What’s Going on With These Darn Prices! Managing the Opportunities (Kevin Bernhardt, UWEX) August...
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Transcript of What’s Going on With These Darn Prices! Managing the Opportunities (Kevin Bernhardt, UWEX) August...
What’s Going on With These What’s Going on With These Darn Prices!Darn Prices!
Managing the OpportunitiesManaging the Opportunities(Kevin Bernhardt, UWEX)(Kevin Bernhardt, UWEX)
August 2008August 2008
View From 10,000 Feet – View From 10,000 Feet – Global Situation (Kevin)Global Situation (Kevin)
View From the Top of the Oil Rig View From the Top of the Oil Rig – Oil prices and Biofuels (Alan)– Oil prices and Biofuels (Alan)
View From the Farm gate (Kevin)View From the Farm gate (Kevin)
Farm & Risk Management Team
© 2008
Sources: Websites
• 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
Farm & Risk Management Team
© 2008
Sources: Written Articles
• 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
• 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.
Farm & Risk Management Team
© 2008
Sources: Other
• Extension Outlook Conference, Kansas City, Aug 18-19, 2008.
• Fortenbery, Randy. Presentation to WI Ag Consultants, March 2008.
Farm & Risk Management Team
© 2008
6
0
0.5
1
1.5
2
2.5
3
3.5
1860 1880 1900 1920 1940 1960 1980 2000
My Motivation (Nominal Corn Prices)
Source: USDA
First, A Quick Reminder of First, A Quick Reminder of Economic BasicsEconomic Basics
P
Q
P*
D S
Farm & Risk Management Team
© 2008
Law of Price Determination
• Demand:If the demand for a good increases, then ceritus paribus the price for that good will increase and visa versa.
DS
P
Q
P
D'
P'
Farm & Risk Management Team
© 2008
Law of Price Determination
• Supply:If the supply for a good increases, then ceritus paribus the price for that good will decrease and visa versa
D
SP
Q
P S’
P'
Individual Supply = MC
Farm & Risk Management Team
© 2008
Law of Price Determination
D
S’P
Q
P’S
P
D'
Farm & Risk Management Team
© 2008
Prices – A Perfect Storm
Farm & Risk Management Team
© 2008
Demand
• Population• Income• Changing Tastes and Preferences• Prices of Complimentary and Substitute
Goods• Value of the Dollar• Trade
Farm & Risk Management Team
© 2008
Supply
• Anything that changes the physical capacity to produce– Technology (productivity gains)– Weather– Factors of production (water, labor, etc)
• Changes in input prices• Trade (domestic)• Changes in units of production
– Institutional (govt)– Switch to other kinds of production– More or less land in production
Farm & Risk Management Team
© 2008
Food For Thought
• The world is not ceritus paribus, It’s Dynamic– Multidimensional mess of constantly changing factors,
substitutions, and interrelationships.– Add to that the wild card of market psychology.– Long-term trends messed up by short term shocks– The world’s producers and consumers will respond
High prices over time will lead to more supply which will lead to a fall in prices.
However, the structure of the factors of supply and demand, how they change, the volatility of their change, and the importance (elasticity) of change may be different
It’s not the first time!
Farm & Risk Management Team
© 2008
Supply
• Growth Rate in Productivity slowed– R& D funding– Non-farm uses for land– Constraints on factors of production (water)– Climate Change??
Farm & Risk Management Team
© 2008
- Past gains from Yield not Area - R&D Funding is down - Why fund R&D with surpluses?
Farm & Risk Management Team
© 2008
Farm & Risk Management Team
© 2008
Farm & Risk Management Team
© 2008
Supply
• Growth Rate in Productivity slowed– R& D funding– Non-farm uses for land– Constraints on factors of production (water)– Climate Change??
Impact on Price
Farm & Risk Management Team
© 2008
Supply
• Change in stock holding policies– 80’s and 90’s were an era of:
Surpluses Stability Free Trade
So why go through the expense of holding stocks?
