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COMMODITY MARKETS INTERRELATIONSHIPS AND THE PRICE SPIKE OF 2007/2008.Lectures 5 & 6 AHEED Course “International Agricultural Trade and Policy”
Taught by Alex F. McCalla, Professor Emeritus, UC Davis.
March 31 ,2010, University of Tirana, Albania
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Why is this a topic of interest? Because of What has Happened to Ag.
Commodity Prices over the Past 3 Years; First They Sky Rocketed Up; But then they came down and are bouncing
around above where they started; Because of Food Price Inflation;
Food Riots in 60+ Poor Countries; But it didn’t just happen in ag markets – it was
more wide spread. Are all primary markets tied together?
Let’s Look at What Happened and Then Will Tell You Where Will Go From There
Show a series of 6 slides that appear to be alike
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Wheat: Near Future- Aug 2006 – Mar. 8, 2010(CBOT)
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Corn: Near Future –Aug. 2006– Mar. 8, 2010 (CBOT)
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Rough Rice: Near Future-Aug 2006- Mar. 8, 2010 (CBOT)
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Soybeans: Near Aug. 2006 – Mar. 8, 2010 (CBOT)
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Coffee: Near Future – Aug. 2006- Mar. 8, 2010 (CBOT)
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Light Crude Oil-Near Future Aug. 2006 –Mar. 8, 2010 CBOT
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Let’s Place Grain Prices in Historical Context
• Since 1870’s LR real grain prices have been declining except for periodic price spikes.
• What do the dates 1910-14, 1972-74 and 1995-96 have in common?
• They were price spikes after which real prices returned to the previous downward trend.
• Therefore one basic question is- when this spike was over would the LR trend revert or be higher?
• Will Show You 4 Pictures
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Index of real corn and wheat prices, 1866-2008
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50
100
150
200
250
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66
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76
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86
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96
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16
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36
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46
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66
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76
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86
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=1
00
Corn Wheat
Sources: Carter, et al. editors (2006), USDA NASS Agricultural Prices, USDA WASDE and BLS “CPI- All Urban Consumers. Quoted in Sumner (2008)
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Real U.S. Prices of Maize, Soybeans, and Wheat, 1924-200811
Index of Real Corn and Wheat Prices and Long term Trend -1948-2008 (from Sumner 2008)
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Declining Real Prices of Grains and Soybeans (2000 US$) 1960-2008 USDA deflated prices from Meyers & Meyer, Dec 200813
Short Answer the Question about LT prices–Nobody Knows for Sure- But We Can Identify Critical Factors
Outline Of Where We Are Going: What Prices and Markets are we talking about?
Will Set Global Context; but Will Focus on Basic Food Products esp Grains;
A Look at Market structure Is There a Consensus on What Caused the Price
Spike? No What are the Candidates?
Is There a Consensus on Where Prices Will Go in the Future? No- What are the Possibilities?
Why is it so Complicated and When Will We Know What Will be the Future of Food Prices?
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What Prices and Markets are we talking about?
Agricultural Products Can Be Grouped into 3 Parts Livestock & Livestock Products-
Milk & Milk Products- butter, cheese, powder; Meat – beef, pork, sheep, poultry; Fiber- wool
Annual/ Field Crops- Fiber- cotton, flax; Cereals- Big 3 rice, wheat, maize—also coarse grains Vegetables; Oilseeds- soya, canola
Perennial Crops- Oil Trees- palm, coconut Beverages- coffee, tea, cocoa Fruits
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What Prices and Markets are we talking about? -2
Markets However Are Not All The Same- They differ by what share of global
production enters international markets –share traded;
If Small Share is Traded, Markets are “thin” Whether Major Producers are the Same as
Major Traders? Degree of Concentration: Among Exporters?
