FAPRI Outlook Prospects for the Next Decade: The New Ag/Energy Nexus

FAPRI Outlook Prospects for the Next Decade: The New Ag/Energy Nexus William H. MeyersProfessor of Agricultural Economicsand Co-Director, FAPRIUniversity of Missouri

LINK MeetingSaint Petersburg, Russia 4 June 2009

OutlineA new and market environment with stronger agriculture and energy linkagesRecent grain market developmentsFAPRI projections of global market prospectsHighlights of resultsKey movers and shakersMain uncertaintiesChallenges and opportunitiesPolicy prioritiesShort termLong term

Why did prices rise, then decline? Can it ALL happen again?Why prices roseReduced grain production in Europe, Australia Economic growth in Asia and elsewhereWeaker dollarHigher petroleum prices Rapid biofuel expansionPolicy interventionsSpeculation roseWhy prices fellSharp increase in global grain production in 2008Financial crisis and world economic slowdownStronger dollar Lower petroleum pricesSlower biofuel growthMany interventions stopSpeculation declined

Corn and petroleum prices

Chart1

63.453.68725

67.493.8177

74.123.266875

72.363.2915

79.913.525

85.83.54875

94.773.7766666667

91.694.17

92.974.830625

95.395.159

105.455.473

112.585.9345

125.46.0022

133.887.084375

133.376.570625

116.675.6705

104.115.3925

76.614.1528

57.313.681875

41.123.635

41.713.8965

39.093.631875

47.943.804375

49.653.89875

54.74.133125

Corn price is nearby futures price. Petroleum price is for West Texas Intermediate. Sources: USDA and EIA

Petroleum

Corn

Dollars per bushel

Dollars per barrel

Sheet1

PetroleumCorn

May 0763.453.68725

Jun 0767.493.8177

Jul 0774.123.266875

Aug 0772.363.2915

Sep 0779.913.525

Oct 0785.83.54875

Nov 0794.773.7766666667

Dec 0791.694.17

Jan 0892.974.830625

Feb 0895.395.159

Mar 08105.455.473

Apr 08112.585.9345

May 08125.46.0022

Jun 08133.887.084375

Jul 08133.376.570625

Aug 08116.675.6705

Sep 08104.115.3925

Oct 0876.614.1528

Nov 0857.313.681875

Dec 0841.123.635

Jan 0941.713.8965

Feb 0939.093.631875

Mar 0947.943.804375

Apr 0949.653.89875

May 0954.74.133125

Grain production, million metric tons (WASDE May 12, 2009)

Grain stocks, million metric tons (WASDE May 12, 2009)

Grain stocks to use ratios (WASDE May 12, 2009)

World grain stocks and real prices, Oct 2008

World grain stocks and real prices (WASDE May 12, 2009)

FAPRI-Missouri/ISU - ConsortiumUniversity of Missouri U.S. Agriculture

___FAPRI est. 1984____Iowa State UniversityCARDWorld AgricultureUnited Nations-Project LINKGlobal MacroIHS Global InsightU.S. and GlobalMacroTexas A&M UniversityAFPCRepresentative Farms - 1989Texas TechCotton - 2003University of ArkansasAFAPCWorld Rice - 1990Arizona StateNFAPPFruit & Veg. - 1995Univ. of WisconsinDairy - 2003

Historical and projected real commodity prices, 2007$

Why do projections differ?

Key elements of baseline assumptionsMacroeconomic VariablesAgricultural PoliciesTechnologyNormal Weather

Macroeconomic drivers: GDP2009 recession and rapid recovery (IHS GI)Strong global outlook from 2011 onward3.3 % average annual GDP growth rateIndia and China average 7.8 and 8.2%, respectively

Real GDP growth rates

Macroeconomic drivers: exchange rateU.S. Dollar strengthens in 2009Real depreciation of $ resumes in 2010 against many currenciesMost Asian currencies appreciate in real terms against the U.S. dollarChina experiences significant real appreciation

Exchange rate, major trading partners, FC/US$

Chart1

0.8852445096

0.8705198999

0.8217153617

0.8589131408

0.9246580029

0.9688721968

0.9533479215

1

1.0598650602

1.0436413751

0.915661499

0.8403941604

0.8242359449

0.8120606331

0.7666154778

0.7325944171

0.8065329

0.777666425

0.7421068

0.732574

0.728012025

0.729434925

0.73014495

0.726511825

0.717265675

0.711862575

Index, 2000 = 1.00

Sheet1

19931994199519961997199819992000200120022003200420052006200720082009201020112012201320142015201620172018

