agricultural price july 2014 change
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RuRal Development InstItute
Agricultural Price Change
1
July 2014
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HigHligHts• Farm-gatepricesinManitobahavegenerallybeenincreasing.However,afteranadjustmentforinflation,thepricesshowageneraldecliningtrend.Thus,farmprices,ingeneral,arenotincreasingfasterthaninflation.
• Forcommoditiesoutsidethesupply-managedsectorsofpoultrymeat,eggsanddairy,theyear-to-yearvariabilityofpricescanvaryfrom+20%to-20%(andthehogpricevariabilityhasbeenatleasttwiceaslarge).
• Acomparisonofoverallfarmoutputpricesandoverallfarminputpricesshowedadeclineintheso-calledtermsoftradeintheearly2000s(i.e.inputpricesincreasedfasterthanoutputprices)buttherewasanincreaseinthetermsoftradeuptomid-2013.
• Thepriceofhogsrelativetothepriceofbarleyshowsaflattrendoverthe1985to2013periodbutthefluctuationsintheratiowereoftenmorethan40%.
• Thepriceofwheatrelativetothepriceofcrudeoilisnowless(althoughveryvariable)comparedtothecalculationforthe1980sandthe1990s.
Bollman, Ray D., & Ashton, W. Rural Development institute, Brandon University, Brandon, Manitoba, July, 2014.
WHy AgRicUltURAl pRice cHAnge?
AgricultureisanimportantsectorinruralManitoba.On-goingmechanization(i.e.,theuseoflargermachines)meansthatthereisadecliningnumberofpeopleemployedonfarmsinManitoba.
However,pricetrendsdrivemanydecisions:
1. ifinputpricesaregoinguprelativetooutputprices,the“cost-pricesqueeze”forcesfarmerstoincreaseyieldsorlowercostsinordertosayinbusiness;whereas
2. ifoutputpricesaregoingupfasterthaninputprices,farmershavemorecashflowtomakeinvestments;and
3. anotheraspectofagriculturalpricechangeisthat,ifpricesaremorevariable,thereisgreateruncertaintyinbeingabletogeneratethecashflowtomeetbillsforexpendituresastheycomedue.
TheobjectiveofthisFactsheetistoshowthetrends–andtheupsandthedowns–inthepricesofagriculturalcommodities.
Weshowthedatafor:
• nominalprices(withoutanadjustmentforinflation);
• realprices(adjustedforinflationusingtheConsumerPriceIndex);andforafewcases
• thetrendintheoutputpriceperdollarofinputprices(usingeitherakeyinputprice,suchasthehog/barleypriceratioforhogs,orusingapriceindexforabasketofoutputsdividedbythepriceindexforabasketofinputs).Tradeanalystsdefinethisasthe“termsoftrade”–isthesellingprice(foroutputs)goingupfasterorslowerthanthebuyingprice(forinputs)?
FinDings
Overtime,thepricesoffarmproductsinManitobahavegenerallyincreased,innominalterms(i.e.beforeadjustingforinflation)(Figure1).
Figure 1. ManitobaFarmProductPriceIndex,Allcommodities(2007=100)
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Bollman, Ray D., & Ashton, W. Rural Development institute, Brandon University, Brandon, Manitoba, July, 2014. 2
However,therehavebeenwidefluctuationsinfarmproductprices.Wemightnotethefollowingpeaks:
• August,1973,duetoaleapinthepriceofwheat;
• July,1996,duetopeaksinwheat,canola,potatoesandhogsthatalloccurredintheJunetoSeptemberperiodin1996;
• July,2008,duetopeaksinwheatandcanola.PotatoesandcattleandcalvespeakedinSeptember,2008andhogspeakedinFebruary,2009;and,mostrecently
• June,2013,dueagaintoconcurrentpeaksincropandlivestockprices.WheatpeakedinDecember,2012,canolapeakedinMay,2013;potatoespeakedinJuly,2013,cattleandcalvespeakedinSeptember,2013andhogspeakedinAugust,2013(detaileddatanotshown).
