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Factors contributing to recent increases in food commodity prices PowerPoint PPT Presentation

Factors contributing to recent increases in food commodity prices Ron Trostle Economic Research Service USDA Economists Group June 10, 2008 1 Food commodity prices: up 220 % since January 2002: 70 % since January 2006

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Factors contributing to recent increases in food commodity prices

Ron Trostle

Economic Research Service

USDA Economists Group

June 10, 2008

1


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Food commodity prices:

up 220 % since January 2002: 70 % since January 2006

1/ Food Commodities include grains, vegetable oils, meats, sugar, and other basic food commodities.

2

Source: International Monetary Fund: International Financial Statistics


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Food commodity prices:

up 220 % since January 2002: 70 % since January 2006

Percent increase in prices since

Jan 2002Jan 2006

Food Commodities 220 70

1/ Food Commodities include grains, vegetable oils, meats, sugar, and other basic food commodities.

3

Source: International Monetary Fund: International Financial Statistics


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Prices of many commodities rose:

Crude oil up 640 % since January 2002

Percent increase in prices since

Jan 2002Jan 2006

Food Commodities 220 70

All commodities 405 80

Crude oil 640 97

1/ Food Commodities include grains, vegetable oils, meats, sugar, and other basic food commodities.

4

Source: International Monetary Fund: International Financial Statistics


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Crop prices increase

(wheat, soybeans, corn & rice)

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Source: International Monetary Fund: International Financial Statistics


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Real crop prices

(wheat, soybeans, corn & rice)

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Source: International Monetary Fund: International Financial Statistics


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Crop price increases: real vs. nominal

Average of 4 crops (wheat, soybeans, corn & rice)

Real prices

Nominal prices

7

Source: International Monetary Fund: International Financial Statistics


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Factors contributing to higher food commodity prices

Strong growth in demand, based on:

Increasing population - Rapid economic growth - Rising per capita meat consumption

1996 1998 2000 2002 2004 2006 2007 2008

Slowing growth in ag production

Declining stocks of food commodities

Escalating crude oil price

Rapid expansion biofuels production

Dollar devaluation

Large foreign exchange reserves

Rising costs of ag production

Adverse weather

Demand factors in brown

Aggressive purchases by importers

Supply factors in green

Exporter policies

Importer policies

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World grain & oilseeds

Total production and use

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Source: USDA PS&D Database


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Total world grain & oilseeds

Stocks and stocks-to-use ratio

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Source: USDA PS&D Database


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Long term trends contributing to higher food commodity prices

  • Demand-side trends

  • Supply-side trends

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Population growth rates decline

(Percent by period)

Percent

12

Source: USDA Agricultural Baseline Projections to 2017.


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Strong economic growth

Average Real GDP growth rates

Percent

13

Source: USDA Agricultural Baseline Projections to 2017.


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Global meat1

Production and percapita consumption

Index: 1971 = 100

Exponential trend growth rates:

1975-90 90-07

Production 3.1 2.5

Population 1.7 1.4

Per capita 1.4 1.1

consumption

1 Total meat = beef + pork + chickens & turkeys.

14

Source: USDA Agricultural Projections to 2017.


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Global rice imports

Million metric tons

1/ European Union, former Soviet Union, and other Europe. 2/ Includes Mexico.

15

Source: USDA Agricultural Baseline Projections to 2017.


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Global soybean oil imports

Million metric tons

1/ European Union, former Soviet Union, and other Europe.

2/ Asia excluding India and China. 3/ Includes Mexico.

16

Source: USDA Agricultural Baseline Projections to 2017.


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Poultry imports 1/

Million metric tons

1/ Selected importers.

2/ EU-27 excludes intra-trade after 2002, EU-15 intra-trade before 2003, Slovenia before 1992.

17

Source: USDA Agricultural Baseline Projections to 2017.


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Total world grain & oilseeds1

Production, yield, area harvested, population & percap production

Index: 1970 = 100

Exponential trend growth rates:

1970-90 90-07

Production 2.2 1.3

Yields 2.0 1.1

Area 0.15 0.14

Population 1.7 1.4

Per capita use 0.56 0.11

1 Total oilseeds = soybeans + rapeseed + sunflowers

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Source: USDA Agricultural Projections to 2017


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Role of biofuels

  • Focus on feedstocks

  • Major producers

  • Impact on land use

  • Impact on price relationships

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Biofuels production:Largest producers

Million Gallons

Ethanol

Biodiesel

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Source: USDA Agricultural Projections to 2017


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U.S. corn use

Billion bushels

1/ Food, seed, and industrial less ethanol.

21

Source: USDA Agricultural Baseline Projections to 2017.


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Global wheat and coarse grains use, 2002/03 – 2007/08

MMT

100%

Total

Food and other non-feed (except US corn ethanol)

44%

27%

Feed

US corn ethanol

30%

Crop year

Note: Category’s share of the change in total use from 2002/03 to 2007/08.

