Mid-term Outlook for World Agricultural Markets Jacinto Fabiosa Co-Director, (515) 294-6183 jfabiosa@iastate.edu Food and Agricultural Policy Research Institute
The Question of Interest? In 27 we asked, will high commodity prices continue in the mid-term? YES! s outlook showed strong prices. Collective market judgment showed strong CBOT futures price. In 28, why are current commodity prices showing some weakness? Resolution of temporary factors the case of food grains Widespread economic slowdown Weak energy prices Strengthening of the US dollar What are the key drivers in shaping market outcomes in the next decade? Economic recovery. Natural resource constraints. Impact of biofuel. Trading-up in consumption.
The Case of Food Grains Temporary area reduction in wheat has recovered. Temporary yield decline in wheat has recovered. Supply shock in a low stock regime can result to temporary sharp spikes in prices. Supply response to a supply shock under a growing biofuel sector has high opportunity cost leading to slower adjustment at high prices. Demand shift response to substitute products in response to a supply shock under a low stock regime propagates price spikes (the case of rice) more than price declines. Wheat Price USD per MT 5 4 3 27 2 1 1985 1989 1993 1997 21 25 29 213 217 27 28
Changes in Wheat Area Million Ha 9 6 3-3 -6-9 5/6 to 6/7 6/7 to 7/8 7/8 to 8/9 AR_ AU_ CA_ EU_ R_ RU_ UK_ U9_ Total Changes in Wheat Yield MT per Ha 5/6 to 6/7 6/7 to 7/8 7/8 to 8/9 1.5 1..5. -.5-1. -1.5 AR_ AU_ CA_ EU_ R_ RU_ UK_ U9_ Ave
Wheat Price and Stock-to to-use Ratio USD per MT Percent 4 3 35 25 3 25 2 2 15 15 1 1 5 5 1985 1988 1991 1994 1997 2 23 26 29 212 215 218 Wheat U.S. FOB Gulf Stock-to-Use Ratio Rice Price USD per MT 4 35 3 25 2 15 1 5 1985 1988 1991 1994 1997 2 23 26 29 212 215 218 Wheat U.S. FOB Gulf Stock-to-Use Ratio Percent 3 25 2 15 1 5
Rice Price and Stock-to to-use Ratio USD per MT 7 Percent 3 6 5 4 3 2 2 1 1 1985 1988 1991 1994 1997 2 23 26 29 212 215 218 Thailand Price 1% long grain Stock-to-Use Ratio Growth in Real GDP - developing Percent 1 8 6 4 2 2 22 24 26 28 21 212 214 216 218 27 28 Worl Bank
Growth in Real GDP - developed Percent 4. 2.. -2. -4. 2 22 24 26 28 21 212 214 216 218 27 28 World Bank 5 4 3 2 1 Growth in Real GDP - world Percent 6 2 22 24 26 28 21 212 214 216 218 27 28 World Bank
Selected Exchange Rate Changes in 29 Percent 4 3 2 1-1 AU_ NZ_ EU_ CN_ TH_ CA_ AR_ BR_ Crude Oil Price USD per bar 12 1 8 6 4 2 1997 2 23 26 29 212 215 218 27 28 NX 27 NX 28-8 NX 28-12
Crude Oil Price USD per bar 12 1 8 6 4 2 1997 2 23 26 29 212 215 218 27 28 Stochastic Baseline: 5 Simulations USD per bar 12 1 8 6 4 2 6 5 4 3 2 1 USD per bu Crude Price High Low Average Corn Price High Low Average
Population Growth Rates Percent 4. 3. 2. 1.. -1. 196 197 198 199 2 Projection WRL EU LA FSU AF AS ME OC NA Market Outlook Highlight s 29 preliminary baseline Resolution of temporary factors and slower economic growth weakens energy and agricultural commodity prices in the short to medium term. Economic recovery and stronger energy prices provide longer term factors driving commodity prices to their historic high levels. The biofuels sector integrates the energy and agricultural commodity prices in both the supply and demand side exacerbating the impact of energy price changes on agricultural commodity prices. Collective judgment of the market? CBOT corn and soybean futures show prices weakening in the short-run but recovering in later contract periods.
