Implications for commodity prices and farm income Mike Dwyer Director, Global Policy Analysis Office of Global Analysis Foreign Agricultural Service US Department of Agriculture Mike.Dwyer@fas.usda.gov Global Policy Analysis Division Office of Global Analysis
Despite drought and cost challenges, U.S. farmers doing very well 2
18 $ per bushel (per CWT for rice) 16 14 12 10 8 6 4 Wheat Soybeans Corn Rice ($/cwt) 2 0 1982 1987 1992 1997 2002 2007 2012 2017 2022 Source: USDA Baseline
140 120 100 80 60 40 20 Cattle Hogs Broilers US $/hundredweight for cattle and hogs & U.S. cents/lb for broilers 0 1982 1987 1992 1997 2002 2007 2012 2017 2022 Source: USDA Baseline
Growing global demand projected to keep U.S. net farm income strong Net Farm Income (Billions US$) 140 120 100 80 60 40 20 0 1987 1992 1997 2002 2007 2012 2017 2022 Source: USDA Baseline & ERS Farm Income Statistics
1. Global economic growth and the rise of the middle class in developing countries 2. Value of the U.S. dollar 3. Worldwide biofuels production 4. Role of trade and trade liberalization 5. Energy and agricultural input prices 6. Additional crop land 7. Biotech developments
Global economy emerged from worst recession in decades in 2010. Developing countries performed better and growing faster than developed countries. Same is happening now and is likely to continue for the next decade. Consumer incomes are rising and middle class households are expanding rapidly, especially in large emerging markets. Impact on global food demand will be significant due to higher income elasticities for food in developing countries.
Most of the increase will be in developing countries and the impact on worldwide food consumption will be significant 1000 Households w/real PPP incomes greater than $20,000 a year Millions of Households 800 600 400 200 Middle class in developing countries projected to increase 110% by 2022 vs. just 12% in developed countries Developing countries Developed countries 0 Source: Global Insight s Global Consumer Markets data as analyzed by OGA
24% of households in these countries are middle class. By 2022, this could increase to 51% and the impact on food consumption will be significant China India Russia Brazil Mexico Indonesia Turkey Thailand Egypt South Korea Philippines Vietnam Malyasia Colombia Taiwan 4 3 4 3 2 2 2 2 2 1 Households w/ Real PPP incomes greater than $20,000 (millions) 13 6 18 56 2012 Proj gains by 2022 122 0 20 40 60 80 100 120 140 160 180 200 Source: Global Insight s Global Consumer Markets data as analyzed by OGA
Lower income countries spend much of that additional income on food 100% 90% 80% Other Education 70% Recreation 60% 50% 40% Transport & communication Health 30% 20% 10% Furnishings Housing 0% Clothing Food Congo, Dem. Rep. Niger Gambia, The Zambia Ghana Nigeria India China Morocco Namibia Paraguay Jordan Peru Brazil Bosnia Kazakhstan Mexico Macao Israel Malta Italy Australia Canada United States Source: USDA, Economic Research Service using International Comparison Program 2005 data.
3,5 3 2,5 2 1,5 1 0,5 0 Ukraine Germany Russia Japan South Korea China UK US Chile Brazil Indonesia Vietnam Mexico Turkey India South Africa Philippines Percent 0,5 1 Data source: World Bank Urban and overall population growth, 2010 Total Urban
Changes in Beef, Pork, and Poultry Consumption 2002 vs 2012 (P) 80% 74% 60% 40% 38% 39% 39% 27% 20% 16% 0% 1% 2% EU North East Asia America ( China) China South America FSU SE Asia South Asia Source: USDA Production, Supply & Distribution Database
Changes in Grains and Oilseed Meals in Feed Consumption 2002 vs 2012 (P) USA Canada E. Asia ( China) EU FSU Mexico 21% 20% 9% 0% 13% 16% MENA 31% SE Asia China South Asia S. America 63% 67% 69% 70% -25% 0% 25% 50% 75% Source: USDA Production, Supply & Distribution Database
115 US Agricultural Trade Weighted Exchange Rate Indexed Value of U.S. Dollar, 2005 = 100 110 105 100 95 90 85 80 75 Source: USDA, Economic Research Service; Foreign Agricultural Service
Boosts feedstock demand, but recent rate of growth is expected to slow 160 140 120 100 EU Billion Liters 80 60 40 20 Brazil USA 0 Products covered: ethanol & biodiesel for all countries, but omits biodiesel for the US. No cellulosic biofuels included. Source: FAS Annual Biofuel Reports and Washington staff analysis.
Global agricultural trade has grown sharply over the past decade should reach $1.1 trillion over next decade. Most countries agricultural imports have increased substantially, esp. China and East/Southeast Asia. U.S. and EU imports growing, too. Almost all major agricultural exporters have seen sharp gains in recent years not just the U.S. FTAs have proliferated worldwide, boosting trade. This will continue with or without the U.S.
