Global Agricultural Supply and Demand: Factors contributing to recent increases in food commodity prices Ron Trostle Economic Research Service U.S. Department of Agriculture Agricultural Markets and Food Price Inflation Federal Reserve Bank of Chicago October 2, 28
Food commodity prices have risen 13 % since January 22 (>7% in last two years ) Index: January 22 = 1 25 2 Food commodity price index 15 1 5 198M1 1982M1 1984M1 1986M1 1988M1 199M1 1992M1 1994M1 1996M1 1998M1 2M1 22M1 24M1 26M1 28M1 2 Source: International Monetary Fund: International Financial Statistics
Prices of many commodities rose even more Index: January 22 = 1 7 65 6 55 5 45 4 35 3 25 2 15 1 5 Crude oil Average of all comodities Food commodity index Jan 1992 Jan 1996 Jan 2 Jan 24 Jan 28 + 585 % + 33 % + 13 % Source: International Monetary Fund: International Financial Statistics
Food commodity prices: Indices for selected crops and total food Index: January 22 = 1 55 5 45 4 35 Corn Soybeans Wheat Rice Food commodity index 3 25 2 15 1 5 Jan 197 Jan 75 Jan 8 Jan 85 Jan 9 Jan 95 Jan 2 Jan 5 Source: International Monetary Fund: International Financial Statistics
8 Crop price increases: real vs. nominal Average of 4 crops (wheat, soybeans, corn & rice) Index: January 22 = 1 7 6 5 4 Real prices 3 2 1 Nominal prices Jan 197 Jan 75 Jan 8 Jan 85 Jan 9 Jan 95 Jan 2 Jan 5 5 Source: International Monetary Fund: International Financial Statistics
Factors contributing to higher food commodity prices 1996 1998 2 22 24 26 27 28 Strong growth in demand, based on: Increasing population + Rapid economic growth + Rising per capita meat consumption Slowing growth in agricultural production Declining demand for stocks of food commodities Escalating crude oil price Increased biofuels production Dollar devaluation Rising farm production costs Adverse weather Large foreign exchange reserves Demand factors in brown Supply factors in green Aggressive purchases by importers Exporter policies 6 Importer policies
Million metric tons 3, World grain & oilseeds Total production and use Production Total use 2,5 2, 1,5 199 1992 1994 1996 1998 2 22 24 26 28 7 Source: USDA PS&D Database
8 Total world grain & oilseeds Stocks and stocks-to-use ratio Million metric ons Stocks / Use (%) Ending stocks Stocks / Use 4% 35% 6 3% 25% 4 2% 15% 2 1% 5% 197 1975 198 1985 199 1995 2 25 % 8 Source: USDA PS&D Database
Long-term trends contributing to higher prices: 1. Supply-side factors Slower growth rate in yields 2. Demand-side factors Population growth Income growth Increased per capita meat consumption 9
Total world grain & oilseeds 1 Production, yield, area harvested, population & percap production Index: 197 = 1 Exponential trend growth rates: 197-9 9-7 Production 2.2 1.3 Yields 2. 1.1 Area.15.14 22 2 18 16 14 Population 1.7 1.4 Per capita use.56.11 12 1 8 197 1975 198 1985 199 1995 2 25 1 Total oilseeds = soybeans + rapeseed + sunflowers Production Yield Population Percap production Area harvested 1 Source: Compiled from USDA s PS&D Database
Population growth rates decline (Percent by period) 4 Percent 1975-199 199-2 2-7 29-17 3 2 1 World Developed Developing Middle East Africa Latin America USA 11 Source: USDA Agricultural Baseline Projections to 217.
Strong economic growth Average Real GDP growth rates Percent 12 1 1975-9 199-2 2-7 29-17 8 6 4 2-2 World Developed Developing China India United States 12 Source: USDA Agricultural Baseline Projections to 217.