Farm & Risk Management Team
© 2008
World Wheat and Course Grain Ending Stocks
050
100150200250300350400450500
197
9/80
198
2/83
198
5/86
198
8/89
199
1/92
199
4/95
199
7/98
200
0/01
200
3/04
200
6/07
Ending Stocks
Farm & Risk Management Team
© 2008
Farm & Risk Management Team
© 2008
Supply
• Change in stock holding policies By itself, limited impact Exacerbates impact of any short falls
Impact on Price
Farm & Risk Management Team
© 2008
Supply
• Weather Shocks– 2006
Russia and Ukraine Australia South Africa
– 2007 SE Europe Russia and Ukraine Turkey, Australia, Argentina, etc.
Impact on Price
Historically, two successive years of
lower global production occurs about once per
decade.
Farm & Risk Management Team
© 2008
Supply
• Higher Oil Prices– Direct Affect: Higher energy costs
for transportation, drying, etc.– Indirect: Higher fertilizer costs and
fuel surcharges on other inputs
• Leads to increased marginal costs– Shifts in practices, shifts to alternative uses,
Lower production
• Shorter supply and higher prices Impact on
Price
Likely have not felt the
full impact of this yet.
Farm & Risk Management Team
© 2008
Supply Recap
• Productivity has slowed
• World stocks are tight: Policy
• World stocks are tight: Weather shocks
• Increasing Input Prices
• CRP and etc.
• Switch in production
Impact on Price
Farm & Risk Management Team
© 2008
Demand
• 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
Farm & Risk Management Team
© 2008
Farm & Risk Management Team
© 2008
Where is Population Growth
0
1000
2000
3000
4000
5000
6000
7000
2006
World
Low & middle income
East Asia & Pacific
Source: World Bank Group:
Farm & Risk Management Team
© 2008
Where’s the Population
Pop. (bil) % of World Rank
World 6.667
China 1.330 19.9 1
India 1.148 17.2 2
Indonesia .238 3.6 6
Bangladesh .154 2.3 9
Nigeria .138 2.1 11
EU .491 7.4 4
U.S. .303 4.5 5
45.1
Source: U.S. Bureau of Census
Farm & Risk Management Team
© 2008
Population Distribution - China
Farm & Risk Management Team
© 2008
Population Distribution - US
Farm & Risk Management Team
© 2008
Population Distribution - India
Farm & Risk Management Team
© 2008
Demand
• PopulationImpact on
Price
Farm & Risk Management Team
© 2008
Demand
• Income– Growing at a faster rate– Growing especially in middle income countries
and in Asia
Farm & Risk Management Team
© 2008
Gross National Income per Capita
0
1000
2000
3000
4000
5000
6000
7000
8000
1962 1967 1972 1977 1982 1987 1992 1997 2002
World
At what point does the elasticity for food
demand change?
Source: World Bank Group:
Farm & Risk Management Team
© 2008
Gross National Income per Capita
0
5000
10000
15000
20000
25000
30000
35000
40000
1962 1968 1974 1980 1986 1992 1998 2004
High income
High Income people don’t eat more food when they get
more money – they buy boats!
Source: World Bank Group:
Farm & Risk Management Team
© 2008
Gross National Income per Capita
0
200
400
600
800
1000
1200
1400
1600
1800
2000
1962 1969 1976 1983 1990 1997 2004
Low & middle income
With more income this group buys food and often
more animal protein.
Source: World Bank Group:
Farm & Risk Management Team
© 2008
Gross National Income per Capita
0
200
400
600
800
1000
1200
1400
1600
1800
2000
1962 1969 1976 1983 1990 1997 2004
East Asia & Pacific
Source: World Bank Group:
Farm & Risk Management Team
© 2008
More Income Changing Diet
Farm & Risk Management Team
© 2008
World Meat & Poultry Consumption (1000 MT)
0
50,000
100,000
150,000
200,000
250,000
300,00019
60
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Source: USDA
Farm & Risk Management Team
© 2008
Internet Users (per 100 people)
Source: World Bank Group
Farm & Risk Management Team
© 2008
Demand
• Income– Growing at a faster rate– Growing especially in middle income countries and in
Asia
– More people with higher incomes not only demand more and different food, but also more energy.
