The Food and Commodity Price Shock and the Caribbean Region

Transcription

1 The Food and Commodity Price Shock and the Caribbean Region Andrew Powell Research Department Inter American Development Bank June 2008 Barbados 1

2 Plan of the Presentation The Current Commodity Shock Temporary or Permanent? Fundamentals Theory Markets The Effects on the Caribbean Context Balance of Payments Conclusions 2

3 The Current Shock Real prices are not at a record But this is a very sharp price peak in commodity prices Especially for some products 3

4 Food Prices Index Index: 1957= Real Nominal Jan-57 Jan-60 Jan-63 Jan-66 Jan-69 Jan-72 Jan-75 Jan-78 Jan-81 Jan-84 Jan-87 Jan-90 Jan-93 Jan-96 Jan-99 Jan-02 Jan-05 Jan-08 Source: IFS Note: Food includes wheat, maize, rice, sugar, soybeans, soybean meal, soybean oil, palm oil, coconut oil, fish meal, groundnut oil, beef, lamb and bananas. 4

5 Wheat Nominal 350 Real Price Index (1957=100) Source: BID/INT based on IFS-IMF Note: Real prices calculated using the US-CPI (2000) Nominal Real Price Index (2000=100)

6 Corn (Maize) Nominal Real Price Index (1957=100) Nominal Real Source: BID/INT based on IFS-IMF Note: Real prices calculated using the US-CPI (2000) Price Index (2000=100)

7 Soybean Nominal Real Price Index (1957=100) Note: Real prices calculated using the US-CPI (2000) Source: BID/INT based on IFS-IMF Nominal Real Price Index (2000=100)

8 Sugar Nominal 130 Real Price Index (1957=100) Source: BID/INT based on IFS-IMF Note: Real prices calculated using the US-CPI (2000) Nominal Real Price Index (2000=100)

9 The food price shock is no larger than the shock in other commodities Real Commodity Prices US CPI 9 M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M M Index 100=1980 OIL COPPER WHEAT COFFEE SOYBEAN COAL RICE MAIZE

10 And Oil Prices have led the Surge Index: January 1992 = Oil All Commodities Food Commodities Source: International Monetary Fund: International Financial Statistics 10

11 Temporary versus Permanent Fundamentals Theory The Markets 11

12 Factors contributing to higher food commodity prices Strong growth in demand, based on: Increasing population - Rapid economic growth - Rising per capita meat consumption Slowing growth in ag production Declining stocks of food commodities Escalating crude oil price Rapid expansion biofuels production Dollar devaluation Global liquidity (foreign exchange reserves) Rising costs of ag production Adverse weather Demand factors in brown Supply factors in green Exporter policies Importer policies 12 12

13 Strong economic growth Average Real GDP growth rates Percent World Developed Developing China India United States 13 Source: USDA Agricultural Baseline Projections to

14 Total world grain & oilseeds Stocks and stocks-to-use ratio Million metric ons Stocks / Use (%) % Ending stocks Stocks / Use 35% % 25% % 15% % 5% % 14 Source: USDA PS&D Database 14

15 Million Gallons 18,000 Ethanol 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Biofuels production: Largest producers Biodiesel Argentina Ukraine & Russia Brazil China Canada EU USA Source: USDA Agricultural Projections to

16 Speculation and Commodity Prices Speculation: an old issue for commodity markets. But changes in non-commercial net long positions do not appear to correlate well with price changes Global liquidity high (Central Bank reserves) and growth in long only investment funds, commodities seen as an asset class. 16

17 Foreign Exchange Reserves E m e r g in g A s ia : F o r e ig n e x c h a n g e r e s e r v e s $ b n C h in a E m e rg in g A s ia e x C h in a J a p a n O P E C R u s s ia S o u rc e : O x fo rd E c o n o m ic s / H a v e r A n a ly tic s 17 17

18 Nature of Price Shock Permanent Income growth and demand (China and India) Use of food as energy (Bio-fuels) Changes in diet Drought Transitory High price of oil and other agriculture imports (?) Speculative capital in search of high-return (?) Price of the Dollar (?) 18

19 Temporary versus Permanent Fundamentals Theory The Markets 19

20 Theory: Relationship Between Availability and Price fu n ction w ith sto rag e N o rm a l ha r ve s t = 1 0 D (p) = 1 0 p ^ (-1 /3 ) r = 3 %, s ig m a = n o s tora ge fu n ctio n A vaila bility Simulations based on Deaton and Laroque 1976 Journal of Political Economy, from joint work with Christopher Gilbert 20

