The New Economics of Food Tuesday, May 3, 21 8: AM 9:15 AM
World population, 18 21 Sources: United Nations and US Census Bureau. 2
Usage of agricultural production Human consumption vs. fuel usage Source: USDA Economic Research Services. Corn usage Million bushels Percentage 6, 45% 5, Ethanol use (Left axis) Share of total production (Right axis) 4% 35% 4, 3% 3, 25% 2% 2, 15% 1, 1% 5% % 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 3
Trends in crop yields Global crop production, 1992-27 US$ billions (PPP) 1,2 1, 724 785 83 815 863 877 877 8 913 917 931 936 963 1,23 1,34 1,57 1,81 6 4 2-1992 1993 1994 1995 1996 1997 1998 1999 2 21 22 23 24 25 26 27 Source: UNData; FAOSTAT. 4
Number of undernourished in the world 1969-29 Millions of peole people 1,5 1, 95 9 85 8 197 1973 1975 1977 198 1983 1985 1987 1989 1993 1996 1999 23 27 29 Source: Food and Agriculture Organization of the United Nations. 5
Historic food price levels Global food price trend index 198-211 Index, 25 = 1 Index, 25 = 1 25 3 2 Coffee Soybeans 25 15 1 Sugar 2 15 1 Corn 5 5 Wheat Rice 198 1984 1988 1992 1996 2 24 28 198 1984 1988 1992 1996 2 24 28 Source: IMF; FAOSTAT. 6
Social impacts of rising food prices The burden has stimulated riots in various regions Egypt (Jan. 211): Has the highest food inflation in the world at 18.5% year on year Population 83M 3+ people killed, 3,+ injured Algeria (Jan. 211): 1kg of sugar that cost 7 dinars a few months ago is now 15 dinars ($2.1). Population 35M 3 people killed, 3+ injured India (March 211): Thousands protest as country s food inflation reaches 1-year high Population 1.16B Source: The Guardian, The Financial Times, The LA Times, BBC News. 7
The situation in the U.S. Raw material costs are outpacing consumer price increases Price Index index, 1982 = 1 3 25 CPI Excl. Food 2 15 Cereals 1 5 CPI 198 1984 1988 1992 1996 2 24 28 Source: U.S. Department of Labor; Bureau of Labor Statistics 211. 8
Stimulus for price increases: Energy prices Price index, 25 = 1 2 18 Energy Index 16 Food Index 14 12 1 8 6 4 2 1992 1994 1996 1998 2 22 24 26 28 21 Note: Fuel Index includes crude oil (petroleum), natural gas, and coal price indices and Food Index includes cereal, vegetable oils, meat, seafood, sugar, bananas, and oranges price indices. Sources: International Monetary Fund, World Economic Outlook Database, October 21. 9
Stimulus for price increases: Disasters Food index, 25 = 1 Number of disasters 2 6 18 Food Index 16 Number of Disasters 5 14 4 12 1 3 8 6 2 4 1 2 198 1985 199 1995 2 25 21 Note: Food Index includes cereal, vegetable oils, meat, seafood, sugar, bananas, and oranges price indices. Disasters include drought, earthquake (seismic activity), epidemic, extreme temperature, flood, industrial accident, storm and volcano Sources: The International Disaster Database 21 and International Monetary Fund, World Economic Outlook Database, October 21. 1
Role of the government Actions taken in previous periods of high food prices Constructive Actions Recognizing the right to food as a sustainable solution to high food prices (28) Cereal Banks that buy from farmers at harvest and sell at affordable prices during the lean season Warehouse receipt programs that allow farmers to deposit grain in a public warehouse at harvest and receive a receipt that can be used as collateral for loans Unconstructive Actions Decreasing spending on agriculture and public goods Restricting exports Source: FAO. 11
Role of the private sector Involvement of agricultural firms and commodities markets Agriculture growth tends to be more stable than that of other sectors Change in demand for agricultural goods is relatively low compared to other goods Agriculture, especially in developing countries, is more self-financed so less affected by credit shortages Commodities markets can both smooth and exuberate volatility Improved liquidity Futures and forwards contracts provide for better planning However, they can also result in price movements caused by speculation Source: FAO Report The State of Food Insecurity 29. 12
Balancing food security and profits Potential Solutions Increase performance of food production Risk management instruments Physical grain reserves Storage = Provide food at the right time Trade = Provide food at the right place Funding instruments Source: The Milken Institute. 13
