseline Projections to 2017. 12

5 10 15 20 25 30 1990 1995 2000 2005 Other Other Asia Indonesia

• N. Africa &
• M. East

Sub-Saharan Africa EU, FSU, & OE 1/ Latin America 2/

Global rice imports

Million metric tons

1/ European Union, former Soviet Union, and other Europe. 2/ Includes Mexico.

Source: USDA Agricultural Baseline Projections to 2017. 13

2 4 6 8 10 12 1990 1995 2000 2005 Rest of world EU, FSU, & OE 1/ India China Other Asia 2/

• N. Africa & M.

East Latin Am 3/

Global soybean oil imports

Million metric tons

1/ European Union, former Soviet Union, and other Europe. 2/ Asia excluding India and China. 3/ Includes Mexico.

Source: USDA Agricultural Baseline Projections to 2017. 14

50 100 150 200 250 300 350 400 1970 1975 1980 1985 1990 1995 2000 2005 Production Per capita Cons Population

Global meat1

Production, per capita consumption, and population

Index: 1971 = 100

Exponential trend growth rates: 1975-90 90-07 Production 3.1 2.5 Population 1.7 1.4 Per capita 1.4 1.1 consumption

Source: USDA Agricultural Projections to 2017. 15 1 Total meat = beef + pork + chickens & turkeys.

1 2 3 4 5 1990 1995 2000 2005 Russia Other N Afr. &

• M. East

East Asia China & Hong Kong Saudi Arabia Mexico European Union 2/

Poultry imports 1/

Million metric tons

1/ Selected importers. 2/ EU-27 excludes intra-trade after 2002, EU-15 intra-trade before 2003, Slovenia before 1992.

Source: USDA Agricultural Baseline Projections to 2017. 16

Role of biofuels:

Major producers Impact on land use

17

Biofuels production: Total of largest producers1

2 4 6 8 10 12 14 16 18 20 2004 2005 2006 2007 2008

Biodiesel Ethanol Billion Gallons

1The 6 largest

producers (USA, Brazil, EU, China, Canada, & Argentina) accounted for 96% of world biofuel production in 2007.

Source: FO Licht, various reports

Biofuels production: Largest producers

2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008

Argentina Ukraine & Russia Brazil China Canada EU USA

19

Million Gallons

Source: USDA Agricultural Projections to 2017

Ethanol Biodiesel

Global area harvested1: Total, and for biofuels feedstocks

100 200 300 400 500 600 700 800 900 1970 1975 1980 1985 1990 1995 2000 2005

Million hectares

1Crops include:

Wheat, Rice, Corn, Barley, Sorghum, Other cereals, Soybeans, Rapeseed, Sunseed, Cotton. Excludes sugarcane and beets

20 Source: Compiled from data associated with generating Baseline Projections to 2017

Total area harvested area planted to feedstocks < 3% of total

2 4 6 8 10 12 14 16 1990 1995 2000 2005 2010 Ethanol FSI less ethanol 1/ Exports Feed & residual

U.S. corn use

Billion bushels

1/ Food, seed, and industrial less ethanol.

Source: USDA Agricultural Baseline Projections to 2017.

Growth in world wheat and coarse grains use:

1980/81 - 2002/03 vs. 2002/03 - 2007/08

22

100 180 100 328 Total 29 53 7 27 U.S. corn for ethanol 27 48 44 144 Feed* 44 79 49 160 Food % MMT % MMT

2002/03 to 2007/08 1980/81 to 2002/03

Use

Adverse weather reduced production:

In 2006

• Australia
• Ukraine & Russia

and 2007

• Europe: dry spring; harvest floods
• SE Europe: drought
• Ukraine & Russia: drought (2nd year)
• USA: late spring freeze
• Canada: hot and dry
• Australia: 2nd year of severe drought
• NW Africa: drought
• Turkey: dry

23

80 100 120 140 160 180 200 220 240 260 1970 1975 1980 1985 1990 1995 2000 2005

Production Yield Area harv

Index: 1970 = 100

Total world grain & oilseeds1

Production, yield, & area harvested

Trend growth rates: 1975-90 90-07 Prod 2.2 1.3 Area 0.15 0.17 Yields 2.0 1.1

1 Total oilseeds = soybeans +

rapeseed + sunflowers Source: USDA Agricultural Projections to 2017 24

Other contributing factors:

• Devaluation of U.S. dollar
• Increasing foreign exchange reserves held

by importers

• Role of hedge funds, index funds, &

sovereign wealth funds:

(affect demand and/or volatility?)

