What is going on? Rising prices for all primary commodity since - - PowerPoint PPT Presentation

The OECD-FAO Agricultural Outlook: Whither commodity prices in the next decade

What is going on?

• Rising prices for all primary commodity since 2000. Since

2006-08, agricultural markets have been in turmoil and indicators of price volatility have risen.

• Droughts, floods, recession, monetary fluctuations–

exchange rates, disparate economic growth, perverse policy responses, financialization of markets.

• Commodity stocks “struggle” to return to normal levels.
• Strong rise of energy/fuel prices has created the largest

source of “new” demand for agricultural crops in many years, and have underpinned rising costs

• Increasing concern for food insecurity, now and for the

future, have created concerns for global governance, yet demand appears robust to higher prices.

2

2011 not a repeat of 2008, but almost

50 100 150 200 250 300 1/2005 1/2006 1/2007 1/2008 1/2009 1/2010 1/2011 Meat Dairy Cereals Oils Food

3

In real terms, the FAO Food Price Index has doubled since 2000

y = 278.14e-0.019x 50 100 150 200 250 300 350 400 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 Index 2004-06=100

4

Implied Volatility has trended up in last two decades –trend to continue?

5 10 15 20 25 30 35 40 45 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Percentage Wheat Maize Soybeans

5

Key characteristics – Prospects for Prices

• High real prices

– Will come down from recent highs in 2011, but will average higher compared to past trends – Denominated by “oil”? – Prices underpinned by higher costs – fertilizer, transport, labor

• High price volatility

– Likely to remain high: under excess demand and low stocks, any supply shock will drive prices up sharply – Energy price volatility will transmit to agriculture – Are agricultural prices increasingly sensitive to income changes?

• Implications

– Higher prices a signal for higher investment and technology application, but higher volatility may restrain? – High concern for food insecurity, policies may be uncoordinated

6

Real crop prices on higher plateau.. But down from recent peaks.

100 200 300 400 500 600 700 USD/MT Maize Wheat Rice Oilseeds Sugar

Real exchange rates relative to US dollar: most have depreciated significantly since 2002

5 10 15 20 25 30 35 40 45 50 1 2 3 4 5 6 7 8 9 10 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Raio to China Yuan – real terms Brazil Argentina EU China Canada Australia India

Key characteristics - Demand

• Food demand remains robust

– Historically strong economic growth in developing, particularly in emerging countries – Over four fifths of food demand growth is in developing countries – Highest food demand growth in value added sectors – meats, dairy etc implies high demand for feed.

• Biofuel feedstock demand will remain strong, but slowing

– Policies are key, but less so at higher energy prices – Ethanol from maize tops out with US mandate, and global growth will come mostly from sugarcane – Biodiesel from edible vegetable oils grows strongly

• Implications

– Robust demand for food, feed and biofuel feedstocks will pressure supply systems

9

Per capita GDP– will strong growth continue?

• 6
• 4
• 2

2 4 6 8 10 12 2005 2007 2009 2011 2013 2015 2017 2019 Percentage World OECD BRIC LDC ROW

10

Net addition to population starting to fall quickly during the next decade and beyond

Source: UN-Statistics/population 2008

• 20000

20000 40000 60000 80000 100000 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016 2022 2028 2034 2040 2046 Change in population in thousands World OECD BRIC LDC ROW

By region the fall in net addition is highest in Asia region – SSA still rising

Source: UN-Statistics/population 2008

• 10000

10000 20000 30000 40000 50000 60000 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016 2022 2028 2034 2040 2046 Change in population in thousands

N.America L.America SSA N.Africa&ME W.Europe E.Europe Oceania&Jpn Asia

Per capita food consumption increasing in transition and developing countries

80 90 100 110 120 130 140 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Index 2004-06=100

N.America L.America W.Europe E.Europe&C.Asia N.Africa&M.East S.S.Africa Asia&Pacific Oceania 13

Shift from staple foods to value-added products continues

• 2%

0% 2% 4% 6% 8% 10% 12% 14% 16%

Per-capita food consumption change between 2008/10 and 2020

Food and feed dominate cereal use, ethanol expands only until 2015

500 1000 1500 2000 2500 3000 Million MT

Total cereals use

Food Feed Biofuel Other 1.2% p.a. 1.3% p.a. 0.6% p.a. 1.3% p.a. 1.1% p.a. 2.6% p.a. 26% p.a. 2% p.a.

