View From 10,000 Feet?
Well, Let’s Just Talk Ag Prices!!!
(Kevin Bernhardt
UW-Extension and Center for Dairy Profitability)
October 2008
Half Hour to Solve the Future of
Ag Prices!
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2
July 2008
October 2008
The Future with respect to Prices
The Future with respect to Farm
Management and Marketing
© 2008
Farm & Risk Management Team
It’s July 2008
Dec Corn @ $7.75+
Dec Milk @ $21
Nov SB @ $16 +
Dec Beef @ $115
3
4
Must be a New Era
(Nominal Corn Prices)
3.5
3
2.5
2
1.5
1
0.5
0
1860
1880
Source: USDA
1900
1920
1940
1960
1980
2000
© 2008
Farm & Risk Management Team
Prices – A Perfect Storm
© 2008
Farm & Risk Management Team
Supply
•
Growth Rate in Productivity slowed
–
–
–
–
Impact on
Price
R & D funding down
Non-farm uses for land
Constraints on factors of production (water)
Climate Change??
© 2008
Farm & Risk Management Team
World Wheat and Course Grain
Ending Stocks
Ending Stocks
19
79
/
19 80
82
/
19 83
85
/
19 86
88
/
19 89
91
/
19 92
94
/
19 95
97
/
20 98
00
/
20 01
03
/
20 04
06
/0
7
500
450
400
350
300
250
200
150
100
50
0
© 2008
Farm & Risk Management Team
Supply
•
Impact on
Price
Weather Shocks
–
–
2006
Historically, two
 Russia and Ukraine
successive years of
 Australia
lower global production
 South Africa
occurs about once per
2007
decade.
 SE Europe


Russia and Ukraine
Turkey, Australia, Argentina, etc.
© 2008
Farm & Risk Management Team
Supply
•
Change in stock holding policies
–
80’s and 90’s were an era of:



–
Impact on
Price
Surpluses
Why go through the
Stability expense of holding stocks?
Free Trade
Not a big impact, but it exacerbates impact of
any short falls
© 2008
Farm & Risk Management Team
Supply
•
Higher Oil Prices
–
–
Direct Affect: Higher energy costs
for transportation, drying, etc.
Indirect: Higher fertilizer costs and
fuel surcharges on other inputs
Likely have
not felt the
full impact of
this yet.
Impact on
Price
© 2008
Farm & Risk Management Team
Demand
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Population
–
Growth rate is slowing, but in absolute number
of mouths to feed the world is growing at about
75 million per year