– Income growth can slow, even go negative, but at some point elasticity for food demand changes.
Impact on Price
Farm & Risk Management Team
© 2008
Demand
• Decline of the U.S. dollar
Farm & Risk Management Team
© 2008
Farm & Risk Management Team
© 2008
USD:Euro46
Farm & Risk Management Team
© 2008
Farm & Risk Management Team
© 2008
Demand
• Decline of the U.S. dollar– You are holding lots of dollars– Because of the value of the dollar, US goods
are relatively cheap
– So what do you do? Buy U.S. commodities
Farm & Risk Management Team
© 2008
Corn and Soybean Exports (TMT)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1980 1985 1990 1995 2000 2005
CornSoybeans
Source: USDA/FAS PS&D data
Farm & Risk Management Team
© 2008
Beef and Pork Exports (TMT)
0
200
400
600
800
1000
1200
1400
1600
1800
1980 1985 1990 1995 2000 2005
BeefPork20082008
Source: USDA/FAS PS&D data
Farm & Risk Management Team
© 2008
• 45% dollar depreciation since 2002– At 2002 levels oil price at $75/b (Hurt)
• High dollar reserves coupled with dollar depreciation– $6.00/bu corn becomes $3.30 corn
Farm & Risk Management Team
© 2008
Demand
• Decline of the U.S. dollarImpact on
Price
Farm & Risk Management Team
© 2008
Demand
• Oil Prices!!!– Increased Income
Bicycle to carIncreased demand for oil
• Increased input cost on Agriculture• Ethanol is profitable
+ Increased demand for corn Changing T&P
Farm & Risk Management Team
© 2008
Farm & Risk Management Team
© 2008
Farm & Risk Management Team
© 2008
56Through Aug 2007
Farm & Risk Management Team
© 2008
Forecasted Oil Exports
Farm & Risk Management Team
© 2008
Demand
• Oil Prices!!!
Impact on Price
Farm & Risk Management Team
© 2008
Demand
• Hedge and Index Funds
Impact on Price
Farm & Risk Management Team
© 2008
Demand
• Prices of Complimentary and Substitute Goods– If pork is profitable, then demand for feed will
be greater– Lots of give and take here
Impact on Price
Farm & Risk Management Team
© 2008
Recap
• Productivity has slowed• World stocks are tight: Policy• World stocks are tight: Weather shocks• Increasing Input Prices• CRP and etc.• Switch in production
• Population• Per capita income• US dollar decline• Oil prices (ethanol demand)• Hedge and Index Funds• Price of other goods
Impact on Price
Farm & Risk Management Team
© 2008
Prices – A Perfect Storm
Farm & Risk Management Team
© 2008
Food For Thought
• The world is not ceritus paribus– The world’s producers and consumers will
respond High prices over time will lead to more supply
which will lead to a fall in prices. High profitability will lead to technological
innovation High prices will lead consumers to substitute,
conserve, etc.
Facing the guillotine is a great way to focus the mind (source unknown)
Farm & Risk Management Team
© 2008
What About Tomorrow?
• Productivity has slowed• World stocks are tight: Policy• World stocks are tight: Weather shocks• Increasing Input Prices• CRP and etc.• Switch in production
• Population• Per capita income• US dollar decline• Oil prices (ethanol demand)• Hedge and Index Funds• Price of other goods
Impact on Price
-What changes are permanentWhat changes are permanent- Long vs Short term trends- Long vs Short term trends
Source: USDA-FSA
Farm & Risk Management Team
© 2008
CRP Contract Expiration (Acres)
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
2007 2008 2009 2010 2011 2012 2013
US TotalPlainsCorn Belt
Contracts expire on September 30
Source: USDA-FSA
And Here’s And Here’s AlanAlan