0.88524450960.87051989990.82171536170.85891314080.92465800290.96887219680.953347921511.05986506021.04364137510.9156614990.84039416040.82423594490.81206063310.76661547780.73259441710.80653290.7776664250.74210680.7325740.7280120250.7294349250.730144950.7265118250.7172656750.711862575

Macroeconomic drivers: oil priceProjected petroleum prices in the near term are well below forecasts made in 2008Below $60/barrel through 2010 then increases to $80/barrel as global economy recovers and demand grows

Petroleum price forecasts from IHS Global Insight*NYMEX July futures, 5/27/09

Chart1

41.471357065541.5141.512004

56.556745769456.6456.642005

66.120040962666.0566.052006

72.182918219272.3472.342007

120.793814036999.8699.76334276672008

130.534.2537.822563.45

121.551.2499948.54250568.86

120.87577.37500560.9999971.91

123.402586.7574.00000573.57

Aug. 2008

Jan. 2009

Mar. 2009

NYMEX*

Dollars per barrel

Sheet1

Aug. 2008Jan. 2009Mar. 2009NYMEX*

200441.471357065541.5141.51

200556.556745769456.6456.64

200666.120040962666.0566.05

200772.182918219272.3472.34

2008120.793814036999.8699.7633427667

2009130.534.2537.822563.45

2010121.551.2499948.54250568.86

2011120.87577.37500560.9999971.91

2012123.402586.7574.00000573.57

Global macro drivers: incomeEconomic recovery fuels next 10 years growthDairy product consumption increases 13 kg per capita (milk equivalent) from 2008 to 2018Per capita meat increases 5.6 kgPer capita vegetable oil increases 3.1 kgFood grain consumption per capita declinesProduction of meats increases 38.6 mmt or 18%Trade in meats increases 4.1 mmt or 24.3%

Changes in per capita food consumption 2008-2018

World meat production and trade

Dairy product consumption in Asia

Meat production and feed use

World grain prices

Crop outlook:world feed grain outlook overviewGrowth in livestock sector drives the increase in demand for feed grains.Feedstock use for ethanol production boosts demandStronger prices increase area and, with yield growth, production increases. Increase in area grows supply in the short-run, while yield improvement is the major source of growth in the long-run.

World corn use and per capita consumption

World corn area and yield

World corn stocks-to-use ratio vs. price

World food grain outlook overviewFood grain per capita consumption declines with growth in income as consumers trade-up to protein rich products.With declining per capita consumption, demand growth comes mainly from population growth.Growth in consumption in regions such as Asia, Africa, and the Middle East fuels growth in trade and strengthen food grain prices.Long-run production growth driven by yield improvement.

World wheat feed and food consumption

World wheat area and yield

World wheat stocks-to-use ratio vs. price

World rice production, use, and per capita consumption

World rice area and milled yield

World oilseed outlook overviewOilseed sector grows with strong demand for both oil and meal products driven by population and income growth, expansion of the livestock sectorChina soybean imports grow by nearly 60 % from 2008 to 2018Increasing interest in renewable fuels and biodiesel mandates drives increase in industrial use of vegetable oil and their prices.Room for area expansion in South America dampens price growth in the next decade.

World vegetable oil consumption

World soybean area and yield

World oilseed prices

World vegetable oil prices

World Protein Meal Prices

FOB Northern European dairy product prices

Movers, shakers and uncertaintiesGood weather and yields in 08/09, but costs and poor weather dampen 09/10 growth, except soybeansPrice surge has abated, but NOT in some LIFDCsTrade safeguard interventions mostly gone Biofuel growth slowed, but policies remainStrong influence of energy markets continueMajor uncertainties (stochastic analysis)Oil priceUS dollar The global financial crisis and impacts on demand growth, trade financingWeather