Food prices and the wider economy Relationship inflation, interest rates and growth prospects Food / Inflation index, 25 = 1 Interest rate / Growth rate percentage 18 18 16 16 U.S. federal fund interest rate 14 14 Inflation index of major economies 12 12 Global food price index 1 1 8 8 6 6 4 4 2 2 Global GDP growth rate -2 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 Source: IMF; U.S. Federal Reserve. 14
Allan Jury Director, U.S. Relations Office, United Nations World Food Program
Distribution of undernourished people Three times higher in countries in protracted crisis than other developing countries Percentage Undernourished 4% 35% 3% 37% 25% 2% 15% 1% 5% 15% 13% % Countries in protracted crisis China and India Other developing countries * Source: FAO Note: Data for 25 to 27 *Excluding countries in protracted crisis, China and India 16
Richardson International Limited Curt Vossen President
Tonnes (millions) Today s backdrop 2,4. World grain supply and demand 2,2. 2,. 1,8. 1,6. 1,4. 1,2. 1,. 1984/85 1989/9 1994/95 1999/ 24/5 29/1 Estimate Production Demand Production has increased to meet the demand, but can supply keep pace as we look into the future? Price may have to increase to ration supply. Source: USDA International Macroeconomic Data Set, July 2, 21 18
Population (billions) Population (billions) Global population Global population Population of China & India 9. 8. 7. 3 year CAGR: 1.% 2. 3 year CAGR: 2.% 6. 5. 4. 3. 2. 1. 1.5 1..5. 197 1975 198 1985 199 1995 2 25 21 215E 22E 225E 23E. 197 1975 198 1985 199 1995 2 25 21 215E 22E 225E 23E China India By 23, global population is expected to reach 8.2 billion; more than double the 3.7 billion population in 197. By 23, 36% of the world s population will reside in India and China. Source: USDA International Macroeconomic Data Set, July 2, 21 19
Economic growth & food consumption Annual Percentage GDP Growth 1 9 8 7 6 5 4 3 2 1 Global economic growth 5-year forecast China India Indonesia Malaysia Thailand Brazil US World Economic growth in developing nations is expected to outpace growth in the developed world. The shift towards more balanced diets is also evident in these countries. 3,5 3, 2,5 2, 1,5 1, 5 3,5 3, 2,5 2, 1,5 1, 5 China - Daily Caloric Intake Per Capita Other Cer eal Fr uits & Vegetables Meat, Eggs, Fish 196's 198's 2's India - Daily Caloric Intake P er Capita Other Cer eal Fr uits & Vegetables Meat, Eggs, Fish 196's 198's 2's Source: IMF Economic Outlook Source: FAO 2
Meat (protein) consumption Percentage of every new dollar earned spent on food Global meat (protein) consumption The income effect on food consumption particularly affects the billions of people at the very lowest level of wealth in developing nations. The combination of increasing population and changing diets has driven up the global demand for food. 21
Production (millions of litres) Production (millions of mt) Bio-fuel production Global ethanol and bio-diesel production 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, 1997 1999 21 23 25 27 29 Ethanol Bio-diesel 4 3 2 1 U.S. corn used for ethanol 4% 3% 2% 1% % 26 28 21E 212E 214E 216E Corn Production Corn Ethanol for Fuel Source: Worldwatch Institute, Renewables 21 Global Status Report % of Crop Source: USDA Ethanol Transportation Backgrounder, 27; USDA World Agricultural Supply and Demand Estimates, September 1, 21; Company Estimates Bio-fuels demand and use have grown significantly over the past several years and is expected to grow into the foreseeable future as countries move towards cleaner air emission standards and increased fuel self-sufficiency. 22
.4 Yield (mt/ha) Global grain yield and arable cropland 6. 5. 4. 3. 2. 1.. 1961 1963 Historical global yield principal Grains 1965 1967 1969 1971 1973 1975 Barley Corn Oats Wheat 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 21 23 25 27 29 211E Source: USDA Foreign Agricultural Service, Online Custom Query for Barley, Corn, Oats and Wheat Yields, 1961-211 Global Arable and Permanent Cropland per Capita (Calendar Year).35.3.25.2.15.1.5 Land per Capita (hectares/person).45. Source: Food and Agriculture Organization of the United Nations, 21 The total global arable and permanent cropland per capita has steadily declined over the past several years, forcing farmers to increase yields to meet the growing demand for grains and oilseeds. As a result of biotechnology, better use of fertilizer, water and technology, most commodities have seen sizable improvements in yields. 23