Thesepricesindicate“incentives”toinvest–theydonotnecessarilyindicatethatmorecashwasreceivedbyfarmersasoftenthereasonforatemporarypricepeakisthatfarmershavelittletosellduringthatmonth.
pRice tRenDs ADJUsteD FoR inFlAtion
However,whenweadjustthefarm-gatepricesforinflation1,theoverallleveloffarmpricesinManitobawasdecreasingfromthemid-1970stotheearly1990sandsincethen,farm-gatepriceshavegenerallyfollowedthelevelofinflation,butwithfluctuations(Figure2).
Figure 2.ManitobaFarmProductPriceIndex,Allcommodities,relativetoCPI*
Wecanagainidentifythepeaks(whicharethesamepeaksasinFigure1)butthesepeaksarewithinapatternofdecliningagriculturalprices,relativetoinflation.
Toillustratethedegreeofvariabilityorfluctuationsinagriculturalprices,wehavetakenthemonthlyManitobaFarmProductPriceIndexandcalculated,fortheperiodsince1985,thepercentchangeinpriceforagivenmonth,comparedtothesamemonthinthepreviousyear2.
Wesee5periodswheretheindexforallfarmpriceswasdeclining(i.e.thebarsinthechartarebelowzero)forconsecutivemonths(Figure3):
• January,1985toDecember,1987(exceptfortwomonths);
• August,1989toJuly,1992(exceptfortwomonths);
• October,1996toJune,2000(exceptforthreemonths);
• June,2003toMay,2006(exceptfor10months);
• April,2009toJune,2010;and
• anotherpricedeclinethathasstartedinSeptember,2013.
Figure 3.InDecember,2013,theManitobaFarmProductPriceIndex(acrossallcommodities)wasdown11%comparedtothesamemonthtothepreviousyear
Similarly,wesee5periodswheretheindexforallfarmpriceswasincreasingforconsecutivemonths:
• January,1988toJuly,1989;
• August,1992toSeptember,1996(exceptfor2months);
1.TheConsumerPriceIndexisusedtoadjustforinflation.
2.Tocalculatethepercentchange,wehaveusedthedifferenceinlogarithms.Thisgeneratesthesamepercentchangeforagivenabsolutepositiveornegativechange.Forexample,ifIate3cookiesyesterdayand6cookiestoday,ourusualarithmeticwouldshowanincreaseof100%.IfItheneat3cookiestomorrow,thatisadeclineof50%.Byusingthedifferenceoflogarithmstocalculatethepercentchange,thechangeof3cookiesiscalculatedrelativetothegeometricmeanof3and6andthusthecalculationshowsanincreaseof69.3%ifmyconsumptionincreasesfrom3to6cookiesandadeclineof69.3%ifthereisadeclinefrom6to3cookies.
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• July,2000toMay,2003;
• June2006toMarch,2009;and
• July,2010toAugust,2013(exceptfortwomonths).
NotethatoutputpriceshavebeendroppingsinceSeptember,2013.
Thereisanoldadageamongoldagriculturaleconomists–“thesolutiontohighpricesishighprices.”Thismeansthatinagriculture,higherworld-widepricesgeneratemoreworld-wideproductionwhichalwayshasreducedprices.JohnMorrissintheJanuary23,2014issueofTheManitobaCo-operator3makesthesamepoint.Henotedthatin1972,weheardthatitwas“differentthistime.”Then,ineachbriefpricerally–1980,1985,1993,1996,2006andthenin2012-13–weheardthis“Theworld’spopulationisgrowing.It’sgettingmoreaffluent,sopeoplewilleatmoremeat.Theyaren’tmakinganymoreland.”
Heconcludeswiththeobservation“Nexttimeyouhearthatit’sdifferentthistime,remember–itwon’tbe.”