What are the key drivers? Widespread softening of many economies in the short-run, but recovery in later periods Raising level of consumption Trading-up in consumption, that is, changing consumption basket away from main bulk staple commodities (e.g., grains) to protein-rich meat and dairy products which require more grains Low energy price in the short-run and recovery in later periods. Raising production cost (e.g., fertilizer, fuel) Increasing demand for biofuels What are the key drivers cont? Biofuels sector development Continuing and expanding government support to develop biofuel sector (e.g., mandates and policy instruments). Area re-allocation from soybeans to corn in the U.S. for ethanol from soybeans, cotton, etc., to sugarcane in Brazil for ethanol Brazil and Argentina primarily use soybean oil to meet their biodiesel mandate.
What are the key drivers cont? Meat and livestock sector development Growth in per capita consumption Recovery in consumption from SPS issues High feed cost Dairy sector development Rising dairy product consumption in Asia Lower availability of exportable surplus from Europe due to CAP reforms High feed cost What are the key drivers cont? Land constraint Land constraint raise prices of all commodities as prices of biofuel feedstocks rise Increasing use of marginal land lowers yield, makes supply more inelastic, and results to higher price adjustments Lower stocks Exert upward pressure on prices May increase price volatility
What are the key drivers cont? Growth in consumption in countries and regions with low to limited productive potential (e.g., wheat in the Middle East, Africa, Asia) directly translates to stronger import demand. Price adjustments are expected to be larger in many commodities with thin markets (e.g., rice). Corn Prices USD per MT 25 2 15 1 5 1985 1989 1993 1997 21 25 29 213 217 35 3 25 2 15 1 5 27 28 Stock-Use-Ratio
Sorghum Prices USD per MT 25 2 15 1 5 1985 1989 1993 1997 21 25 29 213 217 27 28 Barley Prices USD per MT 25 2 15 1 5 1985 1989 1993 1997 21 25 29 213 217 27 28
Soybean Prices USD per MT 6 5 4 3 2 1 25 2 15 1 5 1982 1986 199 1994 1998 22 26 21 214 218 27 28 Stock-Use-Ratio Rapeseed Prices USD per MT 6 5 4 3 2 1 1982 1986 199 1994 1998 22 26 21 214 218 27 28
Sunflower Prices USD per MT 8 7 6 5 4 3 2 1 1982 1986 199 1994 1998 22 26 21 214 218 27 28 Soybean Oil Price USD per MT 1,6 1,2 8 4 12 1 8 6 4 2 1982 1986 199 1994 1998 22 26 21 214 218 27 28 Stock-Use-Ratio
Rapeseed Oil Price USD per MT 1,8 1,5 1,2 9 6 3 1982 1986 199 1994 1998 22 26 21 214 218 27 28 Sunflower Oil Price USD per MT 1,8 1,5 1,2 9 6 3 1982 1986 199 1994 1998 22 26 21 214 218 27 28
Soybean Meal Prices USD per MT 4 32 24 16 8 1982 1986 199 1994 1998 22 26 21 214 218 27 28 Sunflower Meal Prices USD per MT 35 28 21 14 7 1982 1986 199 1994 1998 22 26 21 214 218 27 28
