The 2012 drought: impacts on the FAPRI agricultural commodity outlook By William H. Meyers Howard Cowden Professor of Agricultural and Applied Economics FAPRI at MU UN DESA Expert Group Meeting on the World Economy 22 October 2012 New York, NY
Is this the new normal? World Bank Price Indices 2005=100
Agenda FAPRI outlook in February 2012 What changed? Market outlook as of August 2012 Possible impacts of policy developments
The FAPRI Baseline in February 2012 It is not a forecast It is a projection based on a set of reasonable assumptions about Macroeconomic outlook Technology outlook Policy outlook
Dollars per barrel Oil price assumed to moderate West Texas intermediate oil price 120 100 80 60 40 20 0 2004 2006 2008 2010 2012 2014 2016 2018 IHSGI, July June futures Sources: IHS Global Insight, July 2012; WTI crude oil futures, Oct. 11, 2012
Billion bushels Maize for ethanol growth slows, Feb 2012 baseline 7 6 5 4 3 2 1 0 05/06 07/08 09/10 11/12 13/14 15/16 17/18 19/20 21/22 Feed & residual Ethanol & coproducts Exports Source: USDA FAPRI-MU baseline, February 2012
U.S. maize farm price projections, Feb 2012 Sources: FAPRI-MU baseline, Feb. 2012; USDA, May 2012; CME Dec. contracts, June 8, 2012
So what happened this year? US and Kaz-Rus-Ukr-EU drought greatly changed market outlook FAPRI updated the baseline in August Briefly review that change A taste of August 2012 outlook
Bushels per acre Drop in US corn yield, bu/ac --three years in a row! 170 160 150 140 130 120 110 100 90 80 U.S. corn yield Trend Source: FAPRI calculations based on NASS data, October 2012
Not just maize, but wheat too (USDA WASDE Oct 11, 2012) Production (mil mt) 2011/12 2012/13 change Maize 877.7 839.0-38.7 USA 313.9 271.9-42.0 EU-27 65.3 55.6-9.7 Brazil 72.7 70.0-2.7 Arg + China 213.8 228.0 +14.2 Wheat 695.0 653.0-42.0 FSU-12 114.4 77.7-36.7 EU-27 and Aus. 166.9 154.6-12.3 USA 54.4 61.8 7.4
Not just maize, but wheat too (USDA WASDE Oct 11, 2012) Production (mil mt) 2011/12 2012/13 change Coarse Grains 1148.9 1110.1-38.8 USA 323.7 284.2-39.5 FSU-12 79.0 68.4-10.6 EU-27 146.2 141.0-5.2 Arg + China 230.0 246.0 +16.0 Wheat 695.0 653.0-42.0 FSU-12 114.4 77.7-36.7 EU-27 and Aus. 166.9 154.6-12.3 USA 54.4 61.8 7.4
Big drop in world grain supply
As in 2010, prices react to drop
Agenda FAPRI outlook in February 2012 What changed Market outlook as of August 2012
Dollars per metric ton Sources: FAPRI-MU baseline, Feb. and Aug 2012; USDA, Oct 2012; CME Dec. contracts, Oct 19 2012 U.S. maize farm price projections, August 2012 350 300 250 200 150 100 50 0 05/06 07/08 09/10 11/12 13/14 15/16 17/18 19/20 21/22 FAPRI Jan USDA Oct Dec fut. Oct 19 FAPRI Aug
Billion bushels Ethanol also adjusts to high price 7 6 5 4 3 2 1 0 05/06 07/08 09/10 11/12 13/14 15/16 17/18 19/20 21/22 Feed & residual Ethanol & coproducts Exports Ethnl Aug Feed Aug Exp Aug Source: USDA FAPRI-MU baseline, Feb 2012 and August 2012 update
Billion gallons U.S. ethanol production and use mandates 18 16 14 12 10 8 6 4 2 0 2006 2008 2010 2012 2014 2016 2018 Mandated use that can come from corn ethanol Conventional ethanol production Source: Calculations based on FAPRI-MU baseline, August 2012
Pounds per capita World consumption of 4 crops 350 300 250 200 150 100 50 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Corn Wheat Rice Soybeans Source: FAPRI-MU projections, August 2012
Pounds per capita World consumption of 3 meats 35 30 25 20 15 10 Pork Beef Chicken 5 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 Source: Author calculations based on USDA PSD Online data. USDA country coverage is not complete for meat consumption data, so per-capita consumption may be slightly understated.
