1

Food Commodity Prices:Past Developments and Future Prospects

Ron TrostleEconomic Research Service

U.S. Department of Agriculture

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USDA Outlook ForumFebruary 23, 2012

2

0

50

100

150

200

250

19

80

M1

19

82

M1

19

84

M1

19

86

M1

19

88

M1

19

90

M1

19

92

M1

19

94

M1

19

96

M1

19

98

M1

20

00

M1

20

02

M1

20

04

M1

20

06

M1

20

08

M1

20

10

M1

20

12

M1

Index: January 2002 = 100

Source: International Monetary Fund: International Financial Statistics

Food commodity prices since January 1980:Reversal of a 22-year downward trend

Down 1/3 in 22 years Doubled in 10 years

33

0

50

100

150

200

250

Jan 2002 Jan 2004 Jan 2006 Jan 2008 Jan 10 Jan 12

Index: January 2002 = 100

Source: International Monetary Fund, International Financial Statistics

Food-commodity prices since January 2002:an upward trend and two spikes

Up 130 %

Down 33 %

Up 60 %

June 2008

December2008

June2011

Down 15 %

44

0

50

100

150

200

250

300

350

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Food commodities

4 Crops

Index: January 2002 = 100

Source: USDA/ERS calculations based on IMF: International Financial Statistics

Price indices: Food commodities and 4 crops1

1Crops: index of IMF wheat, rice, corn, & soybean prices, weighted by trade shares.

5

0

50

100

150

200

250

300

350

Jan

-70

19

72

M1

19

74

M1

19

76

M1

19

78

M1

Jan

-80

19

82

M1

19

84

M1

19

86

M1

19

88

M1

Jan

-90

19

92

M1

19

94

M1

19

96

M1

19

98

M1

Jan

-00

20

02

M1

20

04

M1

20

06

M1

20

08

M1

Jan

-10

20

12

M1

Index: January 2002 = 100

Source: International Monetary Fund: International Financial Statistics, Jan 2012p

6 price spikes since 1970 Weighted average of 4 crops (wheat, soybeans, corn & rice) 1/

202%

226%

6

0

50

100

150

200

250

300

350

400

450

500

550

600

650

700

Jan 80 Jan 85 Jan 90 Jan 95 Jan 2000 Jan 05 Jan 10

Crude oilAll commoditiesFood commodities

Index: January 2002 = 100

Source: International Monetary Fund: International Financial Statistics

Non-food commodity prices have risen even more

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Factors contributing to higher food commodity prices Economy wide Ag sector

> Exchange rate (LT & ST)

> Oil price

> Economic growth

> Increasing population

> Cost of energy

> Weather production

> Stock-to-use ratio

> Exporters’ policy response

> Importers’ policy response

> Meat & dairy consumption

> Global biofuel production

> Productivity growth

> Natural resource constraints

Short-termdisruptions

Long-termtrends

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Long-term trends & short-term shocks contributed in different ways:

• Long-term trends in supply and demand have led to gradually tightening world markets since late 1990s• – and to upward trending prices since 2002.

The resulting reduced global stocks and stocks-to-use ratios set the stage for:

• Short-term shocks & disruptions to further restrict world food commodity supplies leading to policy responses that raised short term demand— • — and led to price spikes in 2007/08 and 2010/11.

Global supply and demand pushed up prices

9

0%

5%

10%

15%

20%

25%

30%

35%

1970/71 1975 1980 1985 1990 1995 2000 2005 2010/11

Stocks / Use

Total world grain & oilseeds1

Stocks-to-use ratio

Source: ERS calculations based on USDA WASDE and PS&D Database: Feb 2012

1 Oilseeds = soybeans + rapeseed + sunflowers

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• Developing country economic and population growth led to increased food demand

– Growing middle class, increased urbanization, diet diversification

• Slower growth in ag productivity• Depreciating U.S. dollar • Higher crude oil prices• Biofuel production: USA, EU, BRA, ARG, CAN, et.al.• Increased demand for biofuel feedstocks

• Above factors led to an upward trend in food commodity prices, but did not directly cause the price spikes

Evolution of long-term trends contributing to higher prices

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• Adverse weather reduced world crop production – and further reduced world stocks and stocks-to-use ratios• Sharp changes in macroeconomic factors

dollar dropped quickly – then recovered quickly Sharp spike in crude oil prices (up, then down)

• Some exporting countries restricted shipments (export quotas and export bans), further reducing importer’s access to food commodities

• Anxious importers facilitated consumption (lowered tariffs, raised food subsidies), and increased forward contracting of their import needs. These actions increased short-term demand.