pRice tRenDs By coMMoDity gRoUp
Fortheperiod1985todate,thepatternofagriculturalpricechangebycommoditygroupispresentedinthechartsinAppendixA.Tosummarize:
• Croppricessince1985haveshownnoup-wardordown-wardtrend,relativetoinflation(AppendixAFiguresA3,A5,A7,A9andA11);
• However,thevariationofpricesinthisno-trendscenarioislarge.Year-to-yearpricechangesof+20%or-20%are‘typical’(AppendixAFiguresA4,A6,A8,A10andA12);
• Thepricesoflivestockandanimalproductshaveshownageneraldeclineinprices,relativetoinflation,since1985(AppendixAFiguresA13,A15,A17,A19andA21).Theexceptionisthefarm-gatepriceofmilkwhichshowsagenerallyflattrendinAppendixAFigureA23whichmeansthepriceshavegenerallybeenincreasingwiththerateofinflation.Relativetoinflation,therewasaslightrelativedeclineuptotheearly1990s,
aslightrelativeincreaseuptothemid-2000sandthetrendinthefarmgatemilkpricehasbeenflat(i.e.increasingwithinflation)sincetheendof2007;
• Thesupplymanagementsystemforpoultrymeat,eggsandmilkhasmutedthefarm-gatepricevariability(AppendixAFiguresA20,A22andA24);
• Thepricefluctuationforcattleandcalveshasreachedboth+20%and-20%inyear-to-yearchangessince1985(AppendixAFigureA16);and
• Thepriceforhogsshowsmuchmorevariability.Since1985,ayear-to-yearpricechangeof+40%and-40%hasoccurredatleasttwice(AppendixAFigureA18).
oUtpUt pRices RelAtive to inpUt pRices
Above,wehaveadjustedoutputpricesfortherateofinflationasonewaytoshowthe“relative”trendinoutputprices.
Here,wecompareoutputpricestoinputpricestoseewhetherthepriceofanagriculturalproductisincreasingfasterorslowerthanthepricesof(selected)inputstoproducethatproduct.
Bothoutputpricesandinputpricespeakedinthe3rdquarterof2008,thendeclineduptothe4thquarterof2009andincreasedagainupto2013(Figure4).ThemostrecentdatafortheFarmInputPriceIndexreferstothe3rdquarterof2013.
Figure 4. Indexofpricesoffarmoutputsandfarminputs,Manitoba
FARM-level “teRMs oF tRADe”
BytakingtheratiooftheFarmOutputPriceIndexdividedbytheFarmInputPriceIndex,wecan3.SeeMorriss,John(2014)“Differentthistime–again.”TheManitobaCo-operator,January
23,2014,p.4.
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Bollman, Ray D., & Ashton, W. Rural Development institute, Brandon University, Brandon, Manitoba, July, 2014. 4
calculatethefarm-level“termsoftrade.”Thisratioindicateswhetherfarmoutputpricesareincreasingordecreasingrelativetofarminputprices(Figure5).
Figure 5. Agriculturetermsoftrade:Outputpricesrelativetoinputprices,Manitoba
Outputprices,relativetoinputprices,inManitobaagriculturedeclinedfrom2002tothe2ndquarterof2006,temporarilypeakedinthe3rdquarterof2007,declinedagaintothe3rdquarterof2009beforeincreasingandplateauingfromthe3rdquarterof2011tothe2ndquarterof2013.Recallthatanincreaseinoutputpricesrelativetoinputpricesprovidesfarmerswithsomeleewayintheirinvestmentdecisions.However,anotherrelativedeclineinoutputpriceshasstartedinthe3rdquarterof20134.
Wenowexplorewhetherthepriceofaselectedcommodityisincreasingordecreasingrelativetothepriceofamajorinputsusedtoproducethecommodity.
Thevariationinwheatprices(AppendixBFigureB1)maybecomparedwiththevariationinfertilizerprices(AppendixBFigureB2).Whenwelookattheratioofwheatpricesdividedbyfertilizerprices,theso-called‘termsoftrade’havevariedovertime(Figure6).Therewasageneraldeclineintheearly2000s,aspikeinthe1stquarterin2008beforeasharpdeclinetothe4thquarterof2008followedbysomewhatofanincreaseto2013.Again,thevariability,ratherthanthetrend,maybethemajorobservationhere.
Figure 6. Ratioofwheatpricetofertilizerprice(2010=100),Canada
Feedgrainisamajorinputinhogproduction–anditisaninputwithafluctuatingprice.ThevariationinthepriceofManitobahogsisshowninAppendixBFigureB3andthevariationinthepriceofManitobabarley(amajorfeedgrain)isshowninAppendixBFigureB4.Whenwecalculatetheratioofthepriceofhogstothepriceofbarleytoseewhetherthepriceofhogsisgoingupordownrelativetothepriceofbarley,wefindvirtuallynotrendbutverywidefluctuationsintheratio(Figure7).Thewidevariationsinthehog/barleypriceratioareanamplificationofthevariabilityinthehogprice(AppendixBFigureB3)andthevariabilityinthepriceofbarley(AppendixBFigureB4)5.