25

60 70 80 90 100 110 120 130 1970 1975 1980 1985 1990 1995 2000 2005

Value of U.S. dollar declines after 2002 1/

Index values, 2000=100

1/ Real U.S. agricultural trade-weighted dollar exchange rate, using U.S. agricultural export weights, based on 192 countries.

Source: USDA PS&D Database 26

Foreign Exchange Reserves

200 400 600 800 1000 1200 1400 1600 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 $bn E m erging A sia ex C hina

S ource: O xford E conom ics / H aver A nalytics

E m erg in g A sia: F o reig n exch an g e reserves

C hina O P E C R ussia Japan

27

Policy responses to food price inflation

28

Policy responses to rising prices by selected countries

Exports Imports Domestic policies Country Raised Export Export Reduced Increased Imposed export volume bans import consumer price taxes restrictions tariffs subsidies caps . Export policies: Argentina x x Cambodia x Egypt x Kazakhstan x Russia x Ukraine x Vietnam x x Import policies: Bangladesh x x x EU x Mexico x Morocco x Mongolia x Philippines x Thailand x

Policy responses to rising prices by selected countries

Exports Imports Domestic policies Country Raised Export Export Reduced Increased Imposed export volume bans import consumer price taxes restrictions tariffs subsidies caps . Both export and import policies: China x x x x India x x x x x Indonesia x x x Malaysia x x Serbia x x

Impact of high food commodity prices

• n consumers food budgets

High-income Low-income countries food-deficit countries

• I. Base Scenario

Income 40,000 800 Food expenditure 4,000 400 Food as % of income 10.0% 50% Disaggregate retail food spending (staples vs. non-staples) Staples as % of total food spending 20% 70% Expenditures on staples 800 280 Expenditures on non-staples 3,200 120

• II. Scenario: 50% Price increase in staples

Partial pass through on staples Assumed % pass through 60% 60% Increase in cost of staples 240 84 New cost of staples 1040 364 New total food costs 4,240 484 Food as % of income

10.6% 61%

31

0.4 0.8 1.2 1.6 2

2003 2004 2005 2006 2007 2008

1 2 3 4

Value Quantity *2008 is an forecast

U.S. Title II Food Aid Allocations

$ Billion Million metric tons

32

50 100 150 200 250 300 350 400 450 500 550

1 9 7 M 1 1 9 7 2 M 1 1 9 7 4 M 1 1 9 7 6 M 1 1 9 7 8 M 1 1 9 8 M 1 1 9 8 2 M 1 1 9 8 4 M 1 1 9 8 6 M 1 1 9 8 8 M 1 1 9 9 M 1 1 9 9 2 M 1 1 9 9 4 M 1 1 9 9 6 M 1 1 9 9 8 M 1 2 M 1 2 2 M 1 2 4 M 1 2 6 M 1 2 8 M 1

Corn Soybeans Wheat Rice Food commodity index

Index: January 2002 = 100

Spikes in food commodity prices: Will this time be any different?

Source: International Monetary Fund: International Financial Statistics 33

Categories of factors contributing to higher food commodity prices

34

Continuation of long-term trends: Structural changes: Temporary factors:

Rapid economic growth in many developing countries Population growth in developing countries Increasing per capita meat consumption High oil prices Biofuels production High ag production costs Adverse weather Trade policies by exporters and importers Aggressive buying by importers Further dollar depreciation Slower growth in ag productivity

Role of large

foreign exchange reserves held by importers

Questionable future impact:

Demand factors Supply factors

Prices have declined from their peaks

(as of September 30, 2008)

Early July 39 % Soybeans End of June 38 % Corn Mid March 51 % Wheat Since peak in: Down Commodity

35

2 4 6 8 10 12 1980 1985 1990 1995 2000 2005 2010 2015

U.S. Commodity Prices: History & Projections

Soybeans, Wheat, & Corn

$ per bushel Corn Wheat Soybeans

Source: USDA Agricultural Baseline Projections to 2017, February 2008.

Projections made in November 2007 Dots indicate current estimates for 2008/09

The report is available at: http://www.ers.usda.gov/publications/WRS0801.pdf

Ronald Trostle Economic Research Service U.S. Department of Agriculture rtrostle@ers.usda.gov

202-694-5280

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Global Agricultural Supply and Demand:

Factors Contributing to the Recent Increase in Food Commodity Prices