Among Importers? The Nature of Trade and Production Policies
Applied by Major Players
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WORLD COMMODITY MARKETS -- A TAXONOMY
LIVESTOCK & LIVESTOCK PRODUCTS CROPSANNUAL PERENNIAL
DAIRY MEAT FIBER FIBERS CEREALS VEGETABLES OILSEEDS OIL TREES BEVERAGES FRUITS
BUTTER BEEF WOOL COTTON WHEAT SOYA PALM COFFEE FRESHPOWDER PORK FLAX RICE CANOLA COCONUT TEA PROCESSEDCHEESE POULTRY CORN SAFFLOWER COCOA
COARSEWORLD DAIRY WORLD WORLD FIBER GRAINS WORLD VEGETABLE WORLD BEVERAGEMARKET MEAT MARKET WORLD OIL MARKET MARKETS
MARKETS GRAINSMARKETS
vegetables fruit< 5 % < 5%
Palm 74%< 5 % 10% > 50 % 12% WHEAT 18-20% Soya 36% Coffee 73%
wool cotton RICE 6% Canola 18% Tea 50%% of Production Traded: MAIZE 14% Cocoa 77%> 50%20 - 50%
10 - 20 %< 6 %
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What Prices and Markets are we talking about? -3 Share Traded-
high for tropical products – palm oil 74%,coffee 71%, cocoa 77%,tea 50% -also about 50% for wool;
20 – 50 % - vegetable oils- soy & canola; 10 – 20% - wheat(18), cotton (12), meat (10); < 10 % -rice (7), milk products, fresh
vegetables and fruits < 5%; Not traded –roots and tubers, pulses
Where Share is High, Big Producers are Big Traders too- not Necessarily True in Thinner Markets
Therefore Market Structure Matters.
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Focus Will be on Grains & Oilseeds
Not Time to Talk of All Markets so Will Focus on Grains & Oilseeds because are widely traded and are critical to global food supply.
Specifically on Wheat, Rice, Maize/corn and Oilseeds;
Will be Looking at Market Structure and International Price Behavior;
Will Make Occasional Comparison to Coffee Market
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World Market Structure – Milled Rice
China 137.0 India 84.5 Indonesia 38.8 Bangladesh 30.0 Vietnam
34.4=74% USA 7.0 WORLD 436.3
Thailand 10.0 Vietnam 5.5 USA 3.1 Pakistan 3.8 India 2.0 =79%(top 5 importers 28.1%) WORLD 30.8 7.0% of Pdn Traded
Major Producers mmt 2009/10
Major Exporters mmt 2009/10
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World Market Structure-Maize/Corn
USA 334.1 China 155.0 Brazil 51.0 EU 55.8 Mexico
22.0=77% WORLD 797.8
USA 50.0 Argentina 9.5 Brazil 9.0 Ukraine 5.0 S. Africa 2.5= 89%(top 5 importers 50%) WORLD 85.0
%10.7 of pdn traded
Major Producers mmt 2009/10
Major Exporters mmt 2009/10
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World Market Structure -Wheat
EU 138.2 China 114.5 India 80.6 Russia 61.7 USA 60.3 Canada 26.5 =
71% Pakistan 24.0 Australia 22.5
WORLD 677.4
USA 22.5 Canada 18.5 EU 19.0 Russia 18.0 Australia 15.0 =75%(top 5 importers 26%) WORLD 124.3
18.4% of Pdn Traded
Major Producers MMT-2009/10
Major Exporters MMT- 2009/10
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World Market Structure- Soybeans
USA 91.5 Brazil 66.0 Argentina 53.0 China 14.5 India
8.8=92% WORLD 255.0
USA 38.1 Brazil 25.3 Argentina 7.8 Paraquay 5.3 Canada 2.0=96% top 5 importers 82%
(China 53% of imp) WORLD 81.432% of Pdn is traded
Major Producers mmt 2009/10
Major Exporters mmt 2009/10
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For Comparison-Coffee Market
Brazil 43.5 Vietnam 17.5 Colombia 9.0 Indonesia 6.8 Ethiopia
4.3=65% WORLD 125.2
Brazil 24.1 Vietnam 16.7 Colombia 8.3 Indonesia 6.8 Guatemala 3.7=67%(top 5 Importers 86%)(74 % by EU & US) WORLD 88.771% of pdn is traded
Major Producers- m. 60kg bags 2009/10
Green Coffee Beans
Major Exporters m 60kg bags 2009/10Green Coffee Beans
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What Should We Learn From Market Structure ?
