Outlook For Global Agricultural Markets Over the Next 10 Years Implications for commodity prices and profitability

Global Policy Analysis DivisionOffice of Global Analysis

Outlook For Global Agricultural Markets Over the Next 10 YearsImplications for commodity prices and profitability

Mike DwyerDirector, Global Policy AnalysisOffice of Global AnalysisForeign Agricultural ServiceUS Department of Agriculture

[email protected]

U.S. Agricultural Producers’ Income Statement and Balance SheetDespite drought and cost challenges, U.S. farmers doing very well

2

Global Policy Analysis Division Office of Global Analysis

Crop Prices Expected to Remain High for Next 10 Years…

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

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2015

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2017

2018

2019

2020

2021

2022

0

2

4

6

8

10

12

14

16

18

Wheat Soybeans Corn Rice ($/cwt)

$ pe

r bus

hel (

per C

WT

for r

ice)

Source: USDA Baseline


Same Story For Red Meat and Poultry Prices

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

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2003

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2015

2016

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2018

2019

2020

2021

2022

0

20

40

60

80

100

120

140

Cattle Hogs Broilers

US $

/hun

dred

wei

ght f

or c

attle

and

hog

s &

U.S.

cen

ts/lb

for b

roile

rs

Source: USDA Baseline


… Which Helps Boost Long-Term Outlook for Farm Sector ProfitabilityGrowing global demand projected to keep U.S. net farm income strong

Source: USDA Baseline & ERS Farm Income Statistics

19871989

19911993

19951997

19992001

20032005

20072009

20112013

20152017

20192021

0

20

40

60

80

100

120

140

Net

Far

m In

com

e (B

illio

ns *

US$

)

*1 billion=1,000 Million


Factors Impacting U.S. and Global Food and Agricultural Markets Over the Next Decade

1. Global economic growth and the rise of the “middle class” in developing countries

2. Value of the U.S. dollar3. Worldwide biofuels production4. Role of trade and trade liberalization5. Energy and agricultural input prices6. Additional crop land7. Biotech developments


#1: Economic Growth in Emerging Markets Will Remain Buoyant

Global economy emerged from worst recession in decades in 2010. Developing countries performed better and growing faster than developed countries. Same is happening now and is likely to continue for the next decade.

Consumer incomes are rising and middle class households are expanding rapidly, especially in large emerging markets.

Impact on global food demand will be significant due to higher income elasticities for food in developing countries.


Global “Middle Class” is Expected to Increase Sharply by 2022 – To 1 Billion Households Most of the increase will be in developing countries and the impact on

worldwide food consumption will be significant

100

300

500

700

900

1100

Households w/real PPP incomes greater than $20,000 a year

Mill

ions

of H

ouse

hold

s

Middle class in developing countries projected to increase 119% by 2022 vs. just 11% in developed countries

Developing countries

Developed countries

Source: Global Insight’s Global Consumer Markets data as analyzed by OGA


“Middle Class” in Developing Countries Could Reach 603 Million Households By 2022, Up 119% From 2012 Levels25% of households in these countries are middle class. By 2022, this could

increase to 56% and the impact on food consumption will be significant

VietnamColombia

PhilippinesMalyasia

EgyptTaiwan

ThailandIndonesia

South KoreaTurkey

MexicoBrazil

RussiaIndia

China

0 50 100 150 200 250

2222215

535

614

1774

141Households w/ Real PPP incomes greater than $20,000 (millions)

2012 Proj gains by 2022

Source: Global Insight’s Global Consumer Markets data as analyzed by OGA

Additional Dollar of Income: How Is It Spent? Lower income countries spend much of that additional income on food

Congo, Dem. Rep. Uganda Iraq Paraguay Macedonia, FYR Croatia Italy0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Other

Education

Recreation

Transport & commu-nication

Health

Furnishings

Housing

Clothing

Food

Source: USDA, Economic Research Service using International Comparison Program 2005 data.