Research & Development (Biosciences) Adoption rates have soared from virtually zero prior to 1996 to between 8% and 95% by 29. Biotech crops are now growing faster in developing nations relative to industrialized countries; gaining respectively 17% and 5% in 21 over 29. Source: MetLife 24
Millions of Acres Millions of Acres Research & Development (Biosciences) Global Biotech Acres 4 35 3 25 2 15 1 5 2,5 2, 1,5 1, 5 Biotech companies on average spend $2.7 billion per year on seed and trait projects, or roughly $7 million per day 365 days a year. 14 million farmers worldwide grew Biotech crops in 29. Soybeans Corn Cotton Canola Total Acres Source: ISAAA and Monsanto estimates 25
Speculative investment Commodity hedge funds Speculative net long positions remain at elevated levels and have recently surpassed 27/8 positions. Source: Reuters.com; MRCI.com 26
The influence of China China has only 7% of the world s arable land, but consumes approximately 2% of the world s grain production. 27
Million Tonnes Million Tonnes The influence of China China soybean production, imports and consumption 8 7 6 22 21 2 Total grain used in feed 5 19 4 18 17 3 16 2 15 1 14 13 Production Imports Domestic Consumption EU-27 United States BRICs Source: Rabobank, USDA 28
Tonnes (millions) Tonnes (millions) World grain supply and demand World grain supply and demand World grain ending stocks and stocks-to-use ratio 2,4. 7. 4.% 2,2. 6. 35.% 2,. 5. 3.% 1,8. 4. 25.% 1,6. 3. 2.% 15.% 1,4. 2. 1.% 1,2. 1. 5.% 1,. 1984/85 1989/9 1994/95 1999/ 24/5 29/1 Estimate Production Demand - 1984/85 1989/9 1994/95 1999/ 24/5 29/1 Estimate Ending Stocks Stocks to use ratio.% Source: USDA International Macroeconomic Data Set, July 2, 21 29
21 global weather conditions Source: Rabobank Near-term price expectations have increased due to negative weather around the world. 3
Thank You 31
Bob Baur Chief Global Economist Principal Global Investors 32
Gold spot price 1975-211 Trade-weighted US$ 25 Gold spot price 2 15 1 5 Jan-75 Jan-79 Jan-83 Jan-87 Jan-91 Jan-95 Jan-99 Jan-3 Jan-7 Jan-11 Source: Bloomberg 33
WTI crude oil price 1983-211 Trade-weighted US$ 3 WTI Crude Oil 2 2 1 1 Apr-83 Apr-86 Apr-89 Apr-92 Apr-95 Apr-98 Apr-1 Apr-4 Apr-7 Apr-1 Source: Bloomberg 34
CRB index of raw industrials 1981-211 Trade-weighted US$ CRB Raw Industrials 9 8 7 6 5 4 3 2 1 May-81 May-84 May-87 May-9 May-93 May-96 May-99 May-2 May-5 May-8 Source: Bloomberg 35
Carole Brookins Managing Director, Public Capital Advisors 36
World household income spent on food U.S. households spend between 8-1 percent of disposable income on food High-income countries spend 15 percent or less on food The poor spend more than half of their disposable income on food The world s poorest households spend much as threequarters of their income on food Source: USDA, FAO and WFP 37
195 1952 1954 1956 1958 196 1962 1964 1966 1968 197 1972 1974 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 Dollars/Bushel Structural shift in prices and volatility The corn example $6. Average prices to a new structurally higher range! $5. $4. $3. $2. $1. Corn Price per Unit Average Corn Price $. Source: USD, Rabobank 38
Demand strong economic growth in emerging economies 21 GDP growth rate Population Current USD, Current billions USD, Billions $6, Brazil China Germany India United Kingdom Brazil China Germany India U.K. Brazil 6.7% 194 million $5, $4, China 1% 1,331 million $3, India 8.9% 1,155 million $2, Indonesia 5.8% 23 million $1, $ $ Higher GDP growth Higher protein consumption Higher grain demand 39
Million tonnes Million tonnes Demand - China s corn position highlights commodity shortage 18 14 16 14 12 1 8 12 1 8 China s export program has drawn down on stocks... 6 4 2-2 6 4 2 China has now become a net importer of corn... -4 Source: USDA, Rabobank Net Trade Ending Stocks Is this an isolated weather event or is it a structural issue? 4
Supply land expansion unable to keep up with demand! Global population (millions) Agricultural land (million ha) 41
Short term volatility driven by supply disruption and govt intervention Canada: wet EU: cold/wet Russia: drought Colombia: wet Pakistan: floods China: wet SE Asia: wet Argentina: dry Australia: floods Source: Rabobank 42