1. Markets are very different- Rice- very thin market (7% traded);smallest top 5 producer
is the only one in top 5 traders; exporters & producers highly concentrated, importers not so; two countries produce ½ of world’s rice;
Corn- only 11% traded(thin),largest producer is also largest trader(US);production and trade highly concentrated –pdn top 2=61%-trade top 2=70%.
Wheat- higher share traded; concentration in pdn & trade lower; importer concentration low and same as rice.
Soybeans-about 1/3 of pdn traded; production and exports highly concentrated in same three countries; importer concentration also high.
Coffee-71% of production is traded therefore top producers are also top exporters; 2 importers import 74% of coffee imports; is a highly concentrated market with trade dominating.
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What Should We Learn From Market Structure ? -2
The size of larger producers and traders matters because big players can influence world prices by both domestic and trade policies
If big producers and big traders are the same and the market is concentrated would tend to be more stable unless there was a price war;
Thin markets where big producers are not big traders means changes in domestic policy can have big consequences for world markets. These markets are inherently more unstable;
Individual markets are not necessarily homogenous-japonica, indica and basmati are all called rice but are very different; soft white winter wheat is not a substitute for hard red spring wheat.
Yellow maize is predominantly animal feed ,white maize is human food, underlining differing demands for same commodity
The bottom line is that one might expect these markets to behave very differently.
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But Markets are Linked in Many Ways
Yet in a broader sense individual agricultural commodity markets are linked in many ways; Substitution in consumption: wheat for rice and
maize; wheat for animal feed if feed grain prices rise relative to wheat prices but it is asymmetrical; among vegetable oils and meals.
Competition/substitution in production: along a continuum there is substitution between corn and soybeans, corn and wheat, canola, wheat and coarse grains-etc.etc.
Joint Products –vegetable oil & meal enter separate mkts
Demand for all commodities is driven by population and income growth.
And domestic and trade policies often treat groups of commodities as one.
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Commodity Markets in the Broader Context
Agricultural commodity markets are part of a broader set of primary products markets-petroleum, metals, minerals and forest products. These all may be influenced exchange rate changes, inflation, recession etc
They are also real assets whose value as a store of wealth changes with the impacts of inflation/deflation on monetary assets. Ag Commodities have become part of index and hedge funds.
Finally globalization with closer and faster linkages between real and financial markets world wide means agricultural commodity markets exist in a complex maze of inter-related and often conflicting forces.
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What Caused the Spike? There are at least 4 competing stories
floating around: Macro story-It is a commodity spike –oil, minerals
(including gold), ag commodities prices skyrocket together and feel together- therefore must be macro explanation; Declining $US pushes up global commodity P.’s which
are denominated in $- When US$ appreciated in last ½ of 2008 commodity prices collapsed. Low real interest rates reduced costs of storage therefore investors shift into real commodities.
Speculator story- in periods of uncertainty/decline investors shift to real assets –rapid rise in hedge and particularly index fund investments in commodities, fund investors are very long in commodity markets. But as futures and hedge fund contracts expired investors sold heavily driving prices.This might help explain the magnitude of the volatility of the spike but not sustained price increases
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Changes in Futures Market Players
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Source: Corn Futures Net Positions from CFCT (COT) reports; Quoted in Carter et al. 2008
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What Caused the Spike?-2
– Shocks story- three years of drought in Australia, poor crops in Europe, Canada and US in 2006-07 drew down stocks below critical levels. The explosion of Biofuels demand coupled with reduced supply caused big Price increases.