Industrial use of vegetable oil continues to increase

20 40 60 80 100 120 140 160 180 200 Million MT

Edible vegetable oil use

Food Industrial 4% p.a. 2% p.a. 4% p.a. 18% p.a.

20 40 60 80 100 120 140 160 Billion Litres Coarse grain Wheat Molasses Sugar cane Roots&tubers Other

Maize ethanol flattens out in 2015, sugar cane provides growth

5 10 15 20 25 30 35 40 45 Billion Litres Edible Oils Energy Oil crops and waste

Biodiesel anticipated to grow strongly, but about ¼ of ethanol production

Are oil prices now a floor and ceiling for maize/crop prices? What does this mean?

19

50 100 150 200 250 300 20 40 60 80 100 120 140 160 2005M01 2006M01 2007M01 2008M01 2009M01 2010M01 2011M01 USD/MT USD/barrel Oil (WTI) Corn (Iowa) Mandates underpin prices

Key characteristics - Supply

• Supply growth varies regionally

– Agricultural sectors in South America, Eastern Europe and Central Asia are projected to provide bulk of supply growth

• Coming decade expected to see continued cereal

production growth, oilseeds to expand slower

• Poultry and pork production respond to strong demand

from developing countries

• Productivity growth is slowing

– Where high access to variable inputs, supply response will be strongest in the short term, but limited by higher fertilizer and feed costs – Growth in yields of many crops slowing down compared to previous growth rates – Best land is mostly used, expansion will be to more marginal land, with costly access and more variable yields – Water supply for irrigation is increasingly limited

21

• 0.1

0.1 0.3 0.5 0.7 0.9 1.1 1.3 1.5 20 40 60 80 100 1995 2000 2005 2010 2015 Index 2008 = 1 USD/barrel Crude Oil US maize production cost index

Input cost pressures remain high

Arable Area grows slowly, mainly in developing countries

200 400 600 800 1000 1200 Million hectares Cereals Oilseeds Sugar crops Other World Developed Developing

Is global yield growth slowing?

Barley yield = -1e-04x2 + 0.03x + 1.4 Maize yield= +1e-04x2 + 0.06x + 1.9 Rice yield = -1e-04x2 + 0.05x + 1.7 Soybean yield= -1e-08x2 + 0.03x + 1.1 Wheat yield = -2e-04x2 + 0.05x + 1.0

1 2 3 4 5 6 1961 1971 1981 1991 2001 2011 Tonnes/Ha

Barley Maize Rice, paddy Soybeans Wheat 24

Yields continue to increase but at slower pace

0% 5% 10% 15% World Developed Developing World Developed Developing

Total yield growth 2001-10 vs. 2010-20

2001-2010 2010-2020

Cereals Oilseeds

Yield growth has a large impact on commodity prices in the medium term

Impact on average 2011-2020 world prices of higher and lower yields:

• 20.0%
• 10.0%

0.0% 10.0% 20.0% Oilseeds Poultry Protein meals Coarse grains Rice Wheat Yields + 5% Yields - 5%

Agricultural supply increase – Latin America is growing strongly, but not traditional suppliers

75 100 125 150 Net production index 2004-06 = 100 Latin America

• E. Europe/C. Asia

Sub-saharan Africa North America

• E. Asia
• N. Africa & M. E.
• W. Europe

Oceania

50 70 90 110 130 150 170 190 210 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Index (2004-06=100)

N.America L.America W.Europe E.Europe&C.Asia N.Africa&M.East S.S.Africa Asia&Pacific Oceania

Commodity exports increasing most from Eastern Europe and Central Asia

28

Eastern Europe takes over the lead in world wheat exports

RUK, 23% USA, 23% CAN, 15% E27, 15% AUS, 10% Other, 9% ARG, 5%

2005-2009

RUK, 31% USA, 18% CAN, 14% E27, 12% AUS, 11% Other, 9% ARG, 6%

2020

Latin America is largest net exporter of primary agricultural goods – MENA largest importer