Evolution of short term shocks that resulted in the price spikes (2007/08 & 2010/11)

12

0

50

100

150

200

250

300

350

2002 2004 2006 2008 2010 2012

Index: January 2002 = 100

Primary factors affecting crop prices1

14-crop monthly price index: Wheat, rice, corn, & soybean prices; based on IMF price and trade share data.

Economic & population growth, percap meat consumption

Weather

Large production.

World recession

Declining global stocks:use ratio

Biofuels

Increasingstock:use

ratio

WeatherCrude oil price, $ depreciation

Resurgentecon growth

Policies Policies

Expanded area.Good weather.Higher yields.

DecliningS:U ratio

13

150

200

250

300

350

May10

Jul10

Oct10

Jan11

Apr11

Jul11

Oct11

Jan12

Index: January 2002 = 100

Primary factors affecting crop prices1 (June 2010 – Jan 2012)

Strong LDC economic growth. Rising oil price. U.S. $ depreciates

Russiawheat

export ban

EU suspends barley & feed wheat

import levies

Importersaggressively

buying

Reductions in estimated global ending grain stocks

Argentina drought

China dryness

U.S. HRW drought

Canada & NW Europe:rain damages

wheat crop Aust. rain damages

wheat crop

Russia drought

E. Africa drought

Russia stops grain import

duty

U.S. cornyields drop

(high temps)

Mexico freeze

Argentine& Brazil drought

14-crop monthly price index: Wheat, rice, corn, & soybean prices; based on IMF price and trade share data.

Russia ends

export ban

U.S. $ appreciates

Favorable weather In Europe & FSU

Higher estimated global grain stocks

14

0

50

100

150

200

250

300

350

2002 2004 2006 2008 2010 2012

Food commodity price index3 Meats4 Crops

Index: January 2002 = 100

Source: International Monetary Fund: International Financial Statistics

Livestock prices have becomea significant factor 1/

1/ Meat: index of beef, pork & chicken prices; weighted by world consumption. Crops: index of wheat, rice, corn, & soybeans prices, weighted by trade shares.

1515

0

2

4

6

8

10

12

14

16

1980/81 1985 1990 1995 2000 2005 2010 2015 2020

Future prospects: Corn, wheat, rice, and soybean prices projected to remain historically high

$ per bushel (per cwt for rice)

Corn

Wheat

Soybeans

Source: USDA Agricultural Projections to 2021, February 2012.

Rice

Projections made November 2011

16

30

40

50

60

70

80

90

100

110

120

130

1990 1995 2000 2005 2010 2015 2020

$ per hundredweight, nominal, U.S. markets

Beef cattle: Steers, 5-area

Broilers: 12-city market price

Hogs: National base

Source: USDA Agricultural Projections to 2021, February 2012.

Projections made November 2011

Future prospects: Livestock prices

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Near-term factorsthat may influence future ag prices

• Weather• Stock levels (Supply & demand balances; stocks

policies; self-sufficiency policies)• Policy changes by food commodity exporters &

importers• Exchange rates (Esp. for commodities

denominated in dollars)• Energy & other non ag prices / Ag production costs• Extent of global economic recovery• Import demand: Who will be the importers? (Role

of foreign exchange reserves)

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Longer-term factorsexpected to influence future ag prices

• Biofuels production (Influence of oil prices; Role of policies)

• Food consumption patterns (Continued income-driven increase in per capita meat consumption?)

• Technology advancements– Continued slowing of growth in productivity? – R&D investments. – Role/acceptance of GMO products.

• Natural resource constraints– Land: Ability to expand cultivated area; productive

capacity of new land– Water: Ability to continue rate of growth in irrigated areas

• Climate change– Impact of temperature, precip, and seasonal changes in

cropping patterns & productivity. Variability.

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Conclusions

Expect prices to fall from recent peak, but to remain historically high• Global economic recovery and renewed growth in demand

for crops, animal products, and energy• Some additional growth in global biofuels output• Slower productivity growth• Declining value of the dollar

World ag production can keep pace with demand• In short-run: Production can respond to higher prices within

4 months to 2 years – if the weather cooperates. • Over next 10 years, global production growth rates

projected to be sufficient• Longer-term brings increased uncertainty?

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Why Have Food Commodity Prices Risen Again? http://www.ers.usda.gov/publications/WRS1103/

USDA Agricultural Projections to 2021http://www.ers.usda.gov/publications/oce121/

Contact: Ron Trostle:

rtrostle@ers.usda.gov

202-694-5280

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