Structural Change/Shock story- this is the one most ag commentators had focused on. Fast income growth India, China etc driving demand growth faster and supply growth slowing.
Common to first three is –P increases temp. then back to normal. Fourth involved permanent changes and was the popular story among ag. Economists-but prices came back down
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Structural Change plus Shocks
An Amazing # of analysts who identified a similar set of causes, differed only on relative impacts.
IFPRI, WB, IMF, USDA/ERS, FAO, OECD, Govt. of Australia, WSJ, NY Times, ad infinitum all saw structural change in S & D which was pushing ag. Commodity prices up.
When perturbed by shocks or rapid shifts in parameters, price increases are magnified.
Implication --real prices after the blip should be permanently higher.
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Structural Change plus Shocks-2
IFPRI was representative of the great consistency among Agricultural Economic analysts:
Demand side factors: Rapid growth & rising incomes in emerging
developing countries e.g. India and China had increased the rate of demand expansion;
Bio-fuel demand came on fast and hard pushing the D curve out even faster;
Urbanization and globally rising incomes means demand for more diverse and complex mix of food.
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Shares in Growth of Grain Consumption 2005/06-2007/08 from Meyers & Meyer,2008
Source: Calculated from PSD database, USDA.
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Source: Global Subsidies Source: Global Subsidies Initiative 2007Initiative 2007
BioFuels BoomEthanol production 1975 - 2007 Ethanol production 1975 - 2007 (billion liters)(billion liters)
BiodieselBiodiesel production production 1991 - 2007 (billion liters)1991 - 2007 (billion liters)
EthanolEthanol > 90% of > 90% of biofuel production; biofuel production; Brazil and US Brazil and US dominate the marketdominate the market
Biodiesel:Biodiesel: EU is the EU is the largest producer and largest producer and
consumerconsumer
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Structural Change plus Shocks-3
Supply Side factors- Rate of increase in supply has slowed in last
decade because of slower productivity growth and increased competition for land and water;
Rising petroleum prices have irreversibly increased cost of production.
The result was that global consumption exceeded global production in 6 of the last 8 years.
Global stocks have fallen to the lowest level since early 1970’s.
IFPRI has an interesting set of slides on these factors.
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0
1
2
3
4
5
6
1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003
Ave
rage
ann
ual g
row
th r
ate
(%)
maize
rice
wheat
Productivity growth is declining
Source: World Development Report 2008.Source: World Development Report 2008.37
DAP, US Gulf
World Fertilizer Prices, 2000-2008, US$/mt
Urea, Arab Gulf, prilledMOP, Vancouver
Higher input costs: Global fertilizer prices tripled in 2007
Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
100
200
300
400
500
600
700
800
0
Source: IFDC 2008.Source: IFDC 2008.
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World Grain Ending Stocks from Meyrs and Meyer , 2008
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Which Causes Were More Important? Despite all the “analysis” there have been
precious few empirical estimates as how much each cause contributed. Re Biofuel impacts- wide range: IFPRI -30% of
past increases , 18-25% more by 2020 if demand continues to increase; Andy Stoeckel (Australia) argues diversion of 38% of US corn crop to ethanol has significant price impact (no number) but US Ag Sec says ethanol demand only contributed 3% to overall 42% anticipated food price increase.
Re Increased costs of petroleum based inputs-+ 15% says World Bank.
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Which Causes Were More Important? 2
Decreased investment in Agricultural R&D and general neglect of agricultural development over the past two decades no doubt slowed up productivity growth.
Stock to use ratios falling below 0.15 have in the past been associated with price spikes e.g. 72-74.
The consensus appears to be that entry of new players such as index funds had little long run effect.
• Without question bad policies exacerbated the price spike- export embargoes, increased export taxes and attempting to build stocks.
