Commodity Market OutlookCommodity Market Outlook

WBFI Annual MeetingWBFI Annual Meeting

T. Randall FortenberyProfessor

School of Economic SciencesWashington State University

Price RelationshipsPrice RelationshipsSunflower and Safflower prices are highly

correlated with soybean prices when looking at national average prices on an

annual basis. Proso Millet prices are highly correlated with corn prices.

This suggests that we can look at current futures prices for soybeans and corn, and

unless we believe they are somehow “biased” we can infer what the market is

currently saying about sunflower, safflower, and millet prices in the coming

year.

Sunflower PricesSunflower Prices• If we look at sunflower prices over the last 11

years or so, Changes in the annual values from year to year have about a 95 percent correlation with soybean price changes. In other words, soybean price changes explain about 95 percent of the variation in sunflower prices.

Actual vs. Predicted Actual vs. Predicted Sunflower PricesSunflower Prices

Safflower PricesSafflower Prices• If we look at safflower prices over the last 11

years or so, Changes in the annual values from year to year have about a 91 percent correlation with soybean price changes. In other words, soybean price changes explain about 91 percent of the variation in sunflower prices.

Actual vs. Predicted Actual vs. Predicted Safflower PricesSafflower Prices

Sunflower vs. Sunflower vs. Safflower PricesSafflower Prices

Actual vs. Predicted Actual vs. Predicted Safflower PricesSafflower Prices

Proso Millet PricesProso Millet PricesComparing millet prices to corn over the last over

the last 11 years or so, about 74 percent of the millet price can be explained by corn prices. While this is not as strong as the oilseed price

relationships, it still, provides some useful information in thinking about prices this coming

season.

Important AdditionImportant Addition• SOMETHING ABOUT WHEAT

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Longer Term OutlookLonger Term Outlook

• Value of the U.S. dollar

• Global Economic Activity

• Additional crop land

Total Agricultural Exports (bil $)

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Why the Importance of the U.S. DollarWhy the Importance of the U.S. Dollar

o Prices of traded commodities are often denominated in dollars.

o Commodities have historically been inversely related to the value of the dollar – as the dollar falls, commodity prices tend to rise.

o Falling dollar boosts purchasing power of foreign buyers of dollar-denominated commodities, thereby increasing demand and putting upward pressure on prices.

o U.S. dollar has been trending down since 2002.

o Most economists expect U.S. dollar to ease over the longer term, particularly relative to emerging market currencies.

o If true, this will put continued upward pressure on a wide range of commodity prices as the dollar declines – INCLUDING THOSE FOR WHICH WE ARE NOT A MAJOR PRODUCER!

Agricultural Commodity Prices Expected To Remain High for Next 10 Years …

Source: 2011 USDA Baseline projection

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The Global Economic GrowthThe Global Economic Growth

o Global economy emerging from worst recession in decades. Developing countries performed better and growing faster than developed countries. This should continue through 2020.

o Global recessions historically result in lower commodity prices – Not this time because of strength in emerging markets.

o Consumer incomes are rising and middle class households are expanding rapidly, especially in large emerging markets like China and India.

o Logarithmic growth in middle class expected through 2020 – up 104% in developing countries by 2020 vs just 9% for developed countries.

o Risk Factor – Sustainable Chinese Growth

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Potential Availability of Uncultivated Land

123 million ha

201 million ha

3 million ha

51 million ha

15 million ha

Sub-Saharan Africa 47%

M. East & N. Africa 97%

E. Europe & C. Asia 86%

East & South Asia 22%

Latin America & Car. 76%

Data Source: World Bank

Share of Land With Travel Time to Market < 6 Hours

STOLEN FROM Michael J. DwyerDirector of Global Policy AnalysisOffice of Global Analysis, Foreign Agricultural Service/USDA

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Foreign households w/real PPP incomes greater than $20,000 a year (in millions of households)

“Middle Class” Outside the U.S. Expected to Double By 2020 – To 1 Billion HouseholdsWorldwide food consumption will be impacted

Developing countries

Developed countries (ex US)

Middle class in developing countries projected to increase 104% by 2020 vs. just 9% in developed countries in 2009

Source: Global Insight’s Global Consumer Markets data as analyzed by OGA

ALSO STOLEN

OUTLOOK SUMMARYOUTLOOK SUMMARY• We have likely entered a sustained period of

higher average prices, coupled with increased volatility. Sources of volatility vary, but international relationships continue to increase in importance relative to overall commodity price discovery.

• While the short term outlook for U.S. crops is for slightly weaker prices, this is not a long-run expectation. If commodities continue to be priced in U.S. dollars in international markets, then continued deterioration in the dollars value will contribute to higher commodity prices.

• Think carefully about new ways to contract with business partners.

THANK YOUTHANK YOU