• 50
• 40
• 30
• 20
• 10

10 20 30 40 50 60 Billion of constant $ 2004-06 N.America L.America W.Europe E.Europe&C.Asia MENA SS Africa Other Asia Oceania

Low global stock to use ratios for wheat and coarse grain imply high upside price risk

31

0% 5% 10% 15% 20% 25% 30% 35% 2003 2005 2007 2009 2011 2013 2015 2017 2019 Coarse grain - Stock to use Wheat - Stock to use

Stochastic analysis of yield and impact on prices

50 100 150 200 250 300 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 USD/MT

Stochastic coarse grain price projections

Baseline 10% Percentile 90th Percentile Median

Drivers of higher prices and higher variability

• Weather: is there climate change? Where?
• New energy link/ policies
• Macro variability
• “Demand” outstripping “supply growth”
• High demand growth in emerging countries
• Rising costs, particularly energy, fertilizer, and

resources such as water and labor

• Productivity growth slowing in developed countries?
• Stocks struggle to rebuild
• Trade restrictions – export bans and taxes
• Financialization of markets

33

Key messages

• Price incentives for investment in agriculture have

increased

– Higher costs and higher volatility may impede investment – Price transmission in many countries is a concern – policy and structural issues need to be addressed

• Food security is a critical issue. Upside prices risks

are high, and requires policy responses

• Are we on track to feed the world ?

– Higher prices may indicate no. – Higher productivity, resilience and policy coherence is critical

34

35

Total Factor Productivity growth of agricultural in world regions, 1961-2007 Average annual growth rate by period (%) Period 1961-69 1970-79 1980-89 1990-99 2000-07 1961-2007 All developing countries 0.18 0.54 1.66 2.30 1.98 1.35 Sub-Saharan Africa 0.36

• 0.07

0.57 1.17 1.08 0.62 Latin America & Carribean 0.29 0.70 1.20 2.54 2.60 1.47

• North East (mainly Brazil)
• 0.52
• 0.76

3.08 3.81 3.63 1.87

• Andean countries

1.45 0.59 1.01 2.73 1.74 1.49

• Southern cone

0.36 1.73 0.03 2.15 2.03 1.27 Asia (except west)

• 0.02

0.63 1.95 2.60 2.37 1.53

• North East (mainly China)
• 0.12

0.30 2.77 4.08 2.83 2.03

• Southeast

0.68 2.26 0.98 1.78 2.59 1.66

• South

0.77 0.64 1.98 1.60 1.70 1.23 West Asia 1.06 0.00 2.82 2.25 2.04 1.64 North Africa

• 0.10

0.61 1.33 1.46 0.95 0.89 Oceania

• 0.20

0.07

• 0.11

0.63 0.43 0.17 All developed countries 1.21 1.52 1.47 2.13 0.86 1.48 US and Canada 0.86 1.37 1.35 2.26 0.33 1.29 North West Europe 1.17 1.31 1.22 1.63 0.59 1.21 South East Europe 1.56 1.46 1.91 2.03 0.82 1.59 Australia-New Zealand 0.93 1.29 1.26 0.53

• 0.53

0.74 Asia (e.g. Japan, Korea)

• 7.47
• 0.86

0.39 1.59 1.80

• 0.74

South Africa 0.50 1.53 1.80 2.75 3.09 1.95 Transition economies 0.67

• 0.26

0.25 0.73 1.92 0.61 Central and Eastern Europe 0.63 0.38 0.60 1.92

• 0.12

0.72 Former Soviet Union 0.73

• 0.58

0.20 0.18 3.28 0.65

• Baltic

1.96

• 0.79

0.51 0.23 2.28 0.61

• Central Asia & caucasus
• 0.56

1.85

• 1.72

3.51 2.47 1.28

• Eastern Europe

1.23

• 0.64

0.22 1.19 3.82 1.03

Source: Table 4.7 in Chapter 4 of Alston et al. (2010), using various authors' estimates.