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The large recent fluctuations of international agricultural commodity prices and policies to deal with them in light of future market developments. Alexandros Sarris Professor of Economics, University of Athens, Presentation at the Bank of Greece 18 March 2011. Overview of presentation.
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The large recent fluctuations of international agricultural commodity prices and policies to deal with them in light of future market developments Alexandros Sarris Professor of Economics, University of Athens, Presentation at the Bank of Greece 18 March 2011
Overview of presentation • Recent global agricultural markets in perspective • Causes of agricultural commodity market price increases during 2007-8 and recently • The medium term outlook for global agricultural markets • Agricultural market volatility and its determinants • Policies to deal with agricultural market volatility
Recent commodity price movements have not been uniform (source World Bank)
Very recent agricultural market developments • Agricultural commodity prices rose 5.6 percent in February, up for a ninth straight month. Most of the gains were in raw materials and beverages. Food prices rose 2.9 percent, just 0.7 percentage points more than the dollar depreciation. • Cotton prices surged 19 percent due to a number of supply shortfalls, strong demand and and low stocks, while rubber prices jumped 10 percent as wet weather affected production in south-east Asia. • Coconut oil and palmkernel oil prices (close substitutes) rose 10.9 percent and 8.3 percent, respectively, due to a steep decline in Malaysian palmkernel oil production, causing stocks to fall to a multi-year lows. • Cocoa prices increased 10 percent because of political conflict in Côte d’Ivoire, while coffee increased 8-9 percent on low stocks and tight supplies. • Wheat prices gained 6.6 percent due to concerns about the winter wheat crop in the U.S. and China, and strong international buying. • Maize prices rose 11 due to tight U.S. inventories and concerns that the U.S. might not be able to rebuild its current low level of stocks.
Latest cereal market assessments • FAO’s latest (March 2011) forecast confirms a tightening of the global cereal supply and demand balance in 2010/11. A decline in world production in 2010 in the face of growing demand is expected to result in a sharp drawdown of world stocks. Reflecting this prospect, international cereal prices have increased sharply with export prices of major grains up at least 70 percent from this time last year. • » The latest estimate for the world cereal productionin 2010 is 8 million tonnes more than was anticipated in December but still slightly below 2009. This month’s upward revision reflects mostly higher estimates for production in Argentina, China and Ethiopia. • » The forecast for world cereal utilization in 2010/11 has been revised up by 18 million tonnes since December. The bulk of the revision reflects adjustments to the feed and industrial utilization of coarse grains. Larger use of maize for ethanol production in the United States and statistical adjustments to China’s historical (since 2006/07) supply and demand balance for maize are the main reasons for the revision. • » World cereal stocks for crop seasons ending in 2011 are forecast to fall sharply because of a decline in inventories of wheat and coarse grains. A plunge in stocks of coarse grains at the global level as well as for major exporters is expected to push down stock to use ratios of coarse grains to the lowest in three decades.
Cereal commodity prices in long term perspective (current prices)
Cereal commodity prices in long term perspective (real prices)
Is there an end to cheap food? Real international prices of grains have tended to decrease but since mid 1980s tendency seems to have stopped and may have reversed in 2008-9
Real prices of vegetable oils have tended to decrease but since mid 1980s tendency seems to have stopped
Real prices of livestock commodities have tended to decrease albeit at slowing pace since mid 1980s
Real prices of sugar and beverages have tended to decrease but since mid 1980s tendency seems to have stopped
What determines long term commodity prices? • Supply of agricultural commodities highly elastic at low wages • Demand for agricultural commodities quite inelastic • Opposite case for non-agriculture • Implication: Differential productivity gains can alter terms of trade between agriculture and non-agriculture
How do productivity gains affect agriculture and non-agriculture? • Productivity affects agriculture differently than non-agriculture S’ P P S S p a a c p p’ S’ p’ b b d D D Q Q Panel A. Agricultural Commodity Sector Panel B. Non-agricultural sector