21 Giving Rise to Flat Valleys and Sharp Peaks (2000=100) Coffee prices since 1861 (Santos, Brazil). 21

22 Investment Cycles But supply responses also take time. A coffee tree takes years to flower and 5-75 years to peak Crop-cycling programs limit substitution between certain annual crops And if all prices boom, new land takes time to develop 22

23 Coffee Price Cycles 75% 50% Short Cycle Long Cycle 1977 Brazilian Frost Boom 25% 0% -25% -50% -75% 1930s Depression & WW2 End of ICA Controls "Coffee Crisis" From joint work with Christopher Gilbert 23

24 Implications The combination of storage and investment cycles implies large forecast errors. Its much easier to spot a boom, than to know how long it will last. Large booms have been accompanied by subsequent falls in long term prices New technologies in production, substitution in demand are promoted. 24

25 The Falling Long Run Real Price of Copper: Booms followed by larger Busts c/lb (2000 prices) Copper deflated by US PPI from 1850, from joint work with Christopher Gilbert 25

26 Temporary versus Permanent Fundamentals Theory The Markets 26

27 What can we Learn from the Markets? Futures markets have become increasingly important. In normal times futures prices are tied to spot prices through arbitrage: futures normally in contango. Premium over spot reflects storage costs But when availability is low, spot prices boom: futures generally in backwardation. Futures price below spot, price expected to fall Futures markets then add information regarding expected future spot prices. 27

28 Futures Price Structures Corn Future corn_apr07 corn_jan08 corn_apr08 corn_23may08 corn_13jun May-08 Jul-08 Sep-08 Dec-08 Mar-09 May-09 Jul-08 Sep-09 Dec-09 Mar-10 Jul Wheat Future wheat_apr07 wheat_jan08 wheat_apr08 wheat_23may08 wheat_13jun08 May-08 Jul-08 Sep-08 Dec-08 Mar-09 May-09 Jul-08 Sep-09 Dec-09 Mar-10 Jul Soybean Future soybean_apr07 soybean_jan08 soybean_apr08 soybean_23may08 soybean_13jun08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-08 Sep-09 Nov-09 Jul Rice Future rice_apr rice_jan rice_23may08 rice_13jun08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Nov-09 Jan-10 28

29 Futures Prices do not Reflect a Particular Supply Shortage But Rather Continuing High Prices: The Case of Corn Corn Future corn_apr07 corn_jan08 corn_apr08 corn_23may08 corn_13jun May-08 Jul-08 Sep-08 Dec-08 Mar-09 May-09 Jul-08 Sep-09 Dec-09 Mar-10 Jul-10 29

30 Wheat Prices Suggest High Prices are to Continue. Wheat Future wheat_apr07 wheat_jan08 wheat_apr08 wheat_23may08 wheat_13jun May-08 Jul-08 Sep-08 Dec-08 Mar-09 May-09 Jul-08 Sep-09 Dec-09 Mar-10 Jul-10 30

31 Soybean Prices Expected to Remain High Soybean Future soybean_apr07 soybean_jan08 soybean_apr08 soybean_23may08 soybean_13jun May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-08 Sep-09 Nov-09 Jul-10 31

32 Evidence from Previous Booms It is unusual for such a sharp price peak to be combined with a futures market premium Previous booms were accompanied by backwardation This implies the market considers that prices are still as likely to rise further than fall back 32

33 /4/1972 1/4/1973 1/4/1974 1/4/1975 1/4/1976 1/4/1977 1/4/1978 1/4/1979 1/4/1980 1/4/1981 1/4/1982 1/4/1983 1/4/1984 1/4/1985 1/4/1986 1/4/1987 1/4/1988 1/4/1989 1/4/1990 1/4/1991 1/4/1992 1/4/1993 1/4/1994 1/4/1995 1/4/1996 1/4/1997 1/4/1998 1/4/1999 1/4/2000 1/4/2001 1/4/2002 1/4/2003 1/4/2004 1/4/2005 1/4/2006 1/4/2007 1/4/2008 Index 100= Jan 4th 1972 Real Commodity Prices Wheat Soybean Corn

