Grain Price Volatility and Its Economic Interpretation Brian Wright - - PowerPoint PPT Presentation

Grain Price Volatility and Its Economic Interpretation

Brian Wright

Department of Agricultural and Resource Economics College of Natural Resources University of California, Berkeley. DEC World Bank March 11, 2011

Post- “Inside Job” I perceive a need for disclosure:

Recent or current grant support:

• Energy Biosciences Initiative (UC Berkeley. UIUC, LBL, BP,

funded by BP)

• USDA
• NIH
• NSF
• USPTO

Disclosure (contd.)

• Current consulting relationships:

– World Bank – FAO

• No recent positions in commodity markets
• No investments in agricultural input or service

providers, or significant commodity market or energy market participants

• Recent high prices have focused world

attention on global food security

• Poorest market-dependent consumers are the

most vulnerable

• Widespread urban unrest, political pressure
• Longer-run question: a new regime of

scarcity?

Food Price Volatility: Resurgence of Concerns of 2008

Current situation Claimed similarities to 2008:

① Higher oil prices impacting commodity prices ② Dollar depreciation contributing to higher prices ③ Financial investment in commodities remains high

Claimed differences from 2008:

① International price increases more widespread across commodities, suggesting demand in emerging countries is more important this time ② Weather induce production shortfalls are more of a factor now ③ Policy responses have been less adverse than in 2008

Focus of Study: Market Volatility

① Facts past and present ② Arithmetic of commodity balances ③ Supply, demands, shocks and perceptions

Focus of Study: Market Volatility

Preliminary Questions: Prices When was the last time real (US CPI-deflated) maize prices were as high as they were in 2008, and currently?

Focus of Study: Market Volatility

Preliminary Questions: Were the circumstances in 2008 a “near-perfect storm” for grain markets?

Focus of Study: Market Volatility

Preliminary Questions: Is the relative amplitude of grain production variation increasing?

Focus of Study: Market Volatility

Preliminary Questions: 1) Which year had the largest global downturn in aggregate production of wheat, rice and maize since WWII? 2) What was the % drop?

Focus of Study: Market Volatility

Preliminary Questions: 1) Which of the major grains had the greatest year-on-year production drop since WWII? 2) In what year? 3) What was the % drop?

Focus of Study: Market Volatility

Preliminary Questions: Were the three great commodity booms post WWII energy-led?

UN FAO food price index deflated by US CPI

Deflated Monthly Food Price Index

Source: FAO.

• Note. All indices have been deflated using World Bank Manufactures Unit Value

Index (MUV) rebased from 1990=100 to 2002-2004=100

Real maize prices

Source: USDA.

• Note. Deflated using U.S. CPI, 1982-1984=1.

Real wheat prices

Source: USDA.

• Note. Deflated using U.S. CPI, 1982-1984=1.

Real rice prices

(Thailand, 5% broken, white milled)

Source: IMF.

• Note. Deflated using U.S. CPI, 1982-1984=100.

Long run movements of normalized commodity price indexes deflated by the US CPI

Effects of Oil?

How can oil price affect grains?

• Via fertilizer market?

– Fertilizer prices rose – is that sufficient? – Did fertilizer use decline? – Did fertilizer corps make more profit?

Source: Calculated using Data from PSD Online, USDA.

• Note. World grains = wheat + maize + milled rice. All quantities converted into Calories assuming, for wheat 3338Kcal per Kg,

for maize 3650 Kcal per Kg, and for milled rice 3656 Kcal per Kg). 2010/2011 is projection.

Where is 1972/3?

Source: Calculated using Data from PSD Online, USDA.

Spikes happen when there are:

• 1. Unpredictable (negative) surprises
• 2. Minimal starting stocks

Illustration: Effect of two low harvests:

• 1. Starting with average harvest, and price

at mean:

Effect of two low harvests:

• 1. starting with average harvest, and price at

mean:

• 2. starting at zero stocks

Source: Calculated using production data from PSD Online, USDA.

