The relation between commodity markets and resource markets. (and the impact of Russian embargo) Trevor Donnellan FAPRI-Ireland Teagasc

Transcription

1 The relation between commodity markets and resource markets (and the impact of Russian embargo) Trevor Donnellan FAPRI-Ireland Teagasc

2 Overview Boom in Prices Relationship in Price Across Sectors Decline in Prices Russian Embargo Issues for the Future

3 The boom in agricultural commodity prices Agri commodity prices entered a boom in mid 2000 s A sharp price spike in 2008 Rioting in developing countries as food prices increased Price crash in 2009 (global recession) Prices rising again in 2010, 2011, 2012 Greater international concern about global food security How can the world feed its growing population? Many felt the increase in prices would be sustained It would take a long time for supply growth to improve due to historical underinvestment in agriculture

4 FAO Price Index (Nominal)

5 What was behind the rise in prices? A number of factors Increasing global demand due to population and income growth Affected food, oil, metals and other commodities Poor harvests contributed to declining stock levels especially in grain and oilseed sector made prices more sensitive to size of annual harvest Supply growth struggled to keep pace with demand growth

6 The Price of Breakfast: now lowest since % Financial Times, Sept 2015

7 FAO Price Index (Nominal)

8 Commodity prices are linked Movements in crude oil, fertiliser, metal and agri commodity prices tend to follow each other Effect of rising oil prices increase energy and transport costs higher fertiliser prices more crops directed to fuel production (ethanol and biodiesel) higher grain and animal feed prices higher meat and dairy prices drive up inflation generally in the economy stronger food demand in oil exporting countries End result is Higher farm product prices, but also higher farm production costs higher food prices and and higher consumer prices generally

9 World Bank Commodity Price indices (nominal)

10 Where will prices go next? Over the last decade higher oil prices led to new energy supply sources (shale oil, renewable energy) higher agricultural commodity prices higher agricultural production costs Since 2013 the price boom has been unravelling Supply growth has accelerated and demand growth has slowed Lower feed, fertiliser and crude oil prices and more recently, lower meat and dairy prices We may continue to have lower oil prices over the next few years But we can t be sure Depends on oil production decisions in the big oil exporting countries Trend in oil prices will set trend for other commodity prices

11 Russian Embargo

12 History of the Embargo 2014 Russia bans ag. products and foodstuffs from EU, US, Norway, Canada and Australia Retaliation for sanctions against Russia Ukraine conflict Meat, milk and dairy products, fruits and vegetables, as well as fish and crustaceans Some processed agricultural products are also banned Other agri-food exports unaffected Ban to last for one year but now extended to two years

13 Principal Products Affected by Country

14 Importance of Russia Russia is EU s No.2 agri-food export market Ban represented > 4 % of EU agri food exports 5 billion in trade value Total EU agri-food exports to Russia 11 billion Stronger effects for some sectors & some MS Fruit and Veg (immediate effect perishable good) Cheese and Butter Baltic countries worst affected Smaller (knock-on) effects across the rest of EU

15 Detailed Measures Fruit and Vegetables Support for fruit and veg producers Dairy Private storage of dairy products and public intervention Support package for Baltic countries Special Aid Package for Dairy and Pig sectors Pork Private storage of pork meat Removal of SPS barriers to increase trade Turkey, US and Canada

16 Long Term Effects Will exports to Russia be restored to preembargo levels when embargo ends? Growing belief that increased Russian production and competition from the Rest of World will limit Russian demand for EU food products affected by the embargo A portion of the EU s food export trade to Russia may have been lost indefinitely

17 Big Uncertainties for the Future Path of the crude oil price Will in recover towards US$100 in one or two years or will it take longer? Economic growth in China Can it successfully transition from investment based growth towards consumer based growth? Food policy in China Will China s continue to focus on producing more meat and dairy (and import more animal feed)? Or will it import more meat and dairy directly from the Rest of the World?

18 Thank You Trevor Donnellan