Declining terms of trade for agricultural commodities has been due to faster rates of total factor productivity growth for agricultural than non-agricultural products • Rate of growth of TFP has been faster in agriculture than in non-agriculture • The rate of growth of TFP in agriculture seems to be higher than that of manufacturing. • “Globalization” of agricultural research, has contributed to faster TFP growth in agriculture, • Incidence of productivity advances largely on consumers (through lower prices) and little to producers. • Annual TFP growth in agriculture does not appear to have slowed down for the world. • Hence most likely reason for real price leveling must be lower inputs and faster demand growth
Some fundamentals of the world cereal markets • Dominance of the US in world exports (maize 60%, wheat 25%). Hence US specific factors important (biofuels, US dollar movements, world dollar reserves, futures market trends, US stocks) • Seasonality and inelasticity of supply and demand (supply shocks important) • Differences in wheat and maize markets (maize market more sensitive to US events) • Peculiarities of rice market (only 6% of global production exported, many more trade barriers)
Facts of the 2007-8 world food crisis • Long term trends maybe relevant for the understanding of short term market developments (trends in incomes and demand, productivity growth slowdown, decline in inputs to agriculture such as land, labour, irrigation, fertilizer) • Food export prices rose very quickly and sharply • Prior to the 2007-8 crisis food commodity prices were at an all-time low after declining for most of the previous 30 years • Many commodities’ prices rose sharply (petroleum, metals, minerals, fertilizer). Petroleum price to agric price passthrough 0.17 • Non-food agricultural commodity prices did not rise as sharply as food commodities (food specific versus common macro factors) • US dollar had depreciated against a wide range of currencies (price rises in Euro 25% less) • After peaks in mid 2008 food and other commodity prices declined sharply (bubble, overshooting)
Explanations of high agrifood commodity prices in 2007-8 (new factors in blue) • Strong growth in demand • sustained historically high economic growth world wide (China, India have not become more import dependent) • bio-fuel feedstock demand, particularly for maize and vegetable oils • stronger currencies/ weak USD (weak dollar may have contributed 20 percent to agric price increases) • Low interest rates (enhances demand for speculative stocks) • Constrained supply • high energy related input costs... crude oil up since 2000. Crude oil price rises may have contributed 22 percent to agric good price rises • repeated yield shortfalls in key areas – climate change? • Low commodity stocks • increased speculation/ demand to rebuild • Increased activity on commodity exchange • Increased participation by commodity and other funds • Policies and policy changes • tariff liberalization by importers • decoupling of subsidies, reduction in export subsidies, lower public stocks • increased use of export taxes/ bans • biofuel subsidies/tariffs/tax credits etc, changing mandates etc
Global ending stocks of wheat and stock to utilization ratios for the whole world and for the world without China
Global ending stocks of maize and stock to utilization ratios for the whole world and for the world without China
Global ending stocks of rice and stock to utilization ratios for the whole world and for the world without China
Speculation. Actual and counterfactual corn futures priceswith and without index funds (source Gilbert 2009) The broken line sets innovations to the index investment series to zero.
Simulated impact on commodity prices of a 1 % USD depreciation against all currencies
Policy actions adopted by a sample of 77 developing countries to deal with high international food commodity prices
The global financial crisis and commodity markets: Demand factors • Slower rates of GDP growth in OECD economies, but sustained rates of growth in East Asia economies. Likely downward pressure on prices (it happened last year) • Reduced oil prices lower agricultural production costs and dampen demands for biofuel feedstocks, but this is reversed this year with high oil prices • Portfolio reallocations of international commodity funds and other financial funds, away from commodities, put downward pressure on prices in the short run. Not clear if this has changed recently, but certainly evidence of speculative commodity positions • Exchange rate volatility • Return to market fundamentals? (appears to have happened until recently)
The global financial crisis and commodity markets: Supply factors • With commodity prices declining production incentives will be dampened and supply response can be smaller. Will not hold this year • Freight rates declined and this may have lower import costs after 2008,but this may have changed recently • Falling prices presented an opportunity to replenish stocks, but since stockholding is (among others) a function of future price anticipations did this happen? (Yes) • Large scale investments in land and production will take some time to augment world supply
Medium term (10 year) outlook highlights • Real commodity prices 15-40% above 1997-06 levels • Production increases in the range of 10-40% • Strong expansion of biofuels driven by mandates • LAC and Eastern Europe fastest growing production • Developing countries driving production, consumption, and trade gains