That’s ¼ of US population per year
That’s almost 1 billion more people in next 12 years
© 2008
Farm & Risk Management Team
Where is Population Growth
7000
6000
5000
World
4000
Low & middle income
3000
East Asia & Pacific
2000
1000
0
2006
Source: World Bank Group:
© 2008
Farm & Risk Management Team
Where’s the Population
World
China
India
Indonesia
Bangladesh
Nigeria
Pop. (bil)
6.667
1.330
1.148
.238
.154
.138
% of World
Rank
19.9
17.2
1
2
3.6
2.3
2.1
6
9
11
45.1
EU
.491
U.S.
.303
Source: U.S. Bureau of Census
7.4
4.5
4
5
© 2008
Farm & Risk Management Team
Demand
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Income
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–
Growing at a faster rate
Growing especially in middle income countries
and in Asia
© 2008
Farm & Risk Management Team
Gross National Income per Capita
8000
7000
6000
5000
4000
World
3000
2000
1000
0
1962 1967 1972 1977 1982 1987 1992 1997 2002
Source: World Bank Group:
© 2008
Farm & Risk Management Team
Gross National Income per Capita
40000
35000
30000
25000
High Income people don’t
eat more food when they get
more money – they buy
boats!
20000
High income
15000
10000
5000
0
1962 1968 1974 1980 1986 1992 1998 2004
Source: World Bank Group:
© 2008
Farm & Risk Management Team
Gross National Income per Capita
2000
1800
1600
1400
With more income this
group buys food and often
more animal protein.
1200
1000
800
Low & middle income
600
400
200
0
1962 1969 1976 1983 1990 1997 2004
Source: World Bank Group:
© 2008
Farm & Risk Management Team
Gross National Income per Capita
2000
1800
1600
1400
1200
1000
800
East Asia & Pacific
600
400
200
0
1962 1969 1976 1983 1990 1997 2004
Source: World Bank Group:
© 2008
Farm & Risk Management Team
19
Demand, U.S. $ Index
Impact on
Price
© 2008
Farm & Risk Management Team
U.S. Corn and Soybean Exports
(1980-2008 MY (Sept-Aug) Thousand MT)
70,000
60,000
50,000
40,000
Corn
Soybeans
30,000
20,000
10,000
0
1980
1985
1990
1995
Source: USDA/FAS PS&D data
2000
2005
© 2008
Farm & Risk Management Team
U.S. Beef and Pork Exports
(1980-2008, Calendar Year, TMT)
1800
1600
1400
1200
1000
800
600
400
200
Beef
Pork
2008
2008
0
1980
1985
1990
1995
Source: USDA/FAS PS&D data
2000
2005
© 2008
Farm & Risk Management Team
Demand
•
Oil Prices!!!
–
Increased Income
 Bicycle to car
 Increased demand for oil
• Increased input cost on Agriculture
• Ethanol is profitable
+ Increased demand for corn
Changing T&P
© 2008
Farm & Risk Management Team
Impact on
Price
© 2008
Farm & Risk Management Team
Demand
•
Hedge and Index Funds
Impact on
Price
© 2008
Farm & Risk Management Team
Impact on
Price
SUPPLY
• Productivity has slowed
• World stocks are tight: Policy
• World stocks are tight: Weather shocks
• Increasing Input Prices
• CRP and etc.
• Switch in production
Demand
• Population
• Per capita income
• US dollar decline
• Oil prices (ethanol demand)
• Hedge and Index Funds
• Price of other goods
Prices – A Perfect Storm
© 2008
Farm & Risk Management Team
27
Its Not July
Anymore
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Demand, U.S. $ Index
© 2008
Farm & Risk Management Team
© 2008
Farm & Risk Management Team
U.S. Blended Motor Gasoline
Consumption
Source: U.S. Department of Energy, Energy Information
Administration
30
© 2008
Farm & Risk Management Team
31
Anything Else Happen Since July?
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A Dow that fell and rose by record levels
within a week
A potential world-wide financial collapse
A $700 billion dollar bailout from Congress
Similar actions by other countries
Favre’s playing for the Jets
© 2008
Farm & Risk Management Team
It’s Not July Anymore
Dec Corn @ $7.75+
Now $3.85
Dec Milk @ $21
Nov SB @ $16 +
Now $8.93
Dec Beef @ $115
Now $14.28
Now $88.77
32
33
Net Returns Above VC
Source: USDA, World Agricultural Outlook Board
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What About Tomorrow?
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Impact on
Price
Productivity
World stocks: Policy
World stocks: Weather shocks
Increasing Input Prices
CRP and etc.
Switch in production
Population
-What changes are permanent
Per capita income
- Long vs Short term trends
US dollar decline
Oil prices (ethanol demand)
Hedge and Index Funds
© 2008
Farm & Risk Management Team
Nominal Corn Prices
(Future Range Based on Average of Prior Periods)
6
5.24
5
4.13
4
3.14
3
2
1
0
1860
1880
1900
1920
1940
1960
1980
2000
2020
2040
© 2008
Farm & Risk Management Team
Nominal Corn Prices
Future Range Based on Average of Most Recent Period
Change
6
4.86
5
4.42
4
3
2.25
2
1
0
1860
1880
1900
1920
1940
1960
1980
2000
2020
2040
© 2008
Farm & Risk Management Team
Nominal Corn Prices
Ranges based on all data recent and all periods and no outliers
all periods and recent
8
6.70
7
6.32
6
4.86
4.42
5
4
3
5.24
5.26
4.13
4.21
3.14
4.01
4.63
3.31
4.60
3.00
2.25
2
1
0
1973
1993
2013
2033
2053
2073
2093
2113
2133
2153
© 2008
Farm & Risk Management Team
39
Ethanol, A Fundamental Change
© 2008
Farm & Risk Management Team
40
Ethanol, A Fundamental Change
© 2008
Farm & Risk Management Team
We’ve Hitched Ourselves to the
Oil Train Oil’s Volatility As Well
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© 2008
Farm & Risk Management Team
42
Sources: Websites
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The Oil Drum: http://www.theoildrum.com/story/2006/10/5/215316/408
Association for the Study of Peak Oil: http://aspo-usa.com/
Oil Market Report: http://omrpublic.iea.org/
Now and Future: http://www.nowandfutures.com/index.html
WTRG Economics: http://www.wtrg.com/
World Bank Group: http://ddp-ext.worldbank.org/ext/DDPQQ/member.do?method=getMembers
Farm Foundation: http://www.farmfoundation.org/
USDA Economic Research Service: http://www.ers.usda.gov/
Trading Charts, Inc: http://futures.tradingcharts.com/
CHOICES: http://www.choicesmagazine.org/magazine/issue.php
Foreign Agricultural Service: http://www.fas.usda.gov/default.asp
© 2008
Farm & Risk Management Team
Sources: Written Articles
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Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food
Commodity Prices. USDA/ERS, July 2008. http://www.ers.usda.gov/Publications/WRS0801/
Bahn, Henry. “Commodity Prices Rock World Markets: Structural Shift or Short Term
Adjustments?” Choices, AAEA, 2nd qrt 2008 23(2).
http://www.choicesmagazine.org/magazine/issue.php
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Westhoff, Pat. “Farm Commodity Prices: Why the Boom and What Happens Now?” Choices, AAEA, 2nd qrt
2008 23(2).
Lawrence, John D., James Mintert, John D. Anderson, and David P. Anderson. “Feed Grains and Livestock:
Impacts on Meat Supplies and Prices.” Choices, AAEA, 2nd qrt 2008 23(2).
Irwin, Scott H., Philip Garcia, Darrel L. Good and Eugene L. Kunda. “Recent Convergence Performance of
CBOT Corn, Soybean, and Wheat Futures Contracts.” Choices, AAEA, 2nd qrt 2008 23(2).
Mark, Darrell R., B. Wade Brorsen, Kim B. Anderson, and Rebecca M. Small. “Price Risk Management
Alternatives for Farmers in the Absence of Forward Contracts with Grain Merchants.” Choices, AAEA, 2nd
qrt 2008 23(2).
Abbott, Philip C., Christopher Hurt, and Wallace E. Tyner. “What’s Driving Food Prices?” Issue
Report from the Farm Foundation, July 2008.
http://www.farmfoundation.org/news/templates/template.aspx?articleid=404&zoneid=26
Fortenbery, T. Randall and Hwanil Park. “The Effect of Ethanol Production on the U.S. National
Corn Price.” Univ. of WI-Madison Dept. of Ag and Applied Econ: Staff Paper no. 523, April 2008.
© 2008
Farm & Risk Management Team
Sources: Other
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Extension Outlook Conference, Kansas
City, Aug 18-19, 2008.
Fortenbery, Randy. Presentation to WI Ag
Consultants, March 2008.
© 2008
Farm & Risk Management Team