34 Previous Booms Were Accompanied by Backwardations Corn Future c orn_1988 c orn_1996 c orn_ month 3 month 6 month 9 month 12mont 34

35 Previous Booms Were Accompanied by Backwardations Soybe an Future soybean_1988 soybean_1996 soybean_ month 3 month 6 month 9 month 12mont 35

36 Previous Booms Were Accompanied by Backwardations Wheat Future w heat_1988 w heat_1996 w heat_ month 3 month 6 month 9 month 12mont 36

37 Futures Premia Today and in Previous Booms CORN Spot Prices 6 Months Futures Prices Difference Event Nominal Real Nominal Real % % % -30.5% % -30.0% % 0.3% Today % 4.5% WHEAT Spot Prices 6 Months Futures Prices Difference Event Nominal Real Nominal Real % % % -11.1% % -15.4% % 6.7% Today % 4.5% SOYA Spot Prices 6 Months Futures Prices Difference Event Nominal Real Nominal Real % % % -7.4% % -4.2% % -26.9% Today % -1.0% 37

38 An Important Factor: Oil Crude Oil Future 38 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 oil_apr07 oil_jan08 oil_apr08 oil_23may08 oil_13jun08

39 In Previous Food Price Peaks, Oil Tended to be in Backwardation C r u d e O Il F u tu r e oil_ 1988 oil_ 1996 oil_ month 3 month 6 month 9 month 12 month 15 month 18 month 21 month 24 month 39

40 The Effect on the Caribbean The Context Growth Inflation The Fiscal Space Current Account Effects on the Balance of Payments Individual Countries Regional Effect 40

41 Real Growth in the Caribbean 14% F 12% 10% 8% 6% 4% 2% 0% -2% Antigua and Barbuda Bahamas, The Barbados Dominica Grenada Guyana Haiti Jamaica St. Kitts and Nevis St. Lucia St. Vincent & Grens. Suriname Trinidad and Tobago -4% 41

42 18% Inflation F 16% 14% 12% 10% 8% 6% 4% 2% 0% Antigua and Barbuda Bahamas, The Barbados Dominica Grenada Guyana Haiti Jamaica St. Kitts and Nevis St. Lucia St. Vincent & Grens. Suriname Trinidad and Tobago 42

43 10% 8% Public Sector Balance (% GDP) F 6% 4% 2% 0% -2% -4% -6% -8% -10% -12% -14% -16% Antigua and Barbuda Bahamas, The Barbados Dominica Grenada Guyana Haiti Jamaica St. Kitts and Nevis St. Lucia St. Vincent & Grens. Suriname Trinidad and Tobago 43

44 30% The Current Account (% GDP) F 20% 10% 0% -10% -20% -30% -40% Antigua and Barbuda Bahamas, The Barbados Dominica Grenada Guyana Haiti Jamaica St. Kitts and Nevis St. Lucia St. Vincent & Grens. Suriname Trinidad and Tobago 44

45 Effects on the Balance of Payments: Worst Case Simulations Effect on prices assumed to be permanent No Quantity Effects Would expect import quantities to fall And export quantities to rise We only consider price changes in a limited number of commodities Beef, Corn, Rice, Soybean, Sugar, Wheat We perform the Simulations with and Without Oil Effects are Large for Some Countries 45

46 Haiti* (Trade Balance, U$S Millions ) Beef Average Price Shock (Jan'06- Apr'08) Maize Rice Soybean Sugar Wheat GDP 2006 in US$: 4,975 million Total change in US$: million Total change as a share of GDP: % Total Net Imports Net Exports * Trade data is based on mirrored world trade flows. 46

47 Haiti* (Trade Balance including oil, U$S Millions) Beef Average Price Shock (Jan'06- Apr'08) Maize oil Rice Soybean Sugar Wheat GDP 2006 in US$: 4,975 million Total change in US$: million Total change as a share of GDP: % Total Net Imports Net Exports * Trade data is based on mirrored world trade flows. 47

48 Jamaica (Trade Balance, U$S Millions ) Beef Maize Rice Soybean Sugar Wheat Average Price Shock (Jan'06- Apr'08) GDP 2006 in US$: 10,020 million Total change in US$: million Total change as a share of GDP: % Total Net Imports Net Exports 48