Oil price distribution

Chart1

02/0328.1202/03

03/0432.400833333303/04

04/0545.639166666704/05

05/0660.050833333305/06

06/0759.403333333306/07

07/0899.412507/08

43.4147066743.4147066743.41470667

59.52153551142.160373520128.384201074

92.16790193963.781712372942.701418543

112.0901123278.268775269750.123683478

121.4087295284.250926696853.351658067

129.4816252586.019255970652.995002076

124.3215563782.296460377851.611289005

118.4730824279.747470027550.95429304

119.7317709779.487910426851.033959518

114.200135579.21318082349.817443453

115.937403579.363479446849.957415781

90th percentile

Average of 500 outcomes

10th percentile

September-August year

Dollars per barrel

Sheet1

02/0303/0404/0505/0606/0707/0808/0909/1010/1111/1212/1313/1414/1515/1616/1617/1818/19

90th percentile43.4147066759.52153551192.167901939112.09011232121.40872952129.48162525124.32155637118.47308242119.73177097114.2001355115.9374035

Average of 500 outcomes28.1232.400833333345.639166666760.050833333359.403333333399.412543.442.263.878.384.386.082.379.779.579.279.4

10th percentile43.4147066728.38420107442.70141854350.12368347853.35165806752.99500207651.61128900550.9542930451.03395951849.81744345349.957415781

Maize US farm price uncertainty

Chart1

02/0328.1202/03

03/0432.400833333303/04

04/0545.639166666704/05

05/0660.050833333305/06

06/0759.403333333306/07

07/0899.412507/08

43.4147066743.4147066743.41470667

59.52153551142.160373520128.384201074

92.16790193963.781712372942.701418543

112.0901123278.268775269750.123683478

121.4087295284.250926696853.351658067

129.4816252586.019255970652.995002076

124.3215563782.296460377851.611289005

118.4730824279.747470027550.95429304

119.7317709779.487910426851.033959518

114.200135579.21318082349.817443453

115.937403579.363479446849.957415781

90th percentile


10th percentile


Dollars per metric ton

Sheet1

02/0303/0404/0505/0606/0707/0808/0909/1010/1111/1212/1313/1414/1515/1616/1617/1818/19

90th percentile43.459.592.2112.1121.4129.5124.3118.5119.7114.2115.9


10th percentile43.428.442.750.153.453.051.651.051.049.850.0

Wheat US farm price uncertainty

Chart1

02/03130.805408583202/03

03/04124.926513815403/04

04/05124.926513815404/05

05/06125.661375661405/06

06/07156.525573192206/07

07/08238.095238095207/08

249.3863387562246.9096323007244.5108168327

235.6708474706194.6984177409157.4959728483

241.8175754824195.7181917426154.9377232922

246.4668896109199.2353914558153.0334180151

249.9058313768201.9441967862157.7552759946

253.4235914168207.1646780449160.6741813081

256.8091236232211.3728465364166.6187134902

265.660162672215.1152701743172.3056614014

268.5163131584216.4366681479172.055558506

268.4058536592217.7044037078171.97788315

268.0382343225218.6160863173.9214908899

90th percentile


10th percentile


Dollars per metric ton

Sheet1

02/0303/0404/0505/0606/0707/0808/0909/1010/1111/1212/1313/1414/1515/1616/1617/1818/19

90th percentile249.3863387562235.6708474706241.8175754824246.4668896109249.9058313768253.4235914168256.8091236232265.660162672268.5163131584268.4058536592268.0382343225


10th percentile244.5108168327157.4959728483154.9377232922153.0334180151157.7552759946160.6741813081166.6187134902172.3056614014172.055558506171.97788315173.9214908899

A more uncertain future

Road to economic recovery?Timing and size of oil price volatility?Will biofuel policies change?Will other policies be unstable? Wider range of possible outcomesFarmers and agribusiness can easily get on wrong side of output and/or input marketsComplicated decision making and planningLarger impacts on low income consumers

Challenge and Opportunity

Challenge - how to provide safety net measures for the most vulnerable populationsOpportunity - higher prices can increase incomes from food production in rural areas where agriculture is the main source of income and employmentNational and international policy actions need to be consideredShort runLong run

CONTACT INFORMATION:EMAIL: [email protected]: WWW.FAPRI.MISSOURI.EDU

Spasibo!