Figure 7. Hog/barleypriceratio,Manitoba
4.Thisdeclinehascontinuedinthe4thquarterof2013asportrayedinFigures1and3.
5.TheseobservationsarerelevanttotherequestbyfarmersforapriceinsuranceprogramandtherecentwillingnessoftheGovernmentofManitobatoparticipateinapilotprojecttoevaluatesuchaprogram–see“Manitobajoinsthelivestockpriceinsuranceclub,”ManitobaCo-operator,February26,2014(http://www.manitobacooperator.ca/2014/02/26/manitoba-joins-the-livestock-price-insurance-club/).
Finally,wecomparetheindexofthepriceofwheat(AppendixBFigureB5)withtheindexofthepriceofcrudeoil(AppendixBFigureB6).Petroleumfuelsfarmmachineryandalsopetroleumpricesdrivethepriceoffertilizer.Again,theresultisaveryvariablechartoftherelativeprices(Figure8)6.Inthe1980sandthe1990s,thepriceofwheatrelativetothepriceofcrudeoilfluctuatedupanddownbyafactorof4.Since2000,thefluctuationhasbeen“only”(!)afactorof2.5.Perhapsoneobservationisthatthepriceofwheat,relativetothepriceofcrudeoil,appearstobelowerinthe2000sthaninthe1980sand1990s.
Figure 8. Priceofwheatrelativetopriceofcrudeoilbecamelowerandremainedlowerafter2000,Canada
sUMMARy
Althoughemploymentchangeinagricultureisdrivenmorebytherateofadoptionoflargermachines,thechangeinpricesinagricultureisanindicatoroftheleewayorfinancialcapacityforfarmerstomakeinvestments.
Farm-gatepricesinManitobahavegenerallybeenincreasing,butafteranadjustmentforinflation,thepriceshavegenerallybeendecliningrelativetothepaceofinflation.
Forcommoditiesoutsidethesupply-managedsectorsofpoultrymeat,eggsanddairy,theyear-to-yearvariabilityofpricescanvaryfrom+20%to-20%
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(andthehogpricevariabilityhasbeenatleasttwiceaslarge).
Acomparisonofoverallfarmoutputpricesandanoverallfarminputpricesshowedadeclineintheso-calledtermsoftradeintheearly2000s(i.e.inputpricesincreasedfasterthanoutputprices)buttherewasanincreaseinthetermsoftradeuptomid-2013.
Thepriceofhogsrelativetothepriceofbarleyshowsaflattrendoverthe1985to2013periodbutthefluctuationsintheratiowereoftenmorethan40%.
Thepriceofwheatrelativetothepriceofcrudeoilisnowless(althoughveryvariable)comparedtothecalculationforthe1980sandthe1990s.
Certainly,itisanadvantagetofarmersiftheir‘termsoftrade’aremovingintheirfavour(i.e.outputpricesincreasingfasterthaninputprices).Whenthecost-pricesqueezere-appears(i.e.inputpricesareincreasingfasterthanoutputprices),farmerneedtoincreaseyields(morebushelsperacre,morepoundsofporkmarketedpersow,etc.)and/ortheyneedtoreducecostsinordertostayinbusiness.
FURtHeR ReseARcH QUestions
• WhateffectdoestheexchangeratewiththeUnitedStatesandcornpriceshaveonagriculturalpricechange?
Funding for this project was provided by the Manitoba government.
6.Giventheconnectionbetweenthepriceofcrudeoilandthepriceoffertilizer,the2002to2013patterninFigure8isessentiallythesamepatternasthepatternfor2002to2013inFigure6.ThedatainFigure6arequarterlyaverages(i.e.3-monthaverages)whereasmonthlydataareshowninFigure8.