U.S. maize energy availability

Source: Calculated using supply and use data from Feed Grain Database, USDA.

• Note. Annual supply-use statistics provided by USDA are on a marketing-year basis.

Global consumption of energy from major grains

• Source. Calculated using data from USDA.
• Note. Quantities are converted into Calorie content assuming, for wheat 3338Kcal per Kg, for maize 3650 Kcal per Kg,

and for milled rice 3656 Kcal per Kg).

US share of caloric production of maize, wheat, rice and soy

Source: Roberts and Schlenker

Characteristics of Grain Prices

• Long downward trends
• Generally moderate, smooth movements

around trend, interspersed by occasional steep spikes

• Recent real spikes not unprecedented

Theory of storage implies:

• Storers smooth out troughs in price and low-

value consumption after high harvests by “buying low to sell high”

• Storers smooth expected shortages if cash is

available:

– invest in stocks, raise current price, reduce expected shortage

Theory of storage implies:

• After unexpected shocks, storers smooth out

peaks, but only until their stocks run out

• When stocks run out, shocks must be

matched by imports, drops in consumption of animals, biofuels processors, or (poor) people

Effects of Storage on Prices

• Storers smooth out troughs in price after high

harvests by “buying low to sell high”

• Storers smooth rises caused by expected

shortages if cash is available to invest in stocks

Equivalent shocks

Demand for consumption Market demand, inclusive of stocks

Quantity Price Different impact

• n prices

With stocks Without stocks

When stocks are low, price becomes very sensitive to disturbances in supply

Why price is much more sensitive to shocks when stocks are minimal?

The problem with allocating the blame:

• The response is very nonlinear
• What does nonlinearity mean for

allocating the “blame” for recent price spikes?

World market prices show effects of storage.

• Storers smooth out peaks after unexpected shocks,

but only until their stocks run out

• When stocks run out, price spikes are required, to

force consumers to respond one-for-one to shocks SPIKES OCCUR ONLY IF STOCKS ARE MINIMAL

• is this true?

Maize, stocks to use ratios

Source: USDA.

• Note. The 2010/2011 data is projection.

Calories from major grains, stocks to use ratio

• Source. Calculated using data from USDA.
• Note. World grains (wheat + maize + milled rice) ending stocks to use ratio with and without China (all quantities converted into

Calories assuming, for wheat 3338Kcal per Kg, for maize 3650 Kcal per Kg, and for milled rice 3656 Kcal per Kg). 2010/2011 is projection.

Source: Dawe (2009)

China’s stabilizing export jump in 2002/03

U.S. maize used for fuel vs. World maize ending stocks

U.S. maize used for fuel World maize ending stocks (excluding CHN) World maize ending stocks (including CHN) Marketing Year Million bushels 1000 Metric tons 1000 Metric Tons 1000 Metric Tons 2003 1167.55 29188.75 60393 105245 2004 1323.21 33080.25 95197 131752 2005 1603.32 40083 89397 124652 2006 2119.49 52987.25 73521 110123 2007 3049.21 76230.25 91962 131356 2008 3708.89 92722.25 94655 147824 2009 4568.16 114204 91842 145156 2010 4950 123750 62399 122513 Accumulative use: 22489.83 562245.75 Change from 2003: 2006 17268

• Conversion factor:

– 1 metric ton = 1000kilograms=2204.6 pounds; – Maize: 1 US bushel = 56lb, 25kg; – Wheat: 1 US bushel = 60lbs, 27kg; – 1 barrel = 42 gallon; – 1 Btu = 0.25 kcal; – 1 lbs. = 454 gram.

20000 40000 60000 80000 100000 120000 140000 2… 2… 2… 2… 2… 2… 2… 2… 1000 MT U.S. maize used for fuel World maize ending stocks (excluding CHN)

Global constraints on resources spread effects of biofuels

• Indian wheat shortage rice export

“ban”

• Rice production displaces sugar
• Next year, India announces huge sugar

imports

• Now China appears to be using corn for syrup

corn demand rises

“Bubbles,” obviously

• After it bursts, speculative bubble is

“obvious?”