******Not magic or crystal ballCombination of historical behavior and expert judgment, broad review and consultation with other analystsModels keep things in balancePrice path? Don t know because we dont know oil price or economic rebound etc*******The world wheat price was $144.9 per mt in 2003/04, and it is projected to decrease in 2004/05 to $140.8 per mt with the recovery in area and production, particularly in the EU-15, Eastern European, and FSU countries. The average annual growth rate of the wheat price is 0.24%. The stocks-to-use ratio was 21.5% in 2003/04, and it is projected to continue its downward trend though at a slower pace, reaching 18.7% in 2013/14. Drought and dry conditions reduced the EU-15 wheat harvest in 2003/04 to 91 mmt. A recovery of 11.7 mmt is projected in 2004/05 with the aid of a lower set-aside rate. Production in the EU-15 reaches 107.2 mmt in 2013/14. Although Argentine producers partly switch to soybeans in 2004/05, production resumes later and reaches 20.9 mmt in 2013/14. Canadian production is projected to reach 30.7 mmt in 2013/14, with Australian production at 28.3 mmt in 2013/14. Driven by strong consumption demand, coupled with recent drought in India and decreased area in China, global rice stocks in 2003 dropped to their lowest levels in 20 years. The stocks-to-use ratio was at a record low of 20.1%. Consequently, international rice prices broke the $200 mark in 2003 after three years of weakness. Over the baseline, the rice stocks-to-use ratio remains low, and the international (Thai) price trends upward, reaching $326 per mt by 2013.Still recovering from recent drought in India, world rice area gains 3.0 mha in 2004. Over the next decade, global rice area grows only slightly, at 0.3% annually, ranging between 153 mha to 155 mha. Thus, yield growth is expected to be the main source of the growth in rice output over the same period. The world rice yield improves an average of 1.0% annually over the baseline as a result of continued development and adoption of higher-yielding varieties.In 2003/04, large releases of stocks increased supply much more than demand, causing a drop in the corn price. In 2004/05, stocks are released at a lower rate, putting pressure on the supply despite increasing production. Thus, the corn price increases in 2004/05 by 1.6% to $105.2 per mt. The stocks-to-use ratio was 10.5% in 2003/04; it decreases to 8.8% in 2013/14.

*****World oilseed prices climbed strongly in 2003/04 as demand grew faster than supply. All oilseed prices are expected to fall significantly next year under the pressure of record supplies. Another price decline is expected for the 2005/06 season. Oilseed prices recover slightly after that before settling on a declining path for the remainder of the outlook period as production expansion outpaces demand growth. In the long run, prices are expected to keep their established relationships.World soybean production reaches 273 mmt by 2013/14, an increase of 37% over the current year. In 2009/10, Brazil overtakes the U.S. as the largest soybean producer in the world. At the end of the outlook period it holds a 35% share. The U.S share drops to 30%. World soybean production becomes even more concentrated: the top three producer countries increase their production share from 82% to 85%.

*World oilseed prices climbed strongly in 2003/04 as demand grew faster than supply. All oilseed prices are expected to fall significantly next year under the pressure of record supplies. Another price decline is expected for the 2005/06 season. Oilseed prices recover slightly after that before settling on a declining path for the remainder of the outlook period as production expansion outpaces demand growth. In the long run, prices are expected to keep their established relationships.World soybean production reaches 273 mmt by 2013/14, an increase of 37% over the current year. In 2009/10, Brazil overtakes the U.S. as the largest soybean producer in the world. At the end of the outlook period it holds a 35% share. The U.S share drops to 30%. World soybean production becomes even more concentrated: the top three producer countries increase their production share from 82% to 85%.

*World oilseed prices climbed strongly in 2003/04 as demand grew faster than supply. All oilseed prices are expected to fall significantly next year under the pressure of record supplies. Another price decline is expected for the 2005/06 season. Oilseed prices recover slightly after that before settling on a declining path for the remainder of the outlook period as production expansion outpaces demand growth. In the long run, prices are expected to keep their established relationships.World soybean production reaches 273 mmt by 2013/14, an increase of 37% over the current year. In 2009/10, Brazil overtakes the U.S. as the largest soybean producer in the world. At the end of the outlook period it holds a 35% share. The U.S share drops to 30%. World soybean production becomes even more concentrated: the top three producer countries increase their production share from 82% to 85%.

*****

FAPRI Outlook Prospects for the Next Decade: The New Ag/Energy Nexus

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