$/MT World Grain Prices, Aug update 400 350 300 250 200 150 100 50 0 HRW wheat, U.S. FOB Gulf Barley, Canada FOB Thunderbay Maize, U.S. FOB Gulf
$/MT World Oilseed Prices, Aug update 800 700 600 500 400 300 200 100 Rapeseed, FOB Hamburg Sun seed, FOB Lower Rhine Soybeans, FOB Rotterdam
$/barrel Stochastic results show uncertainty 180 160 140 120 100 80 60 40 20 0 10th percentile Average of stoch. 90th percentile Source: FAPRI-MU August 2012 stochastic baseline, Refiners acquisition price
$/MT Price volatility to continue 500 450 400 350 300 250 200 150 100 50 0 Price in 3 out of 500 MAIZE FOB Gulf outcomes No. 65 No. 425 No. 116 Source: FAPRI-MU August 2012 stochastic baseline. Maize FOB Gulf prices
Price in dollars per bushel 2012/13 U.S. corn yields and prices (FAPRI-MU stochastic baseline, prepared in February 2012) 9 8 7 6 5 4 3 2 1 0 2 of 500 outcomes Yield: 124.6 bu./a. Price: $7.20/bu. Average of 500 outcomes Yield: 162.1 bu./a. Price: $4.81/bu. 120 130 140 150 160 170 180 190 U.S. yield in bushels per acre
$/MT Maize price uncertainty 450 400 350 300 250 200 150 100 50 0 10th Percentile Baseline 90th Percentile Source: FAPRI-MU August 2012 stochastic baseline, US FOB GULF PRICE
$/MT Wheat Price Uncertainty 450 400 350 300 250 200 150 100 50 0 10th Percentile Baseline 90th Percentile Source: FAPRI-MU August 2012 stochastic baseline, HRW WHEAT US FOB GULF
$/MT Soybean Price Uncertainty 800 700 600 500 400 300 200 100 0 10th Percentile Baseline 90th Percentile Source: FAPRI-MU August 2012 stochastic baseline
Agenda FAPRI outlook in February 2012 What changed Market outlook as of August 2012 Possible impacts of policy developments
Implications of an RFS waiver Current low RIN values suggest RFS is not very binding Use is in line with market demand given blending economics Few short-run economical alternatives to ethanol for octane enhancement Implies a waiver would not have big effect on ethanol use or on corn prices in short run Lots of uncertainties about actual market response
US Farm bill debate so far Bills passed by Senate and House Ag. Committee Eliminate direct and countercyclical payments, ACRE Create new risk management programs Senate emphasizes revenue-based program House Ag. emphasizes price-based program & crop insurance add-on N0 large impacts on crop prices
Main focus for new CAP reform Financial frame with upper spending limits Greening of 30 % of Direct payments as mandatory Partial convergence of direct payments Capping of Direct Payments Small market effects but could slow down production growth 25/10/2012 31
What to expect Continued prices higher than before the 2007/08 price surge Continued price volatility from year to year and from week to week Beware of many uncertainties that can impact markets at any time.
Unknowns and uncertainties High volatility likely to continue Major uncertainties in the markets Policy proposals and policy reactions Oil/Energy prices Exchange rates World price surges Financial crises Weather events/climate change
Recent FAPRI analyses August baseline update: http://www.fapri.missouri.edu/outreach/publications/2012/fapri_mu_report _06_12.pdf Senate and House Ag. Committee farm bill: http://www.fapri.missouri.edu/outreach/publications/2012/fapri_mu_report _05_12_Rev.pdf RFS waiver options: http://www.fapri.missouri.edu/outreach/publications/2012/fapri_mu_report _11_12.pdf Or just visit www.fapri.missouri.edu to see what s new