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The Stocks / Shock Story: The Current Favorite The Fact that Grain Consumption Exceeded Production 6
out of 8 years after 2000 drew down stocks sharply to levels below 1972-73.
At a critical point as stocks fall, players in the market change behavior and hold or acquire stocks, the result, given highly inelastic demand in the SR, drives prices up rapidly ( Brian Wright). This may explain the run up but the down?
• But question was what would happen to prices after the bubble broke?
• Most projections forecast higher Real Prices after the peak- a sampling here- OECD and FAPRI.
• IFPRI and the World Bank had similar projections.
• But Current prices are bouncing around their projections
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Expected world commodity prices for the coming decade- OECD
Source: OECD-FAO (2008).
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OECD-FAO Projections: Wheat
OECD-FAO Agricultural Outlook, 2008-2017
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FAPRI Projections of US Crop Prices from JanPrices from January 2008
Actual wheat prices were 2008 US$ 12.4 per Bushel in March and less than US$ 5 per Bushel in early Dec. 2008
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Consequences: Depends On-
Before looking at future let’s look at impacts of price spike. If Country -depends on:
- exporter or importer; - high or low income; - degree of dependence on world markets; - degree of P pass through to Prod &/or Con. - worst case- low income, high dependency, high grain
consumption - North Africa and Middle East.
If Person -depends on: Consumer or producer ? Of grains or livestock? High pass thru -bad for consumers, good for grain
producers Low pass thru –bad for government fiscal and foreign Ex
budgets
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Consequences: An Example
High Income Low IncomeBase Case:Income/yr $40,000 $800% spent on food $4000(10%) $400 (50%)Staples as% of food 20%-$800 70%-$28050 % inc. in staple p:New staples cost $1200 $420New Total food costs $4400 $540
New % Spent on Food 11% 67.5%
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Impacts on Food Prices& Inflation
Therefore impacts on food prices depends on: Share of commodity price in final product- e.g. wheat
cost < 10% cost of bread, polished rice =50%; Whether commodity is an input into another food
product- grain into dairy and meat production; Share of income spent on food; if high food price
increases reduce real income- in example the poor consumer has $140 less to spend on other things;
Re Inflation –share of food & ag industry in GDP
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What Were the Consequences
The consequences for poor net importing developing countries were severe. Rising foreign exchange costs for imports,
particularly bad if not an oil exporter; e.g Tunisia, Jordan,Yemen –respectively import 53, 65 & 76% of their cereals;
Rising fiscal costs of domestic feeding programs- for Tunisia estimated increase $200 Mil. to $1 Bil.;
Countries pushing back towards inefficient self-sufficiency because don’t trust world markets;
World Bank estimates pushed 100 mil people into poverty;
Created political and social unrest.Plus side if prices passed to poor farmers, good
for food security and poverty reduction.
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Why Did The Bubble Break and What Has Happened Since? Wheat- 2008/09 record crop 683 mmt +12%:
Record yields and + 3% Acreage; 09/10 - 667.4 mmt
Stocks up from record low of119.4mmt to 164.0mmt Expected to 196mmt by end of 09/10
Rice- 2008/09 record crop 447 mmt ,09/10 down to 436mmt, stocks rose 2% and remain stable.
Coarse grains -3% increase in production in 08/09
EU wheat production up 30mmt, coarse grain production up 24 mmt; both fell back in 09/10
There has been a supply response in all major producers.
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Why Did The Bubble Break and What Has Happened Since? -2
Most countries have reversed restrictive policies –including the worst offenders-India & Egypt;
WTO trade talks revived but still unfinished; Renewed rhetoric about turning around decline in
investment in ag. research and rural development- e.g. double CGIAR budget-;
But will it translate into action now prices down; Growing recognition of potential impact of global
warming –mainly negative for developing countries
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Why Did The Bubble Break and What Has Happened Since?- 3
Over Shadowed by Global Economic Collapse: Oil prices have plunged to below $40 but have
bounced back to around $80/barrel; Severe contraction in demand for all products but
food less as is basic; people feel worse off; Rising lay-offs and unemployment globally; Collapse of credit and housing markets; Should reduce rate of growth in demand –
upwards price pressure less; Reduces incentives for supply response- opposite
effect.
