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