What is going on? Rising prices for all primary commodity since - PowerPoint PPT Presentation

The OECD-FAO Agricultural Outlook: Whither commodity prices in the next decade

What is going on? • Rising prices for all primary commodity since 2000. Since 2006-08, agricultural markets have been in turmoil and indicators of price volatility have risen. • Droughts, floods, recession, monetary fluctuations – exchange rates, disparate economic growth, perverse policy responses, financialization of markets. • Commodity stocks “struggle” to return to normal levels. • Strong rise of energy/fuel prices has created the largest source of “new” demand for agricultural crops in many years, and have underpinned rising costs • Increasing concern for food insecurity, now and for the future, have created concerns for global governance, yet demand appears robust to higher prices. 2

2011 not a repeat of 2008, but almost 300 250 Meat 200 Dairy 150 Cereals Oils 100 Food 50 0 1/2005 1/2006 1/2007 1/2008 1/2009 1/2010 1/2011 3

In real terms, the FAO Food Price Index has doubled since 2000 400 350 300 Index 2004-06=100 250 200 y = 278.14e -0.019x 150 100 50 0 1961 1966 1971 1976 1981 1986 1991 1996 2001 2006 2011 4

Implied Volatility has trended up in last two decades – trend to continue? 45 40 35 30 Percentage 25 Wheat Maize 20 Soybeans 15 10 5 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 5

Key characteristics – Prospects for Prices • High real prices – Will come down from recent highs in 2011, but will average higher compared to past trends – Denominated by “oil”? – Prices underpinned by higher costs – fertilizer, transport, labor • High price volatility – Likely to remain high: under excess demand and low stocks, any supply shock will drive prices up sharply – Energy price volatility will transmit to agriculture – Are agricultural prices increasingly sensitive to income changes? • Implications – Higher prices a signal for higher investment and technology application, but higher volatility may restrain? – High concern for food insecurity, policies may be uncoordinated 6

Real crop prices on higher plateau.. But down from recent peaks. 700 600 500 USD/MT 400 300 200 100 0 Maize Wheat Rice Oilseeds Sugar

Real exchange rates relative to US dollar: most have depreciated significantly since 2002 10 50 Raio to China Yuan – real terms 9 45 8 40 Brazil 7 35 Argentina 6 30 EU 5 25 China 4 20 Canada 3 15 Australia 2 10 India 1 5 0 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Key characteristics - Demand • Food demand remains robust – Historically strong economic growth in developing, particularly in emerging countries – Over four fifths of food demand growth is in developing countries – Highest food demand growth in value added sectors – meats, dairy etc implies high demand for feed. • Biofuel feedstock demand will remain strong, but slowing – Policies are key, but less so at higher energy prices – Ethanol from maize tops out with US mandate, and global growth will come mostly from sugarcane – Biodiesel from edible vegetable oils grows strongly • Implications – Robust demand for food, feed and biofuel feedstocks will pressure supply systems 9

Per capita GDP – will strong growth continue? 12 10 8 6 Percentage World 4 OECD BRIC 2 LDC 0 ROW -2 -4 -6 2005 2007 2009 2011 2013 2015 2017 2019 10

Net addition to population starting to fall quickly during the next decade and beyond 100000 Change in population in 80000 thousands 60000 World OECD 40000 BRIC 20000 LDC ROW 0 -20000 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016 2022 2028 2034 2040 2046 Source: UN-Statistics/population 2008

By region the fall in net addition is highest in Asia region – SSA still rising 60000 Change in population in 50000 N.America L.America 40000 thousands SSA 30000 N.Africa&ME W.Europe 20000 E.Europe 10000 Oceania&Jpn Asia 0 -10000 1950 1956 1962 1968 1974 1980 1986 1992 1998 2004 2010 2016 2022 2028 2034 2040 2046 Source: UN-Statistics/population 2008

Per capita food consumption increasing in transition and developing countries 140 130 Index 2004-06=100 120 110 100 90 80 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 N.America L.America W.Europe E.Europe&C.Asia N.Africa&M.East S.S.Africa Asia&Pacific Oceania 13

Shift from staple foods to value-added products continues Per-capita food consumption change between 2008/10 and 2020 16% 14% 12% 10% 8% 6% 4% 2% 0% -2%

Food and feed dominate cereal use, ethanol expands only until 2015 Total cereals use 3000 2% p.a. 1.1% p.a. 2500 2.6% p.a. 26% p.a. 2000 Million MT 1.3% p.a. 1500 0.6% p.a. 1000 1.3% p.a. 1.2% p.a. 500 0 Food Feed Biofuel Other