Urbanization Also Drives Consumption Change

Ukra

ine

Germ

any

Russ

ia

Japa

n

Sout

h Ko

rea

Chin

a

UK US

Chile

Braz

il

Indo

nesi

a

Viet

nam

Mex

ico

Turk

ey

Indi

a

Sout

h Af

rica

Phili

ppin

es

-1

-0.5

0

0.5

1

1.5

2

2.5

3

3.5

Urban and overall population growth, 2010

Total Urban

Percent

Data source: World Bank

EU North America

East Asia (-China)

China South America

FSU SE Asia South Asia

0%

20%

40%

60%

80%

1% 2%

16%

27%

38% 39% 39%

74%

Changes in Beef, Pork, and Poultry Consumption2002 vs 2012 (P)

Meat Demand Growth Focused in Developing Countries

Source: USDA Production, Supply & Distribution Database

S. America

South Asia

China

SE Asia

MENA

Mexico

FSU

EU

E. Asia (-China)

Canada

USA

-25% 0% 25% 50% 75%

70%

69%

67%

63%

31%

16%

13%

0%

-9%

-20%

-21% Changes in Grains and Oilseed Meals in Feed Consumption2002 vs 2012 (P)

… Which Leads to Rising Feed Demand In Developing Markets

Source: USDA Production, Supply & Distribution Database


# 2: Value of the Dollar Expected to Ease Further … Keeping Upward Pressure on Commodity Prices

Source: USDA, Economic Research Service; Foreign Agricultural Service

20022003

20042005

20062007

20082009

20102011

20122013

20142015

20162017

20182019

20202021

202275

80

85

90

95

100

105

110

115US Agricultural Trade-Weighted Exchange Rate

Inde

xed

Valu

e of

U.S

. Dol

lar,

2005

= 1

00

20062007

20082009

20102011

20122013

20142015

20162017

20182019

20202021

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

EU

USA

Brazil

Products covered: ethanol & biodiesel for all countries, but omits biodiesel for the US. No cellulosic biofuels included. Source: FAS Annual Biofuel Reports and Washington staff analysis.

#3: Biofuels Production Continues to GrowBoosts feedstock demand, but recent rate of growth is expected to slow


#4: Trade Will Increase and Trade Liberalization Will Continue

Global agricultural trade has grown sharply over the past decade -- should reach $1.1 trillion (1012) over next decade.

Most countries’ agricultural imports have increased substantially, esp. China and East/Southeast Asia. U.S. and EU imports growing, too.

Almost all major agricultural exporters have seen sharp gains in recent years – not just the U.S.

FTAs have proliferated worldwide, boosting trade. This will continue -- with or without the U.S.


Global Agricultural Trade Projected to Reach $1.1 Trillion (1012) Over Next Decade

0

200

400

600

800

1,000

1,200 Global Agricultural Trade

*Bill

ions

US$

Source: Global Trade Atlas; USDA/FAS/OGA Projections

**1 billion=1,000 Million


Global Agricultural Import Growth Focused in Developing Markets

Source: GTIS data analyzed by OGA

2002 2003 2004 2005 2006 2007 2008 2009 2010 20110

100,000,000,000

200,000,000,000

300,000,000,000

400,000,000,000

500,000,000,000

600,000,000,000

700,000,000,000

800,000,000,000

900,000,000,000

155,527,548,430178,580,504,720201,516,909,321213,439,933,497229,097,714,543267,840,287,812317,260,778,923271,894,063,927300,884,945,702366,357,442,35899,121,072,522

117,060,830,282139,921,253,889151,659,394,824174,108,648,786

230,267,596,306

307,398,804,522278,928,757,136

349,295,645,783

449,547,417,158

Global Agricultural Imports2002 - 2011

DevelopingDeveloped

*Bill

ions

US$

+350%

+135%



#5: Energy and Agricultural Input Prices Likely To Remain High

Commercial scale agriculture is energy and input intensive – planting, growing, harvesting, transporting, processing, and packaging.

In recent years, input prices have risen in response to strong growth in global demand for energy and ag products. Prices of diesel, fertilizer, seed, and agricultural chemicals have risen.

Rising production costs pressure farmers’ operating margins, mitigates supply response, and lead to higher long run agricultural commodity and food prices.


