Major Points of Discussion

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1 Situation and Outlook for Agricultural Commodity Prices Presented to Global Insight s World Economic Outlook Conference April 16, 2008 Michael J. Dwyer Chief Economist and Director of Global Trade and Biofuels Analysis Foreign Agricultural Service/USDA 1

2 Major Points of Discussion Prices for wheat, corn, and soybeans (and products) have risen in recent years but have surged since 2007 now at record levels. However, most commodity prices have increased as have broader export and import price indices. The price surge is due to a complex set of ag-specific supply and demand factors, the weak dollar, and hot money from hedge and index funds shifting into commodities a perfect storm. Higher grain and oilseed prices are NOT a simple case of growing biofuels production. Biofuels are only one factor. Long term outlook for grain and oilseed prices? Strong growth in foreign demand for food (especially from large emerging markets), continued weakness in the dollar, and continued global expansion of biofuels will keep feed grain and oilseed prices higher than previous decade although lower than current levels. Wheat prices should ease as current weather-reduced crops rebound. Effect on overall food inflation? Higher ag commodity and energy prices helped U.S. food price inflation rise faster in 2007 than any year since 1990, exceeding headline inflation -- expected to continue through 2009 before easing. Similar story in other countries especially developing countries who rely on ag imports and whose food demand is more elastic. Countries with strong currencies get some relief. 2

3 Commodity Prices Have Been Rising Since 2002 But Have Surged Since 2007, Particularly Ag Commodities U.S. prices set the tone for most of the world Wheat futures Corn futures Soybean futures Goldman Sachs commodity index Up 50% since 02 3

4 Prices For U.S. Ag Exports and Imports Have Been Rising Sharply Since 2002 Non-Ag Products, Too! Broad-based price increases suggests macro forces such as strong global economic growth and weak dollar are major factors Ag import prices Up 40% since 02 Total merchandise import prices Up 32% since 02 Ag export prices Up 50% since 02 Total merchandise export prices Up 20% since 02 4

5 Many Factors Are Driving Grain and Oilseed Prices Higher Unrelenting growth in global food demand, growing global biofuels production, weaker U.S. dollar, reduced foreign availabilities, policy errors, and growing interest in commodities by investors lift prices to record levels Strong growth in global economy Consumer incomes are rising and middle class households are expanding rapidly, especially in large emerging markets where global import demand growth is concentrated Impact on food demand is significant due to higher income elasticities in emerging markets Value of the U.S. dollar continues to fall Dollar has been depreciating since In 2007, real value fell to 30 year lows. Further declines expected in Boosts purchasing power of foreign buyers of dollar-denominated commodities, thereby increasing demand and putting upward pressure on prices. Renewable energy markets boost demand Continued expansion of global biofuels production is boosting demand for grains and oilseeds and their prices 5

6 Many Factors Are Driving Grain and Oilseed Prices Higher continued Bad weather has reduced exportable supplies by foreign competitors (i.e. Australia, EU, Canada, Russia, Ukraine) When combined with strong global demand, grain and oilseed stocks of major exporters are down sharply, pushing world prices higher Policy moves Shrinking supplies and food security/inflation concerns have led some U.S. competitors to curb exports, shifting price pressures from their domestic markets to rest of world. Growing interest in commodities by hedge and index funds As concerns over inflation rise and stock/bond markets suffer from economic growth and credit concerns, investors shift to commodities. While supply-demand fundamentals support higher prices, the move upward has been exacerbated by hot-money flows. Could grain and oilseed prices go appreciably higher? With stock-to-use ratios of major exporters already at +30 year lows and global demand strong, a crop shortfall in a major exporter could send commodity prices higher. Cross price effects links the entire sector together 6

7 Longer Term Price Outlook For Grains and Oilseeds 7

8 U.S. Grain and Oilseed Prices Expected to Remain Higher Than Previous Decade Land enrolled in U.S. Conservation Reserve Program (CRP) expected to remain at million acres. Will Brazil boost acreage in response to continued high prices? Continued growth in global food demand and increasing biofuels production, combined with no significant change in total U.S. planted acreage (roughly 100 million hectares) or CRP acreage, should keep crop prices higher than previous decade. Higher net returns to corn (versus soybeans and wheat) means a higher proportion of land should go to corn production 8

9 Factors Influencing Global Agricultural Markets and Prices Over the Next Decade Global economic growth slowdown expected but no recession -- expanding middle class in emerging markets is key. However, a sharp correction or recession could have profound implications for demand and prices. Value of the U.S. dollar down further through 2011 which will put additional upward pressure on commodity prices before rising modestly through 2017 Energy prices higher oil prices support biofuels prices which boost profitability and hence demand for their feedstocks such as corn, oilseeds, and sugar Biofuels production mandates in U.S. and EU are demand stimulants. Output set to rise in other countries too such as Brazil, Canada and Argentina. Agricultural & trade policies/agreements studies indicate further policy reform would boost ag prices as subsidies and market access barriers are reduced Biotech developments could be a major factor in boosting yields which would boost production and help reduce prices Additional crop land how will producers react to high prices, especially in Brazil? Increase in area harvested would boost production which could lower prices 9

10 Middle Class Outside the U.S. Expected to Double By 2020 Approaching 1 Billion Households Developing countries to account for 87 percent of the growth Foreign households w/real PPP incomes greater than $20,000 a year (in millions of households) Middle class in developing countries projected to increase 160% by 2020 vs. just 15% in developed countries 400 Developing countries 200 Developed countries (ex US) Source: Global Insight s Global Consumer Markets data as analyzed by OGA/FAS/USDA 10

11 Middle Class in Developing Countries Could Reach 715 Million Households By 2020, Up 160% From 2004 Levels 24% of households in these countries are middle class. By 2020, this could exceed 50% and the impact on food consumption will be huge Developing countries with fastest growing middle class China India Russia Mexico Brazil Thailand Indonesia Nigeria Philippines Turkey Iran Poland Egypt Vietnam levels Proj gains by Households with real PPP incomes greater than $20,000 (in millions) Source: Global Insight s Global Consumer Markets data as analyzed by OGA/FAS/USDA 11

12 Forecast 12

13 What Impacts Are Commodity Prices Having On Food Prices? In the United States Higher ag commodity and energy prices push food prices at the retail level up 4.2% in 2007, the fastest increase since 1990 and could rise another 5% in Through 2009, food price increases should exceed headline inflation. In 2008, increases expected to be greatest in fats & oils (7-8%) and cereals/bakery products ( %), as higher wheat and vegetable oil prices are passed on. In 2009, price increases for red meats, poultry, and eggs should exceed the general inflation rate as the livestock sector reduces output in response to tighter margins. For , food prices should rise less than general inflation rate as commodity prices stabilize. In other countries Situation varies depending on country but generally food prices are rising around the world faster than the overall rate of inflation. However, countries with strong currencies receive some relief since ag commodity and oil import prices are dollar denominated. Concerns are greatest in importing countries with lowest incomes where food demand is more elastic. 13

14 Long Term Outlook for Food Price Increases in the United States Food price increases in 2007 were the highest since Food price increases expected to exceed overall inflation rate during

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