Rapeseed Meal Prices USD per MT 35 28 21 14 7 1982 1986 199 1994 1998 22 26 21 214 218 27 28 Sugar Price USD per MT 4 36 3 27 2 18 1 9 1982 1986 199 1994 1998 22 26 21 214 218 27 28 Stock-Use-Ratio
Cattle Price USD per MT 2,5 2, 1,5 1, 5 198 1984 1988 1992 1996 2 24 28 212 216 27 28 Hog Price USD per MT 1,4 1,2 1, 8 6 4 2 198 1984 1988 1992 1996 2 24 28 212 216 27 28
Poultry Price USD per MT 2,5 2, 1,5 1, 5 198 1984 1988 1992 1996 2 24 28 212 216 27 28 Butter Price USD per MT 5, 4, 3, 2, 1, 1982 1986 199 1994 1998 22 26 21 214 218 27 28
Cheese Price USD per MT 6, 5, 4, 3, 2, 1, 1982 1986 199 1994 1998 22 26 21 214 218 27 28 NFD Price USD per MT 5, 4, 3, 2, 1, 1982 1986 199 1994 1998 22 26 21 214 218 27 28
Ethanol Price USD per gal 2.5 2. 1.5 1..5. 1995 1998 21 24 27 21 213 216 27 28 Biodiesel Prices USD per gal 8. 6. 4. 2.. 25 27 29 211 213 215 217 27 28
Corn CBOT Futures Price USD per bu 5. 4. 3. 2. 1.. 12:7 3:8 5:8 7:8 9:8 12:8 3:9 5:9 7:9 27 28 9:9 12:9 3:1 5:1 7:1 9:1 12:1 7:11 12:11 Price Distribution Dec Corn Futures USD per bu 4.22 4. 3.75 3.5 3.25 3. 2.75 2.5 2.25 2. 1.75 1 5 4 4 6 6 27 13 28 5 1 15 2 25 3 Percent 17 2 24
Soybean CBOT Futures Price USD per bu 12. 1. 8. 6. 4. 2.. 1:8 3:8 5:8 7:8 8:8 9:8 11:8 1:9 3:9 5:9 7:9 8:9 9:9 27 28 F(P<6.5)=65% 11:9 1:1 3:1 5:1 7:1 8:1 9:1 11:1 1:11 3:11 7:11 11:11 Price Distribution Nov Soybean Futures USD per bu 1.3 >9. 1 9. 8.5 8. 7.5 7. 6.5 6. 5.5 5. <4.5 2 3 4 9 27 11 14 28 13 5 1 15 2 25 3 18 25 Percent
Focus on Impacts of Biofuels Energy and agricultural commodity market weakly linked through supply interaction (cost of production). Biofuel sector integrates the energy and agricultural commodity market through demand interaction Impact Both interaction raises prices of agricultural commodity with higher energy prices. Break-even floor price. Ethanol and biodiesel which affect both corn and soybean raises the opportunity cost of supply adjustments. Biofuel Mandate (target) Country Units Ethanol Biodiesel Combined EU % 4 (215) % 6 (22) Brazil % 25 (26) 2 (28) 1 (21) Argentina % 5 (21) Canada % 5 (21) India % 5 (27) 1 (212) China % 15 (22) US bg 35 (222) 1 (212)
EISA RFS Billion gal 4 3 2 15 corn 1 29 213 218 222 Total Advanced Cellulosic Biodiesel Biofuel Policy Instruments RFS Tax Credit and Import Duty Tax credit (federal motor tax) Ethanol of $.45/gallon Biodiesel of $1. per gallon Import duty to expire on 28 2.5% ad valorem $.54/gal specific TRQ for CBI At least 5% locally produced feedstock Maximum of 6 million gallons or 7% of consumption
Supply Side Link of Energy and Ag Commodity Markets S1 pc1>pc So p p1 po Do Demand Side Link of Energy and Ag Commodity Markets S1 pc1>pc So pc p2 p1 po D1 pc1>pc Do pc