49 Jamaica (Trade Balance including oil, U$S Millions) Beef Average Price Shock (Jan'06- Apr'08) Maize oil Rice Soybean Sugar GDP 2006 in US$: 10,020 million Total change in US$: million Total change as a share of GDP: % Wheat Total Net Imports Net Exports 49

50 The Caribbean and Latin America CCB Antigua & Barbuda Bahamas, The Barbados Dominica Grenada Guyana Haiti Jamaica St Kitts & Nevis St Lucia St Vincent & The Grenadines Suriname Trinidad and Tobago Net Impact (% GDP) Six products Six products plus oil n/a n/a Net Impact (% GDP) Six products Six products CSC plus oil Argentina Brazil Chile Paraguay Uruguay Net Impact (% GDP) Six products Six products CAN plus oil Bolivia Colombia Ecuador Peru Venezuela Net Impact (% GDP) Six products Six products CID plus oil Belize Costa Rica Dominican Republic El Salvador Guatemala Honduras Mexico Nicaragua Panama

51 Balance of Payments Effects (1) The effect of oil prices dominates that of food prices for most countries (not Haiti) If the shock is persistent; the effects are serious for several Caribbean nation countries may be considerably poorer - especially if oil prices remain high It would be a high risk strategy to assume that the shock is short-lived and borrow, especially given the current fiscal space. 51

52 Balance of Payments Effects (2) But this is a worst case scenario Quantities will adjust especially if prices are passed through In general it may be best to allow pass through, monitoring second round effects on inflation And ensure the vulnerable are protected This maintains meaningful price signals and hence minimizes the macro impact, the more prices are distorted the greater the macro impact will be 52

53 Conclusions (1) Commodity Prices have risen due to multiple factors As is generally the case, when availability falls prices peak very sharply and become highly volatile Some factors may be short lived (more on supply side) but demand factors and energy prices suggest persistence The markets anticipate price rises as likely as falls; no clear expectation of decreases as in previous booms Commodity theory suggests we are in a boom but large uncertainty as how long it will last, but prices will eventually fall back 53

54 Conclusions (2) The challenge is how to make policy in such circumstances; it s s a very risky bet to assume a short-lived boom. Should look for policy interventions that would be useful whether temporary or permanent, or interventions that can be reversed easily if prices fall back sharply. Protect the vulnerable and allow markets to respond efficiently to prices. 54

55 Appendix Individual Country Effects 55

56 Antigua & Barbuda (Trade Balance, U$S Millions ) GDP 2006 in US$: 998 million Total change in US$: million Total change as a share of GDP: % Net Imports Net Exports 56

57 Antigua & Barbuda (Trade Balance including oil, U$S Millions ) GDP 2006 in US$: 998 million Total change in US$: million Total change as a share of GDP: % Net Imports Net Exports 57

58 Barbados (Trade Balance, U$S Millions ) Average Beef Price Shock (Jan'06- Apr'08) Maize Rice GDP 2006 in US$: 3,430 million Soybean Sugar Wheat Total change in US$: million Total change as a share of GDP: % Total Net Imports Net Exports 58

59 Barbados (Trade Balance including oil, U$S Millions) Beef Average Price Shock (Jan'06- Apr'08) Maize oil GDP 2006 in US$: 3,430 million Rice Soybean Sugar Total change in US$: million Total change as a share of GDP: % Wheat Total Net Imports Net Exports 59

60 Dominica (Trade Balance, U$S Millions ) Average Beef Price Shock (Jan'06- Apr'08) Maize Rice Soybean Sugar Wheat GDP 2006 in US$: 319 million Total change in US$: million Total change as a share of GDP: % Total Net Imports Net Exports 60

61 Dominica (Trade Balance including oil, U$S Millions ) GDP 2006 in US$: 319 million Total change in US$: million Total change as a share of GDP: % Net Imports Net Exports 61

62 Grenada (Trade Balance, U$S Millions ) GDP 2006 in US$: 525 million Total change in US$: million Total change as a share of GDP: % Net Imports Net Exports 62

63 Grenada (Trade Balance including oil, U$S Millions ) GDP 2006 in US$: 525 million Total change in US$: million Total change as a share of GDP: % Net Imports Net Exports 63

64 Guyana (Trade Balance, U$S Millions ) Beef Maize Average Price Shock (Jan'06- Apr'08) GDP 2006 in US$: 896 million Rice Soybean Total change in US$: million Sugar Wheat Total change as a share of GDP: % Total Net Imports Net Exports 64

