agricultural price july 2014 change

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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

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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*

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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