Biofuel Sets a Lower Price Support USD per g/b 5. Gasoline 4. Price 3. Cost Ethanol Price Corn Price Ethanol price Crude price Gasoline price Ethanol price is 2/3 of gasoline price 2. 1.. 3.56 1.53 2.37.25.32.29 Fuel cost Other costs Fixed Cost 4.17 Feedstock (corn) price Excess revenue of $1.53 Yield per bushel is 2.72 Maximum feedstock price to break-even is $4.17 per bushel U.S. Corn Ethanol Production and Revenue USD per gal Billion gal 2. 2 1.5 15 1. 1.5 5. 23 25 27 29 211 213 215 217 Production Net Revenue Fixed Cost Mandate
US Ethanol Production by Source Billion gal 3 25 2 15 1 5 3 25 2 15 1 5 2 22 24 26 28 21 212 214 216 218 Corn Non-corn Grain Cellulosic RFS US Ethanol S & U and Price Million gal 25 USD per gal 3. 2 15 1 5 2.5 2. 1.5 1..5 1993 1995 1997 1999 21 23 25 27 29 211 213 215 217. Production Consumption Price Import Stock
U.S. Existing and Planned Ethanol Plants U.S. Existing and Planned Biodiesel Plants
U.S. Area Allocation Million Acres 9 8 7 6 5 2 22 24 26 28 21 212 214 216 218 Corn Soybeans World Ethanol Price and Trade Million Gal 5, USD per Gal 2. 4, 3, 2, 1, 1.5 1..5 1995 1997 1999 21 23 25 27 29 211 213 215 217. Trade Ethanol Price
Brazil Sugar Cane Production and Use in Ethanol Thousand MT 1,, Percent 7 8, 6, 6 4, 2, 5 2 23 26 29 212 215 218 Production Share 4 World Biodiesel Price and Trade 7. 6. 5. 4. 3. 2. 1. USD per Gal Million Gal 12 1 8 6 4 2. 23 25 27 29 211 213 215 217 Net Trade World Biodiesel Price
Brazilian Biodiesel Supply and Utilization Million gal 1, Million gal 2 8 6 4 2 16 12 8 4 26 28 21 212 214 216 218 Production Consumption Net Exports -4 Argentine Biodiesel Supply and Utilization Million gal 6 5 4 3 2 1 Million gal 4 3 2 1 25 27 29 211 213 215 217 Production Consumption Net Exports
EU27 Biodiesel Supply and Utilization Million gal 3,5 Million gal 6 3, 2,5 2, 1,5 1, 4 2 5 25 27 29 211 213 215 217 Production Consumption Net Imports EU Biofuels share in transport sector Percent 6. 5. 4. 3. 2. 1.. 25 27 29 211 213 215 217 Biofuels in transport Biodiesel in diesel transport Target
US Biodiesel Supply and Utilization Million gal 1,5 1,2 9 6 3 Million gal 5 4 3 2 1 25 27 29 211 213 215 217 Production Consumption Net Exports US Corn Utilization Share by End- use Percent 1. bb 12. 13.7 14.9 1 13.39 11.17 1.32 9.82 8 18.57 15.52 16.3 18.45 6 11.41 29.31 35.55 35.17 4 2 56.64 44. 38.1 36.56 23 28 213 218 Feed Fuel Alcohol Export Others
US DDG Supply and Utilization Million tons 45 4 35 3 25 2 15 1 5 1997 1999 21 23 25 27 29 211 213 215 217 Production Consumption Net Exports Million tons 8 7 6 5 4 3 2 1 US Soybean Oil Utilization Share by End- use Percent 1 5.26 11.2 8.38 1. 15.22 8 15.62 26.75 24.47 6 93.74 4 73.36 64.87 6.31 2 23 28 213 218 Food Biodiesel Export
Biodiesel Feedstock Share Percent 1 8 6 4 2 26 28 21 212 214 216 218 Other Fats and Oils Soybean Oil Income Elasticity and Income Income 8, 6, 4, 2,.1.32.44.56.62.66.71.75.79 Elasticity
Change in per capita consumption 28-218 Kilograms 15 1 5 trading-up -5 Meat Dairy Vegetable Oil Food Grains Per Capita Meat Consumption Kg per person 7 6 5 4 3 2 1 1999 21 23 25 27 29 211 213 215 217 Beef Pork Poultry
