price outlook and volatility in global grain markets: policies and other factors by william h....
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Price outlook and volatility in global grain markets: Policies and other factors
byWilliam H. Meyers
Howard Cowden Professor of Agricultural and Applied Economics
and Interim Director, Division of Applied Social SciencesAt University of Missouri
IVth Astana Economic ForumAstana, Kazakhstan
3 May 2011
AgendaWhat is going on? This is not like 2008Recent evidence
What is ahead for grain markets? FAPRI 2010 - 2020 Baseline analysis
USDA comparisonsVolatile and uncertain future
Recent evidenceFinancial crisis had very diverse impacts
Commodity prices very volatile and uncertain
Impacts of weather and government policies
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World
European Union
Central and eastern Europe
Commonwealth of Independent States
Kazakhstan
USDA Price Range $5.50 – 5.70/buBasis -0.73
Weekly Corn Prices
USDA Price Range $5.20 - $5.60/buBasis -0.41
West Texas Oil Avg for 2009: $61.65
West Texas Oil Avg for 2007: $72.32
West Texas Oil Avg for 2008 : $ 99.57
Projected U.S. Energy Information Admin Average for 2011: $106.38Projected U.S. Energy Information Admin Average for 2012: $113.50
West Texas Oil Avg for 2010: $79.40
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Energy
Food
Metals and minerals
Wheat production and exports: Russia and Ukraine
Source: USDA, PSD Online, April 2011
US corn yield estimates and producer corn prices, 2010-11
Source: USDA “WASDE,” various editions Source: USDA “Agricultural Prices,” various editions
Pdn. Wheat -35mmt, Coarse grain -24 Sply. Wheat – 4 mmt Coarse grain -23
Why prices are rising
Reduced wheat production mainly in Russia, Kazakhstan, Ukraine and EU
Policy intervention by Russia, Ukraine, also importers
Reduced US maize yieldsBut grain stocks are higher
than in 2007/08Biofuel feedstock growthOther demand growth
Apr. production estimates
PRODUCTIONWorld wheat -35.6 mmtWorld coarse grains -24.2 mmtWorld rice +10.3 mmtWorld total grain -49.5 mmtSUPPLY=PDN + StocksWorld wheat supply -4.4 mmtWorld coarse grains -22.9 mmtWorld rice + 12.7 mmtWorld total grain -14.6mmt
Policies and market volatilityGovernment policies can affect level,
volatility of agricultural market pricesIn 2007/08 and again in 2010/11, countries
restricted exports and allowed more importsThis helped stabilize domestic marketsBut increased volatility in world markets
Biofuel policiesIncrease demand for corn, vegetable oil,
etc.Affect linkage between ag. & energy
markets
AgendaWhat is going on? This is not like 2008Recent evidence
What is ahead for grain markets? FAPRI 2010 - 2020 Baseline analysis
USDA comparisonsVolatile and uncertain future
Baseline Assumptions
Agricultural Policies
Macroeconomic Variables
Technology
Weather
Macro outlook and Policy in the Baseline
GDP growth, exchange rates, inflation, etc come from January 2011 IHS Global Insight forecasts
Baseline assumes current policies remain in place, including expiration of US biofuel subsidies/duties
Changes that may come as result of WTO agreement or new legislation is a scenario of change from this baseline
Technology and weather in the Baseline
The baseline assumes average rates of technological change.
Among other things, this means that crop yields increase in line with historical trends and prices.
We also have to make assumptions for the productivity of livestock.
Normal weather is assumed BUT historical yield variations are used for sensitivity analysis
Real GDP Growth Rates
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2001 2003 2005 2007 2009 2011 2013 2015 2017 2019
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World Developing Developed
World Grain Prices, 2011 Estimates
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Corn, U.S. FOB Gulf Wheat, U.S. FOB Gulf Soybeans, CIF Rotterdam
Main Factors in Price StrengthStrong economic recovery in Emerging
Market EconomiesRising demand for grains, oilseeds, fiber
Slow pace of area and yield growthRising energy, processing, and transport
costsIncreased sugar, grain and oilseed for
biofuelTrade interventions slow market response
AgendaWhat is going on? This is not like 2008Recent evidence
What is ahead for grain markets? FAPRI 2010 - 2020 Baseline analysis
USDA comparisonsVolatile and uncertain future
FAPRI 2011 Estimates of FOB Gulf wheat prices, stochastic range
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Dollars per mt
Wheat 90th pctile Wheat, Stochastic mean Wheat Apr 28 spot Wheat 10th pctile
FAPRI 2011 Estimates of FOB Gulf maize prices, stochastic range
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Corn, U.S. FOB Gulf Corn 90th pcttile Corn 10th pcttile Corn Apr 28 spot
Volatile and uncertain future1. Road to economic recovery?2. Timing and size of oil price volatility?3. How will exchange rates move?4. Will biofuel policies change?5. Will trade interventions continue? 6. Climate change and weather
impacts?7. Wider range of possible outcomes
Try to discern the music Many years ago Professor Jim Houck told his
students in Price Analysis class an analogy between prices and radio static.
“Sometimes”, he said, “the static is so loud that you cannot hear the music”.
Our challenge is to understand the music playing behind the daily static in the market
Challenge and Opportunity1. Challenge - how to provide safety net
measures for the most vulnerable populations
2. Opportunity - higher prices can increase availability and access
3. Devise policy strategies that are sustainable in an unpredictable environment
Policy prioritiesShort run
Avoid polices that conflict with long term development
Prudent use of limited budget resourcesContinue and accelerate reformsComplete the Doha Round of trade
negotiations and restore trust in the international trading system
Food security safety nets and early warning
Policy priorities Long run (but start yesterday)
Economic growth reduces poverty and food insecurity
Investment (public and private) in agric. development AND R&D for production and post harvest
Improve market functioning to facilitate price transmission and integration with global markets
Enhance rural development and rural infrastructure investments
Invest in social protection or safety net measures to protect vulnerable populations
Thank you!