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So What Might Happen Next
But Basic Structural Parameters are Still in Place; World population will rise to near 9 bil in 2050; Incomes still rising rapidly in large middle income
developing countries like India, China and Brazil-increased demands for higher value foods –e.g.meat;
World markets will continue to be price sensitive to cumulative shocks which will occur randomly;
Growing urbanization with alter needed food supply chains and increase competition for water and land.
Therefore repeat scenarios will surely occur but when??
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So What Can We Say?
How much will be next year’s supply response, now that prices have crashed;
Stocks will rebuild but probably slowly; Global warming portends increased frequency
and magnitude of negative weather events; Therefore will be perhaps larger and more
frequent cumulative production dips as in 2005/07;
The best we can say about future markets is that there likely to be greater annual instability and a possibility of increased frequency of spikes.
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What Others Are Saying. Willi Meyers and Seth Meyer U of Missouri;
“…the two most important drivers of this near-term outlook are the level of petroleum price and supply response that has been generated by high prices and favorable weather so far this year.”
Ulrich Koester University of Kiel, Germany: “Uncertainty about future prices is extremely
high; It is likely that prices in the short and medium
term will not be significantly higher than US$ 150 to 200 per MT in real terms and likely lower than 2006 in national currencies;
Long-term price projection are very uncertain, however, unlikely that prices will be above US$ 200MT if prices of oil developed as projected.”
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Colin Carters Conclusions
• Export Food commodity prices largely driven by ethanol demand, supply problems, interest rates, & exchange rates.
controls & speculation were more of a “reaction” than a “cause” of high prices.
Now we are heading into a period of “deglobalization” & protectionism.
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FAO Earlier
“While attention is distracted by the international financial crisis & the drop in grain prices has taken the urgency off .., a new, more severe, food crisis is looming..” “We don't have stocks, no security against production disruptions…It may be next season or ten years down the line, but (a new food crisis) will happen... & it will be much worse,"
United Nation's, FAO. Nov. ‘08
Does the Food Crisis Still Loom?Does the Food Crisis Still Loom?
What Others Are Saying- FAO FAO messages 1 In June 2008, the prices of basic foods on international markets reached
their highest levels for 30 years, threatening the food security of the poor worldwide. In 2007 and 2008, mainly because of high food prices, an additional 115 million people were pushed into chronic hunger.
2 Since then, prices have declined, driven lower by the financial crisis, emerging world recession, falling oil prices and an appreciating US dollar. However, they are still high by recent historical standards and the structural problems underlying the vulnerability of developing countries to international price increases remain.
3 Many factors contributed to the dramatic increase in world food prices, but new biofuel demands and record oil prices were the major drivers, leading some analysts to ask whether new linkages between food and energy markets have broken the long-run downward trend in real agricultural commodity prices.
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What Others Are Saying- FAO 2 4 High product prices did not prove to be an opportunity for farmers
in developing countries. They did not seize that opportunity to invest and raise their production and productivity because the high prices did not filter through to them, their access to affordable inputs was limited, their available technology was weak, necessary infrastructure and institutions were lacking and some policy responses (such as price controls and tariff reductions) actually reduced incentives.
5 The need to protect consumers from higher food prices must be balanced against maintaining incentives for productivity-raising investment and supply response. Policy measures need to be targeted, non-distortionary and positive towards agricultural investment.
6 Many developing countries need international support to overcome budgetary constraints and to identify and implement appropriate policies. Developed countries also need to consider the impacts of their agriculture, trade and energy policies on international food prices and availability.
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