Japan Beef Supply and Utilization Thousand MT 1,6 Thousand MT 12 1,2 9 8 6 4 3 199 1993 1996 1999 22 25 28 211 214 217 Production Consumption Imports China Net Trade Thousand MT 2-2 -4-6 -8 Beef Pork Broiler 27 218
World Meat Production and Trade 3 25 2 15 Million MT 3 25 2 15 1 1 1999 22 25 28 211 214 217 5 Production Trade Dairy Product Consumption in Asia Thousand MT 3, 25, 2, 15, 1, 5, Percent.96.92.88.84 22 25 28 211 214 217.8 Consumption China and India Share
EU-27 Dairy Net Exports Thousand MT 5 4 3 2 1 Butter Cheese NFD WMP Before 26 26 to 217 Meat Production and Feed Use Million MT 3 25 2 15 1 5 Million MT 1 8 6 4 2 1999 21 23 25 27 29 211 213 215 217 Meat Production Grain Feed Use Oil Meal Feed Use
Per Capita Vegetable Oil Consumption Kg per person 25 2 15 1 5 1999 21 23 25 27 29 211 213 215 217 Soyoil Rapeseed Oil Sunflower Oil Peanut Oil Palm Oil World Wheat Area and Yield Million Ha 24 23 22 21 2 MT per Ha 3.5 3. 2.5 2. 1.5 1..5 19 1985 1988 1991 1994 1997 2 23 26 29 212 215. Area Yield
World Rice Area and Yield Million Ha 16 155 15 145 14 135 MT per Ha 3.5 3. 2.5 2. 1.5 1..5 13. 1985 1988 1991 1994 1997 2 23 26 29 212 215 218 Area Yield World Soybean Area and Yield Million Ha 12 1 8 6 4 2 MT per Ha 3. 2.5 2. 1.5 1..5. 1985 1988 1991 1994 1997 2 23 26 29 212 215 218 Area Yield
World Corn Area and Yield Million Ha 2 16 12 8 4 MT per Ha 6 5 4 3 2 1 1985 1988 1991 1994 1997 2 23 26 29 212 215 Area Yield Argentine Land Use Percent 1 9 8 7 6 Ha per AU 2.7 2.5 2.3 2.1 1.9 1.7 5 2 22 24 26 28 21 212 214 216 218 1.5 % of Agricultural Area Animal Stocking Rate
Brazil Land Use Percent 1 Ha per AU 2.2 9 8 1.8 7 1.4 6 5 2 22 24 26 28 21 212 214 216 218 1. % of Agricultural Area Animal Stocking Rate Wheat Net Imports by Region Thousand MT 12, 1, 8, 6, 4, 2, 1997 1999 21 23 25 27 29 211 213 215 217 Asia Latin America Middle East and Africa
What are the wild cards on energy situation? Improvement in efficiency of energy use in transport sector? Discovery of new energy reserves? Investment and technological development in energy extraction? What are the other wild cards? Technology (e.g., yield) development from GMO What are the impacts on agricultural markets if technologies for second generation feedstocks become commercially feasible? Will water supply become limiting? Will a multilateral trade agreement on agriculture be reached? When? How deep will the reforms be?
Thank You! EU Ethanol S & U Million gal 2,5 2, 1,5 1, 5 Million gal 8 6 4 2 23 25 27 29 211 213 215 217 Production Consumption Net Imports
EU Sugar S & U Thousand MT 25, 2, 15, 1, 5, Thousand MT 6 4 2-2 -4 25 27 29 211 213 215 217 Production Consumption Net Exports -6 LC per USD 7 6 5 4 3 2 1 Selected Exchange Rate 1996 1998 2 22 24 26 28 21 212 214 216 218 Australia Argentina Brazil European Union Canada
Selected Exchange Rate 14 12 1 8 6 4 2 LC per USD 1 8 6 4 2 1996 1998 2 22 24 26 28 21 212 214 216 218 Japan China