Global rice imports Million metric tons 3 Other 25 2 15 1 5 199 1995 2 25 Other Asia Indonesia N. Africa & M. East Sub-Saharan Africa EU, FSU, & OE 1/ Latin America 2/ 1/ European Union, former Soviet Union, and other Europe. 2/ Includes Mexico. 13 Source: USDA Agricultural Baseline Projections to 217.
Global soybean oil imports Million metric tons 12 1 8 6 4 2 199 1995 2 25 1/ European Union, former Soviet Union, and other Europe. 2/ Asia excluding India and China. 3/ Includes Mexico. Rest of world EU, FSU, & OE 1/ India China Other Asia 2/ N. Africa & M. East Latin Am 3/ 14 Source: USDA Agricultural Baseline Projections to 217.
Global meat 1 Production, per capita consumption, and population Exponential trend growth rates: 1975-9 9-7 Production 3.1 2.5 Population 1.7 1.4 Per capita 1.4 1.1 consumption Index: 1971 = 1 4 35 3 25 2 15 1 5 197 1975 198 1985 199 1995 2 25 Production Per capita Cons 1 Total meat = beef + pork + chickens & turkeys. Population 15 Source: USDA Agricultural Projections to 217.
Poultry imports 1/ Million metric tons 5 4 3 2 Russia Other N Afr. & M. East East Asia China & Hong Kong Saudi Arabia 1 199 1995 2 25 Mexico European Union 2/ 1/ Selected importers. 2/ EU-27 excludes intra-trade after 22, EU-15 intra-trade before 23, Slovenia before 1992. 16 Source: USDA Agricultural Baseline Projections to 217.
17 Role of biofuels: Major producers Impact on land use
Billion Gallons Biofuels production: Total of largest producers 1 2 18 16 14 12 1 8 6 4 2 24 25 26 27 28 Biodiesel Ethanol 1 The 6 largest producers (USA, Brazil, EU, China, Canada, & Argentina) accounted for 96% of world biofuel production in 27. Source: FO Licht, various reports
Biofuels production: Largest producers Million Gallons 18, Ethanol Biodiesel 16, 14, 12, 1, 8, 6, 4, 2, Argentina Ukraine & Russia Brazil China Canada EU USA 24 25 26 27 28 24 25 26 27 28 19 Source: USDA Agricultural Projections to 217
Global area harvested 1 : Total, and for biofuels feedstocks Million hectares 9 8 7 Total area harvested 6 5 4 3 2 1 area planted to feedstocks < 3% of total 197 1975 198 1985 199 1995 2 25 1 Crops include: Wheat, Rice, Corn, Barley, Sorghum, Other cereals, Soybeans, Rapeseed, Sunseed, Cotton. Excludes sugarcane and beets 2 Source: Compiled from data associated with generating Baseline Projections to 217
U.S. corn use Billion bushels 16 14 12 1 8 6 4 2 Ethanol FSI less ethanol 1/ Exports Feed & residual 199 1995 2 25 21 1/ Food, seed, and industrial less ethanol. Source: USDA Agricultural Baseline Projections to 217.