22

Source: USDA’s PS&D Database and estimates from ERS


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Other contributing factors

  • Higher energy prices

  • Weaker U.S. dollar

  • Increasing foreign exchange reserves held by importers

  • Adverse weather reduced crop production

  • Role of hedge funds, index funds, & sovereign wealth funds:

    • (affect demand and/or volatility?)

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Value of U.S. dollar declines after 2002 1/

Index values, 2000=100

1/ Real U.S. agricultural trade-weighted dollar exchange rate, using U.S. agricultural export weights,

based on 192 countries.

24

Source: USDA PS&D Database


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Foreign Exchange Reserves

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Adverse weather reduced crop production in 2006 and 2007

  • Ukraine & Russia: drought for 2 years

  • Australia: severe drought for 2 years

  • Europe: dry spring; harvest floods

  • SE Europe: drought

  • NW Africa: drought

  • USA: late spring freeze

  • Canada: hot and dry

  • Turkey: dry

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Food Price Inflation:Policy responses by someexporters and importers

  • Export restrictions

  • Lower import tariffs

  • Consumer subsidies

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Defensive measures to control inflation -- Exporters

  • Eliminated export subsidies:

    • China (grains & products)

  • Export taxes:

    • China (grains & products)

    • Argentina (wheat, corn, soybeans, soymeal, soyoil)

    • Russia (wheat)

    • Malaysia (palm oil)

    • Kazakhstan (wheat)

  • Export quantitative restrictions:

    • Argentina, Ukraine (wheat)

    • India & Vietnam (rice)

  • Export bans:

    • Ukraine, Serbia, India (wheat)

    • Egypt (rice)

    • Kazakhstan (oilseeds & veg oils)

    • Cambodia (rice to neighboring countries)

    • Indonesia (rice)

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Defensive measures to control inflation -- Importers

  • Reduce Import tariffs:

    • India (wheat flour)

    • Indonesia (soybeans, wheat; will “green line” wheat flour)

    • Serbia (wheat)

    • Thailand (pork)

    • EU (grains)

    • Korea & Mongolia

  • Subsidized distribution of imported staples

    • Morocco (import wheat; subsidize bread sales)

  • Promoting a/o subsidizing production:

    • Indonesia (soybeans)

  • Other:

    • Iran imported corn from the USA

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Other developments

  • Domestic price controls:

    • China (cooking oils, grain, meat, milk & eggs)

    • Thailand (food)

  • Protests

    • Malaysia (millers & bakers)

    • Indonesia (soybean prices; meat prices)

    • Pakistan (wheat)

    • USA (wheat)

  • Food riots:

    GuineaMauritaniaMorocco

    SenegalCameroonMexico

    UzbekistanYemenNiger

    Burkina FasoEgyptHaiti

    EthiopiaPhilippinesThailand

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Impact of high food commodity prices

on consumers food budgets

High-incomeLow-income countriesfood-deficit

countries

I. Base Scenario

Income40,000 800

Food expenditure4,000 400

Food as % of income10.0%50%

Disaggregate retail food spending

(staples vs. non-staples)

Staples as % of total food spending20%70%

Expenditures on staples800280

Expenditures on non-staples3,200120

II. Scenario: 50% Price increase in staples

Partial pass through on staples

Assumed % pass through60%60%

Increase in cost of staples24084

New cost of staples1040364

New total food costs 4,240484

Food as % of income10.6%61%

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U.S. Title II Food Aid Allocations

$ Billion

Million metric tons

*2008 is an forecast

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Food commodity price spikes

since 1970

33

Source: International Monetary Fund: International Financial Statistics


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Categories of factors contributing to higher food commodity prices

Temporary factors:

Structural changes:

Questionable future impact:

Continuation of long-term trends:

  • Rapid economic

    growth in many

    developing

    countries

  • Population growth

    in developing

    countries

  • Increasing per

    capita meat

    consumption

  • Adverse

    weather

  • Trade policies

    by exporters

    and importers

  • Aggressive

    buying by

    importers

  • Further dollar

    depreciation

  • Slower growth

    in ag productivity

  • Role of large

    foreign exchange

    reserves held by

    importers

  • High oil

    prices

  • Biofuels

    production

  • High ag

    production

    costs

  • Supply factors in green

  • Demand factors in brown

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U.S. Commodity Prices: History & Projections

Soybeans, Wheat, Corn, & Rice

Projections from Nov 2007 USDA Baseline

$ per bushel; ($ per cwt for rice)

Rice

Soybeans

Wheat

Corn

Source: USDA Agricultural Baseline Projections to 2017, February 2008.

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Global Agricultural Supply and Demand:Factors Contributing to the Recent Increase in Food Commodity Prices

Report available at:

http://www.ers.usda.gov/Publications/WRS0801/

Ronald Trostle

Economic Research Service

U.S. Department of Agriculture

[email protected]

202-694-5280

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