65 Guyana (Trade Balance including oil, U$S Millions) Beef Average Price Shock (Jan'06- Apr'08) Maize oil Rice Soybean Sugar Wheat GDP 2006 in US$: 896 million Total change in US$: million Total change as a share of GDP: -0.16% Total Net Imports Net Exports 65

66 Haiti* (Trade Balance, U$S Millions ) Beef Average Price Shock (Jan'06- Apr'08) Maize Rice Soybean Sugar Wheat GDP 2006 in US$: 4,975 million Total change in US$: million Total change as a share of GDP: % Total Net Imports Net Exports * Trade data is based on mirrored world trade flows. 66

67 Haiti* (Trade Balance including oil, U$S Millions) Beef Average Price Shock (Jan'06- Apr'08) Maize oil Rice Soybean Sugar Wheat GDP 2006 in US$: 4,975 million Total change in US$: million Total change as a share of GDP: % Total Net Imports Net Exports * Trade data is based on mirrored world trade flows. 67

68 Jamaica (Trade Balance, U$S Millions ) Beef Maize Rice Soybean Sugar Wheat Average Price Shock (Jan'06- Apr'08) GDP 2006 in US$: 10,020 million Total change in US$: million Total change as a share of GDP: % Total Net Imports Net Exports 68

69 Jamaica (Trade Balance including oil, U$S Millions) Beef Average Price Shock (Jan'06- Apr'08) Maize oil Rice Soybean Sugar GDP 2006 in US$: 10,020 million Total change in US$: million Total change as a share of GDP: % Wheat Total Net Imports Net Exports 69

70 St. Kitts and Nevis (Trade Balance, U$S Millions ) Average Beef Price Shock (Jan'06- Apr'08) Maize Rice Soybean Sugar Wheat GDP 2006 in US$: 477 million Total change in US$: million Total change as a share of GDP: % Total Net Imports Net Exports 70

71 St. Kitts and Nevis (Trade Balance including oil, U$S Millions ) GDP 2006 in US$: 477 million Total change in US$: million Total change as a share of GDP: % Net Imports Net Exports 71

72 St. Lucia (Trade Balance, U$S Millions ) Average Beef Price Shock (Jan'06- Apr'08) Maize Rice Soybean Sugar Wheat GDP 2006 in US$: 899 million Total change in US$: million Total change as a share of GDP: % Total Net Imports Net Exports 72

73 St. Lucia (Trade Balance including oil, U$S Millions ) GDP 2006 in US$: 899 million Total change in US$: million Total change as a share of GDP: % Net Imports Net Exports 73

74 St. Vincent and the Grenadines (Trade Balance, U$S Millions ) Average Price Shock (Jan'06- Apr'08) Beef Maize Rice Soybean Sugar Wheat GDP 2006 in US$: 423 million Total change in US$: million Total change as a share of GDP: % Total Net Imports Net Exports 74

75 St. Vincent and the Grenadines (Trade Balance including oil, U$S Millions ) GDP 2006 in US$: 423 million Total change in US$: million Total change as a share of GDP: % Net Imports Net Exports 75

76 Suriname (Trade Balance, U$S Millions ) Average Beef Price Shock (Jan'06- Apr'08) Maize Rice Soybean GDP 2006 in US$: 2,115 million Total change in US$: million Sugar Wheat Total change as a share of GDP: % Total Net Imports Net Exports 76

77 Trinidad & Tobago (Trade Balance, U$S Millions) Average Beef Maize Price Shock (Jan'06- Apr'08) GDP 2006 in US$: 8,140 million Rice Soybean Sugar Total change in US$: million Total change as a share of GDP: % Wheat Total Net Imports Net Exports 77

78 Trinidad & Tobago (Trade Balance including oil, U$S Millions) Beef Average Price Shock (Jan'06- Apr'08) Maize oil Rice Soybean Sugar GDP 2006 in US$: 8,140 million Total change in US$: million Total change as a share of GDP: 4.89 % Wheat Total Net Imports Net Exports 78

79 The Bahamas* (Trade Balance including oil, U$S Millions) Beef Average Price Shock (Jan'06- Apr'08) Maize oil GDP 2003 in US$: 5,502 million Rice Soybean Sugar Wheat Total change in US$: million Total change as a share of GDP: % Total Net Imports Net Exports * Trade data is available for 2006 and GDP data for