Price “bubbles” and “crashes” in a deterministic model with variable supply

Arithmetic

• Available supply –Stocks = Consumption
• In short run supply is fixed (in agriculture, not

minerals incl. oil).

• Price is a function of consumption
• If speculators affect price, they must affect

consumption, so they must change stocks

• Where are the extra stocks?

Global consumption of energy from major grains

US Corn Ethanol Policy

• $500 B subsidy extended by congress
• Currently at Blend Wall
• US is exporting ethanol

US Corn Ethanol Policy: The Danger

• Corn farmers are very powerful now
• If they can, they will make the current price

the floor

• Ethanol can be expanded faster than yields

can rise

• Already the policy may be costing global

consumers $120B. (See Roberts and Schlenker 2010)

• How does that compare to World Bank aid?

Living with biofuels: Stabilization imperatives

Three Facts:

• Surging grain use for biofuels and animal

feed have reduced global stock levels

• Grains for food are substitutable with feed

uses globally

• Feed and fuel uses are less essential than

minimum food needs in a crisis

New emergency stabilization initiative:

Opportunity for nations with biofuels or animal feeding industries:

• Governments could buy call options from

domestic biofuels producers or animal feeders to guarantee mutually advantageous diversion of grain from biofuels production to human food or animal feed in specified severe food crises.

• Target consumption of poor, not market

price

New emergency stabilization imitative:

• If severe crises are relatively

infrequent, such options might be more cost-effective than food storage or creation of a production reserve.

• Similar options exist for irrigation

water diversion to domestic use

Storage proposals

• 1. An obvious proposal is to impose the “social

planner” solution by replacing private distorted storage with optimal storage.

• 1. A second class of storage policies tries to ensure

a minimum consumption level for the most vulnerable.

• 2. A third class of policies aims to limit price

volatility.

Other initiatives for consideration

• 1. Strengthening of WTO disciplines on export

controls and extend them to export taxes could encourage market access in a shortage

• 2. Better collection and sharing of information on

global grain stocks and production prospects could improve market transparency, and help prevent the onset of unjustified market panic.

• 3. Consumption-targeted emergency food stocks
• Food for work?

Conclusions

• 1. No evidence of a new regime of greater

volatility.

• 2. Price spikes not easily identified by production

fluctuations from trend

• 3. Price spikes can be identified by stocks-to-use

ratios, excluding stocks unavailable to global market (such as Chinese stocks in most years).

• 4. As before, spikes occur only when stocks have

run down and market is fragile

• 5. Govt. shocks are crucial: exporters cannot

guarantee access even in “non-emergencies”

Conclusions (contd.)

• 6. Importers need strategic stocks to protect

the poor: – target consumption, not price

• 7. Better than stocks or production reserves?

Use options or modify mandates, to divert grain to food uses in rare, specified emergencies.

Thanks to my colleagues:

• Abdolreza Abbassian, FAO
• Bruce Babcock, Iowa State U.
• Eugenio Bobenrieth, Universidad de Concepcion, Chile
• Juan Bobenrieth, Universidad del Bio-Bio, Chile
• Carlo Cafiero, FAO
• Concepción Calpe, FAO
• Yongdong Liu, ARE, University of California, Berkeley
• Josef Schmidhuber, FAO
• Zhen Sun, ARE, University of California, Berkeley
• Wallace Tyner, Purdue U.
• Stefan Tangerman
• Phil Verleger, U. of Alberta
• Yang Xie, ARE, University of California, Berkeley
• Di Zeng, ARE, University of California, Berkeley

Thanks also to:

• Justin Lin
• Ann Harrison
• Julian Lampietti
• Don Larsen
• Olivier Mahul
• Will Martin
• Marc Sadler