Industrial use of vegetable oil continues to increase Edible vegetable oil use 200 4% p.a. 180 160 18% p.a. 140 Million MT 120 100 80 60 4% p.a. 2% p.a. 40 20 0 Food Industrial

Maize ethanol flattens out in 2015, sugar cane provides growth 160 140 120 Billion Litres 100 80 60 40 20 0 Coarse grain Wheat Molasses Sugar cane Roots&tubers Other

Biodiesel anticipated to grow strongly, but about ¼ of ethanol production 45 40 35 Billion Litres 30 25 20 15 10 5 0 Edible Oils Energy Oil crops and waste

Are oil prices now a floor and ceiling for maize/crop prices? What does this mean? 160 300 140 250 120 200 USD/barrel 100 USD/MT 80 150 60 100 40 Mandates underpin prices 50 20 0 0 2005M01 2006M01 2007M01 2008M01 2009M01 2010M01 2011M01 Oil (WTI) Corn (Iowa) 19

Key characteristics - Supply • Supply growth varies regionally – Agricultural sectors in South America, Eastern Europe and Central Asia are projected to provide bulk of supply growth • Coming decade expected to see continued cereal production growth, oilseeds to expand slower • Poultry and pork production respond to strong demand from developing countries • Productivity growth is slowing – Where high access to variable inputs, supply response will be strongest in the short term, but limited by higher fertilizer and feed costs – Growth in yields of many crops slowing down compared to previous growth rates – Best land is mostly used, expansion will be to more marginal land, with costly access and more variable yields – Water supply for irrigation is increasingly limited 21

Input cost pressures remain high 1.5 100 1.3 1.1 80 Index 2008 = 1 USD/barrel 0.9 60 0.7 0.5 40 0.3 20 0.1 0 -0.1 1995 2000 2005 2010 2015 Crude Oil US maize production cost index

Arable Area grows slowly, mainly in developing countries 1200 World 1000 Developing Million hectares 800 600 Developed 400 200 0 Cereals Oilseeds Sugar crops Other

Is global yield growth slowing? 6 Maize yield= +1 e-04 x 2 + 0.06x + 1.9 5 Rice yield = -1 e-04 x 2 + 0.05x + 1.7 4 Tonnes/Ha Wheat yield = -2 e-04 x 2 + 0.05x + 1.0 3 Barley yield = -1 e-04 x 2 + 0.03x + 1.4 Soybean yield= -1 e-08 x 2 + 0.03x + 1.1 2 1 0 1961 1971 1981 1991 2001 2011 Barley Maize Rice, paddy Soybeans Wheat 24

Yields continue to increase but at slower pace Total yield growth 2001-10 vs. 2010-20 Oilseeds Cereals 15% 10% 5% 0% World Developed Developing World Developed Developing 2001-2010 2010-2020

Yield growth has a large impact on commodity prices in the medium term Impact on average 2011-2020 world prices of higher and lower yields: Wheat Rice Coarse grains Protein meals Poultry Oilseeds -20.0% -10.0% 0.0% 10.0% 20.0% Yields + 5% Yields - 5%

Agricultural supply increase – Latin America is growing strongly, but not traditional suppliers Net production index 2004-06 = 100 150 125 100 75 Latin America E. Europe/C. Asia Sub-saharan Africa North America E. Asia N. Africa & M. E. W. Europe Oceania

Commodity exports increasing most from Eastern Europe and Central Asia 210 190 Index (2004-06=100) 170 150 130 110 90 70 50 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 N.America L.America W.Europe E.Europe&C.Asia N.Africa&M.East S.S.Africa Asia&Pacific Oceania 28

Eastern Europe takes over the lead in world wheat exports 2005-2009 2020 ARG, 6% Other, 9% ARG, 5% Other, 9% RUK, 23% RUK, 31% AUS, 10% AUS, 11% E27, 12% E27, 15% USA, 23% USA, 18% CAN, 14% CAN, 15%

Latin America is largest net exporter of primary agricultural goods – MENA largest importer 60 50 40 Billion of constant $ 2004-06 30 20 10 0 -10 -20 -30 -40 -50 N.America L.America W.Europe E.Europe&C.Asia MENA SS Africa Other Asia Oceania

Low global stock to use ratios for wheat and coarse grain imply high upside price risk 35% 30% 25% 20% 15% 10% 5% 0% 2003 2005 2007 2009 2011 2013 2015 2017 2019 Coarse grain - Stock to use Wheat - Stock to use 31

Stochastic analysis of yield and impact on prices Stochastic coarse grain price projections 300 250 USD/MT 200 150 100 50 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 Baseline 10% Percentile 90th Percentile Median