1.200 Global Agricultural Trade 1.000 800 Billions US$ 600 400 200 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Source: Global Trade Atlas; USDA/FAS/OGA Projections
Billions US$ 900 800 700 600 500 400 300 200 100 0 99 117 140 152 174 156 179 202 213 229 Global Agricultural Imports 2002 2011 Developing Developed 230 268 307 317 279 349 272 301 450 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 366 +350% +135% Source: GTIS data analyzed by OGA
South America, led by Brazil, dominates regional exports Billion Dollars 200 160 120 80 40 Total Agricultural Export By Latin America Mexico Central America South America 0 2006 2007 2008 2009 2010 2011 2012 Source: USDA FAS
EU USA China Russia Japan S. Korea Saudi Arabia Iran Egypt Indonesia 37 32 22 6 6 3 3 3 3 3 0 5 10 15 20 25 30 35 40 Total Agricultural Exports in 2012 (Billion $)
5 76% Five Year Growth in Exports (2007 vs. 2012) 4 31% 2007 2012 Billion $ 3 2 147% 118% 1 70% 38% 0 Guatemala Costa Rica Honduras Nicaragua El Salvador Panama Data sources: Global Trade Atlas Note: For Panama and Costa Rica 2012 exports are projections by FAS/USDA
However, Asia is only a minor market for the region s exports. In 2012, U.S. and the EU accounted for only 65% of regional exports, down from 83% in 2004 14 Billion Dollars 12 10 8 6 4 14% 42% Asia EU ROW 33% 28% 2 41% USA 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 37% Source: USDA FAS
Commercial scale agriculture is energy and input intensive planting, growing, harvesting, transporting, processing, and packaging. In recent years, input prices have risen in response to strong growth in global demand for energy and ag products. Prices of diesel, fertilizer, seed, and agricultural chemicals have risen. Rising production costs pressure farmers operating margins, mitigates supply response, and lead to higher long run agricultural commodity and food prices.
300 IMF Price Indices Index 2005 = 100 250 200 150 100 Crude oil All Commodities Food 50 0 Source: International Monetary Fund: International Financial Statistics
While commodity prices will remain fairly strong over next 10 years, they will lag rising production costs land rental rates also affected by rising land prices Billions US$ 600 500 400 300 200 Gross Farm Income Total Production Expenses % Operating Margin* 37 34 31 28 25 22 19 * Net farm income/total cash receipts 100 16 13 0 10 Source: USDA/ERS
How aggressively will producers around the world respond to strong commodity prices? Where will the gains occur? Transportation/storage infrastructure and marketing costs will play a big role. Land tenure issues, laws governing foreign investment, and the degree of price transmission will also be major issues. South America will likely lead in land expansion (largely new frontier lands in Brazil) as will the Former Soviet Union (esp. Russia and Ukraine). Africa has more uncultivated land but high marketing costs, poor infrastructure, and long distances from markets will be a constraint.
Globally 446 million hectares of uncultivated land (1.1 billion acres) 52 million ha Share of Land With Travel Time to Market < 6 Hours 123 million ha 3 million ha 14 million ha Latin America & Car. 76% 202 million ha Sub Saharan Africa 47% M. East & N. Africa 87% E. Europe & C. Asia 83% East & South Asia 23% Source: World Bank
120% 100% 80% Area Yield Production % Change 60% 40% 20% 0% 20% Grains Oilseeds* Cotton Total *Includes soybean, sunflower, rapeseed, and peanut Source: USDA PSD Database
Big drop in U.S. yields in 2012/13 is due to worst drought in decades 12 Corn Yield and Trend Tons/hectare 10 8 6 4 2 0 United States EU East Asia South America Central America Source: USDA PS&D Database
Prolonged economic stagnation or new recession, crisis in Euro Zone, or a hard landing in China pose risks to agriculture s outlook USDA does not publish alternative baseline projections and only publishes once a year. The projections in this presentation were based on assumptions developed in fall of 2012 and published February 2013. Fiscal and monetary actions in the coming months should pre empt another global crisis but may not revive pre crisis (2008/09) growth rates However, if macroeconomic outlook worsens, it could: Reduce the growth of the middle class in emerging markets Increase the value of the U.S. dollar (safe haven response) Reduce global trade (including agricultural trade) Reduce almost all dollar based commodity prices Reduce farm income
Have we entered a golden era for agriculture? That depends on your definition The price and profit outlook looks more promising than it has in decades. New price/income floors for ag producers who receive world prices for their products. Strong growth in global food, feed, (bio)fuel, and fiber demand and a relatively weak U.S. dollar will keep food and agricultural prices high over the next decade. Much of this new demand will be centered in Asia agricultural trade will continue to grow with most of the new import demand coming from developing country markets, such as China, Southeast Asia, Middle East/North Africa, and Latin America. High commodity prices and production gains should help the total profitability of agriculture (despite operating margins coming under pressure) at least in those countries with high degrees of price transmission. If so, this should continue attracting new investment into the sector, i.e. land and new technologies. However, beware of rising input costs and short term exogenous shocks they are a major element of risk in the profit outlook.
Strong growth in global food, feed, (bio)fuel, and fiber demand and a weaker U.S. dollar will keep agricultural commodity prices high over the next 10 years which should keep U.S. farm economy strong. Much of this new demand will be centered in Asia agricultural trade will continue to grow with most of the new import demand coming from advanced developing markets, such as China, Southeast Asia, and Latin America. High commodity prices should help the total profitability of agriculture, despite operating margins coming under pressure. If so, this should continue attracting new investment into the sector, i.e. land and new technologies.