Food Prices and Trade Boom, Bust and Beyond by Wyatt Thompson and Patrick Westhoff Power Point Presentation for the International Agricultural Trade Research Consortium Analytic Symposium “Confronting Food Price Inflation: Implications for Agricultural Trade and Policies” June 22-23, 2009 Seattle, Washington Wyatt Thompson Patrick Westhoff FAPRI (www.fapri.missouri.edu) University of Missouri IATRC Seattle, June 22, 2009 Causes of boom and bust Contributing forces Focus on implications for outlook and trade Macroeconomic outlook and demand Biofuel policy and energy-agriculture links Jun 08: $7.08 Dec 08: $3.64 Jul 08: 0.9% Apr 09: -0.2% WHY PRICES ROSE Economic growth in Asia and elsewhere WHY PRICES FELL Financial crisis and world economic slowdown Source: Global Insight, January 2009. WHY PRICES ROSE Economic growth in Asia and elsewhere Higher petroleum prices WHY PRICES FELL Financial crisis and world economic slowdown Lower petroleum prices 160 7 140 6 120 5 100 4 80 3 60 2 40 1 20 0 0 Dollars per barrel Dollars per bushel 8 Corn Petroleum May Aug Nov Feb May Aug Nov Feb May 07 07 07 08 08 08 08 09 09 Note: Corn price is nearby futures price. Petroleum price is for West Texas Intermediate. Sources: USDA and EIA. WHY PRICES ROSE WHY PRICES FELL Economic growth in Asia and elsewhere Higher petroleum prices Rapid biofuel expansion Financial crisis and world economic slowdown Lower petroleum prices Slower biofuel growth 16 14 Billion gallons 12 10 Idle nameplate 8 Under construction 6 Operating 4 2 0 9/28/2007 9/25/2008 5/26/2009 Source: Renewable Fuels Association. Note: Idle nameplate capacity (1.7 billion gallons on 5/26/09) was not reported in 2007 or 2008. WHY PRICES ROSE WHY PRICES FELL Economic growth in Asia and elsewhere Higher petroleum prices Rapid biofuel expansion Reduced grain production in Europe, Australia Weaker dollar Policy response Speculation Financial crisis and world economic slowdown Lower petroleum prices Slower biofuel growth Sharp increase in global grain production in 2008 Stronger dollar Policy response Speculation WHY PRICES ROSE WHY PRICES FELL Economic growth in Asia and elsewhere Higher petroleum prices Rapid biofuel expansion Reduced grain production in Europe, Australia Weaker dollar Policy response Speculation Financial crisis and world economic slowdown Lower petroleum prices Slower biofuel growth Sharp increase in global grain production in 2008 Stronger dollar Policy response Speculation 2007 2008 2009 2010 US real GDP growth (%) 2.0 1.1 -3.7 1.4 US inflation rate (%) 2.9 3.8 -1.9 1.5 US unemployment (%) 4.6 5.8 9.2 10.2 Federal funds rate (%) 5.0 1.9 0.1 0.2 30-yr. mortgage rate (%) 6.3 6.0 4.9 5.0 WTI oil price ($/barrel) 72 100 38 48 Federal budget deficit (bil. $) 162 455 1,905 1,678 Current account deficit (bil. $) 731 672 395 571 Exchange rate index (2000=100) 77 73 82 78 Source: IHS Global Insight, March 2009 forecast. kg of selected grains per person 350 300 250 200 Other 150 Feed 100 50 0 60s 70s 80s 90s 00s 05/06 06/07 07/0808/0909/10 Sources: USDA’s PSD Online, May 2009; US Census population data, May 2009. Year (MY or CY) real wheat price world GDP change or trend per capital feed use of Wh, Rc, Ba, Cr per capita other use of Wh, RC, Ba, Cr per capita 1970s trend + 1.2% +1.7% +1.5% +1.1% 1980s trend - 3.9% +1.8% 0.0% +0.3% 1990s trend - 1.2% +1.5% - 0.7% -0.1% 2005 - 3.9% +2.1% -0.4% +1.0% 2006 +21.0% +2.8% -1.6% +1.5% 2007 +37.1% +2.5% -0.8% +1.9% 2008 + 9.6% +1.3% 0.3% +1.2% 2009 projections - 2.4% -0.7% -1.1% +1.2% Recent percent changes Sources & definitions: US average farm price of wheat (MY) from ERS Wheat Tables deflated by PPI all goods from St Louis Fed; world GDP from ERS macro tables divided by US Census world population; feed and food use of wheat, barley, and corn from FAS PSD view database. GDP per person, thousands of USD 0 10 20 30 40 average own-price elasticity 0 -0.1 -0.2 -0.3 -0.4 -0.5 -0.6 -0.7 -0.8 Argentina Brazil Canada China EU25 India Japan Mexico Estimate GDP per person, thousands of USD 0 10 20 30 40 average own-price elasticity 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 Argentina Brazil Canada China Indonesia Japan Malaysia Mexico Estimate GDP per person, thousands of USD 0 10 20 30 40 average own-price elasticity 0.0 -0.2 -0.4 -0.6 -0.8 -1.0 -1.2 -1.4 Argentina Brazil Canada China EU25 India Japan Mexico Estimate Income growth & elasticity Properties of demand Margins (Dawe and Maltsoglou; ERS) ▪ Relation to income? Urbanization versus integration? Quality (Yu and Abler) If from 2003 to 2030: “Basic” food is sum of grain calorie consumption Per capita Income: x1.6 developed (+1.8%/year) x3.4 developing (+4.5%/year) Nil in Sub-Saharan Africa Own-price basic food demand elasticity either 1. constant 2. decreasing with income Then at constant real prices … Market Elasticity changes with shares Small changes SSA income growth 2030 aggregate demand elasticity = -0.35 2003 2030 Aggregate basic food demand elasticity -0.34 -0.35 Implied price change for supply shock (-1% per person) 2.83% 2.75% Changes in quantities to accommodate negative production shock (-1% per person) Developed -0.25% -0.25% Developing -1.04% -1.01% Sub-Sah. Africa -1.39% -1.35% Own-price elasticities: Developed: -0.09-0.04 Developing: -0.37-0.25 SSA constant: -0.50 SSA income growth SSA elasticity: -0.43 2030 aggregate demand elasticity = -0.34 (Less elastic, higher share) 2003 2030 Aggregate basic food demand elasticity -0.34 -0.31 Implied price change for supply shock (-1% per person) 2.83% 3.12% Changes in quantities to accommodate negative production shock (-1% per person) Developed -0.25% -0.13% Developing -1.04% -0.76% Sub-Sah. Africa -1.39% -1.53% What sorts of income changes have we seen? WHEN WAS REAL GDP ONEHALF OF 2007 LEVEL? National Per capita US 1983 1971 Japan 1978 Developed RATIOS OF REAL PER CAPITA GDP TO UNITED STATES 1990 2007 US 1.00 1.00 1973 Japan 0.90 0.81 1980 1972 Developed 0.90 0.89 S.S. Afr. 1985 N.A. S.S. Afr. 0.01 0.01 Brazil 1983 1971 Brazil 0.14 0.13 India 1996 1992 India 0.01 0.02 China 2000 1999 China 0.02 0.05 Developing 1993 1987 Developing 0.04 0.05 Sources & definitions: Macroeconomic data from ERS; population data from US Census . Data start in 1969; “N.A.” indicates that the series did not double in this time period. GDP comparisons use market exchange rates. What sorts of income changes have we seen? Cross-effects? Demand for staples overall versus demand for individual staples ▪ Options depend on market integration? Livestock products non-basic ▪ But input feed is a use of staple grains US biofuel policy Renewable Fuel Standard (RFS) Source and notes: EISA 2007, biodiesel RFS assumed constant after 2012. Mandates overlap with conventional as remainder of overall mandate. higher own-price corn elasticity Average corn price (dollars per mt) RFS implies: lower own-price corn elasticity 200 180 160 140 120 100 80 60 40 20 0 <50 50-70 EISA No EISA 70-90 90-110 >110 Petroleum price ranges (dollars per barrel) Source: Thompson, Meyer, Westhoff. Energy Policy. Vol. 37 (2), 745-749. February, 2009. Rules affect trade Sugar-cane ethanol likely to be advanced Biodiesel from vegetable oils unsure (averaging?) Equivalence values Paperwork for all biofuels (prove land use) Rollover (20%) and deficits Waivers New legislative initiatives EuroChoices, June 2009 (http://www3.interscience.wiley.com/journal/122457318/issue) . FACTORS OF PRICE BOOM AND BUST MACRO, MANDATES, AND MARKETS Production shocks Economic growth & financial crisis US dollar value Petroleum prices Biofuels Policy Speculation Income growth affects market elasticity? Which way? How fast? Biofuel policy affects market elasticity? What setting? Policy details and changes? Email thompsonw@missouri.edu westhoffp@missouri.edu FAPRI-Missouri website www.fapri.missouri.edu