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Bollman, Ray D., & Ashton, W. Rural Development institute, Brandon University, Brandon, Manitoba, July, 2014. 6
AppenDix A sUppleMentARy cHARts: MAnitoBA FARM pRoDUct pRice inDex
Figure A1. ManitobaFarmProductPriceIndex,Allcommodities,relativetoCPI*
Figure A4. InDecember,2013,theALLCROPSFarmProductPriceIndexwasdown23%,comparedtothesamemonthinthepreviousyear
Figure A2. InDecember,2013,theManitobaFarmProductPriceIndex(acrossallcommodities)wasdown11%,comparedtothesamemonthinthepreviousyear
Figure A5. ManitobaFarmProductPriceIndex,GRAINS,relativetoCPI*
Figure A3. ManitobaFarmProductPriceIndex,ALLCROPS,relativetoCPI*
Figure A6. InDecember,2013,theGRAINSFarmProductPriceIndexwasdown32%,comparedtothesamemonthinthepreviousyear
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Figure A10. InDecember,2013,theVEGETABLES(exceptpotatoes)FarmProductPriceIndexwasdown8%,comparedtothesamemonthinthepreviousyear
Figure A7. ManitobaFarmProductPriceIndex,OILSEEDS,relativetoCPI*
Figure A11. ManitobaFarmProductPriceIndex,POTATOES,relativetoCPI*
Figure A8. InDecember,2013,theOILSEEDSFarmProductPriceIndexwasdown20%,comparedtothesamemonthinthepreviousyear
Figure A9. ManitobaFarmProductPriceIndex,VEGETABLES(exceptpotatoes),relativetoCPI*
Figure A12. InDecember,2013,thePOTATOESFarmProductPriceIndexwasthesame,comparedtothesamemonthinthepreviousyear
RuRal Development InstItute
Bollman, Ray D., & Ashton, W. Rural Development institute, Brandon University, Brandon, Manitoba, July, 2014. 8
Figure A13. ManitobaFarmProductPriceIndex,LIVESTOCK&ANIMALPRODUCTS,relativetoCPI*
Figure A14. InDecember,2013,theLIVESTOCK&ANIMALPRODUCTSFarmProductPriceIndexwasup5%,comparedtothesamemonthinthepreviousyear
Figure A18. InDecember,2013,theHOGFarmProductPriceIndexwasup2%,comparedtothesamemonthinthepreviousyear
Figure A16. InDecember,2013,theCATTLE&CALVESFarmProductPriceIndexwasup8%,comparedtothesamemonthinthepreviousyear
Figure A15. ManitobaFarmProductPriceIndex,CATTLE&CALVES,relativetoCPI*
Figure A17. ManitobaFarmProductPriceIndex,HOGS,relativetoCPI*
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Figure A19. ManitobaFarmProductPriceIndex,POULTRYMEAT,relativetoCPI*
Figure A20. InDecember,2013,thePOULTRYMEATFarmProductPriceIndexwasdown9%,comparedtothesamemonthinthepreviousyear
Figure A24. InDecember,2013,theDAIRYFarmProductPriceIndexwasunchanged,comparedtothesamemonthinthepreviousyear
Figure A22. InDecember,2013,theEGGSFarmProductPriceIndexwasdown2%,comparedtothesamemonthinthepreviousyear
Figure A21. ManitobaFarmProductPriceIndex,EGGS,relativetoCPI*
Figure A23. ManitobaFarmProductPriceIndex,DAIRY,relativetoCPI*
RuRal Development InstItute
Bollman, Ray D., & Ashton, W. Rural Development institute, Brandon University, Brandon, Manitoba, July, 2014. 10
AppenDix B: sUppleMentARy cHARts: pRices FoR cAlcUlAtion oF pRice RAtios FoR DiscUssion oF teRMs oF tRADe
Figure B1. Indexofpriceofwheat(2010=100)Canada
Figure B4. Priceofbarley(dollarpermetrictonne),Manitoba
Figure B2. Indexofpriceoffertilizer(2010=100)Canada
Figure B5. Indexofpriceofwheat(2010=100),Canada
Figure B3. Priceofhogs(dollarsperhundredweight),Manitoba
Figure B6. Indexofpriceofcrudeoil(2010=100),Canada