Growth in world wheat and coarse grains use: 198/81-22/3 vs. 22/3-27/8 Use 198/81 to 22/3 22/3 to 27/8 MMT % MMT % Food 16 49 79 44 Feed* 144 44 48 27 U.S. corn for ethanol 27 7 53 29 Total 328 1 18 1 22
Adverse weather reduced production: In 26 Australia Ukraine & Russia and 27 Europe: dry spring; harvest floods SE Europe: drought Ukraine & Russia: drought (2nd year) USA: late spring freeze Canada: hot and dry Australia: 2nd year of severe drought NW Africa: drought Turkey: dry 23
Total world grain & oilseeds 1 Production, yield, & area harvested Index: 197 = 1 26 24 22 Production Yield Area harv 2 18 16 14 Trend growth rates: 1975-9 9-7 Prod 2.2 1.3 Area.15.17 Yields 2. 1.1 12 1 8 197 1975 198 1985 199 1995 2 25 1 Total oilseeds = soybeans + rapeseed + sunflowers 24 Source: USDA Agricultural Projections to 217
Other contributing factors: Devaluation of U.S. dollar Increasing foreign exchange reserves held by importers Role of hedge funds, index funds, & sovereign wealth funds: (affect demand and/or volatility?) 25
Value of U.S. dollar declines after 22 1/ Index values, 2=1 13 12 11 1 9 8 7 6 197 1975 198 1985 199 1995 2 25 1/ Real U.S. agricultural trade-weighted dollar exchange rate, using U.S. agricultural export weights, based on 192 countries. 26 Source: USDA PS&D Database
Foreign Exchange Reserves Emerging Asia: Foreign exchange reserves $bn 16 China 14 12 1 Emerging Asia ex China 8 6 4 2 Japan OPEC Russia 1998 1999 2 21 22 23 24 25 26 27 28 Source: Oxford Economics / Haver Analytics 27
Policy responses to food price inflation 28
Policy responses to rising prices by selected countries Exports Imports Domestic policies Country Raised Export Export Reduced Increased Imposed export volume bans import consumer price taxes restrictions tariffs subsidies caps. Export policies: Argentina x x Cambodia x Egypt x Kazakhstan x Russia x Ukraine x Vietnam x x Import policies: Bangladesh x x x EU x Mexico Morocco Mongolia Philippines Thailand x x x x x
Policy responses to rising prices by selected countries Exports Imports Domestic policies Country Raised Export Export Reduced Increased Imposed export volume bans import consumer price taxes restrictions tariffs subsidies caps. Both export and import policies: China x x x x India x x x x x Indonesia x x x Malaysia x x Serbia x x
Impact of high food commodity prices on consumers food budgets High-income countries Low-income food-deficit countries I. Base Scenario Income 4, 8 Food expenditure 4, 4 Food as % of income 1.% 5% Disaggregate retail food spending (staples vs. non-staples) Staples as % of total food spending 2% 7% Expenditures on staples 8 28 Expenditures on non-staples 3,2 12 II. Scenario: 5% Price increase in staples Partial pass through on staples Assumed % pass through 6% 6% Increase in cost of staples 24 84 New cost of staples 14 364 New total food costs 4,24 484 Food as % of income 1.6% 61% 31
U.S. Title II Food Aid Allocations $ Billion Million metric tons 2 4 1.6 Value Quantity 3 1.2.8 2.4 1 23 24 25 26 27 28 *28 is an forecast 32
28M1 Spikes in food commodity prices: Will this time be any different? Index: January 22 = 1 55 5 45 4 35 Corn Soybeans Wheat Rice Food commodity index 3 25 2 15 1 5 197M1 1972M1 1974M1 1976M1 1978M1 198M1 1982M1 1984M1 1986M1 1988M1 199M1 1992M1 1994M1 1996M1 1998M1 2M1 22M1 24M1 26M1 33 Source: International Monetary Fund: International Financial Statistics
Categories of factors contributing to higher food commodity prices Temporary factors: Structural changes: Continuation of long-term trends: Questionable future impact: Adverse weather Trade policies by exporters and importers Aggressive buying by importers High oil prices Biofuels production High ag production costs Rapid economic growth in many developing countries Population growth in developing countries Increasing per capita meat consumption Further dollar depreciation Slower growth in ag productivity Role of large foreign exchange reserves held by importers Supply factors Demand factors 34
Prices have declined from their peaks (as of September 3, 28) Commodity Wheat Corn Soybeans Down 51 % 38 % 39 % Since peak in: Mid March End of June Early July 35
U.S. Commodity Prices: History & Projections Soybeans, Wheat, & Corn $ per bushel 12 1 Projections made in November 27 Dots indicate current estimates for 28/9 Soybeans 8 6 4 2 Wheat Corn 198 1985 199 1995 2 25 21 215 Source: USDA Agricultural Baseline Projections to 217, February 28.
Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices The report is available at: http://www.ers.usda.gov/publications/wrs81.pdf Ronald Trostle Economic Research Service U.S. Department of Agriculture rtrostle@ers.usda.gov 22-694-528 37