Higher Energy Prices Contribute to Higher Food and Agricultural Commodity Prices

Source: International Monetary Fund: International Financial Statistics

1994

Jan

1994

Sep

1995

May

1996

Jan

1996

Sep

1997

May

1998

Jan

1998

Sep

1999

May

2000

Jan

2000

Sep

2001

May

2002

Jan

2002

Sep

2003

May

2004

Jan

2004

Sep

2005

May

2006

Jan

2006

Sep

2007

May

2008

Jan

2008

Sep

2009

May

2010

Jan

2010

Sep

2011

May

2012

Jan

2012

Sep

0

50

100

150

200

250

300IMF Price Indices

Crude oil All Commodities

Food

Inde

x 20

05 =

100


U.S. Operating Margins Will Be Pressured By Rising Production ExpensesWhile commodity prices will remain fairly strong over next 10 years, they will lag rising production costs – land rental rates also affected by rising land prices

19921995

19982001

20042007

20102013

20162019

202210

13

16

19

22

25

28

31

34

37 * Net farm income/Total cash receipts

% O

pera

ting

Mar

gin*

Source: USDA/ERS

19921995

19982001

20042007

20102013

20162019

20220

100

200

300

400

500

600Gross Farm Income

Total Production Expenses

*Bill

ions

US$



#6: Planted Acreage Will Increase

Where will the gains occur? Transportation/storage infrastructure and marketing costs will play a big role.

Land tenure issues, laws governing foreign investment, and the degree of price transmission will also be major issues.

South America will likely lead in land expansion (largely new frontier lands in Brazil) as will the Former Soviet Union (esp. Russia and Ukraine).

Africa has more uncultivated land but high marketing costs, poor infrastructure, and long distances from markets will be a constraint.

How aggressively will producers around the world respond to strong commodity prices?


Potential Availability of Uncultivated LandGlobally 446 million hectares of uncultivated land (1.1 billion acres*)

123 million ha

202 million ha

3 million ha

52 million ha

14 million ha

Sub-Saharan Africa 47%

M. East & N. Africa 87%

E. Europe & C. Asia 83%

East & South Asia 23%

Latin America & Car. 76%

Share of Land With Travel Time to Market < 6 Hours

Source: World Bank

*1 acre = 0.4047 ha


Global Production Gains Since 1990 Due Largely to Yield Growth

Grains Oilseeds* Cotton Total-20%

0%

20%

40%

60%

80%

100%

120%

Area Yield Production

*Includes soybean, sunflower, rapeseed, and peanut

% C

hang

e

Source: USDA PSD Database


#7: Role of Biotechnology Will Grow


Technology Is Key to Meeting Future DemandBig drop in U.S. yields in 2012/13 is due to worst drought in decades

Source: USDA PS&D Database

96/9

696

/97

97/9

898

/99

99/0

000

/01

01/0

202

/03

03/0

404

/05

05/0

606

/07

07/0

808

/09

09/1

010

/11

11/1

212

/13(p

)

0

2

4

6

8

10

12Corn Yield and Trend

United StatesLinear (United States)EULinear (EU)East AsiaLinear (East Asia)South AmericaLinear (South America)

Tons

/hec

tare


What Could Go Wrong To Affect Global Outlook?

USDA does not publish alternative baseline projections and only publishes once a year. The projections in this presentation were based on assumptions developed in fall of 2012 and published February 2013.

Fiscal and monetary actions in the coming months should pre-empt another global crisis but may not revive pre-crisis (2008/09) growth rates

However, if macroeconomic outlook worsens, it could:Reduce the growth of the middle class in emerging marketsIncrease the value of the U.S. dollar (safe haven response)Reduce global trade (including agricultural trade) Reduce almost all dollar-based commodity pricesReduce farm income

Prolonged economic stagnation or new recession, crisis in Euro Zone, or a hard-landing in China pose risks to agriculture’s outlook


Summary -- The Bottom Line

The price and profit outlook looks more promising than it has in decades. New price/income floors for ag producers who receive world prices for their products.

Strong growth in global food, feed, (bio)fuel, and fiber demand and a relatively weak U.S. dollar will keep food and agricultural prices high over the next decade.

Much of this new demand will be centered in Asia -- agricultural trade will continue to grow with most of the new import demand coming from developing country markets, such as China, Southeast Asia, Middle East/North Africa, and Latin America.

High commodity prices and production gains should help the total profitability of agriculture (despite operating margins coming under pressure) – at least in those countries with high degrees of price transmission. If so, this should continue attracting new investment into the sector, i.e. land and new technologies.

However, beware of rising input costs and short-term exogenous shocks – they are a major element of risk in the profit outlook.

Have we entered a “golden era” for agriculture? That depends on your definition

Thank You!

Outlook For Global Agricultural Markets Over the Next 10 Years Implications for commodity prices and profitability

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