What causes the commodity price boom? What causes the commodity price boom? AGRI Green Team Seminar on the Health Check AGRI Green Team Seminar on the Health Check May 15, 2008 May 15, 2008 AGRI-G1 Agricultural Policy Analysis and Perspectives DG for Agriculture and Rural Development European Commission
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What causes the commodity price boom? AGRI Green Team Seminar on the Health Check May 15, 2008 AGRI-G1 Agricultural Policy Analysis and Perspectives DG.
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What causes the commodity price boom?What causes the commodity price boom?AGRI Green Team Seminar on the Health CheckAGRI Green Team Seminar on the Health CheckMay 15, 2008May 15, 2008
AGRI-G1Agricultural Policy Analysis and PerspectivesDG for Agriculture and Rural DevelopmentEuropean Commission
AGRI G1 High food prices 2
Is the commodity price boom a new phenomenon?Is the commodity price boom a new phenomenon?
Ag commodity price booms have happened in the recent past – the post-1973 period is the most characteristic, caused by the oil shock– grain market have faced 4 other price surges post-1973– In all previous cases, supply adjustments subsequently lowered prices
In real terms, agricultural prices are below their previous peaks In real terms, agricultural prices are below their previous peaks – energy prices and metals/minerals have long exceeded their post-1973 peaks energy prices and metals/minerals have long exceeded their post-1973 peaks – food and agricultural commodities following a downward trend in real terms food and agricultural commodities following a downward trend in real terms – different agricultural commodities reflecting different very different patterns different agricultural commodities reflecting different very different patterns – some agricultural commodities continue a rather steady pathsome agricultural commodities continue a rather steady path
Agriculture and food are not leading, but following the Agriculture and food are not leading, but following the ""price boomprice boom"" – since early 2004, agriculture and food indexes lag behind other indexessince early 2004, agriculture and food indexes lag behind other indexes– the terms of trade for agriculture have deterioratedthe terms of trade for agriculture have deteriorated– energy and fertiliser costs affect production costs energy and fertiliser costs affect production costs – evidence emerges that land value increases also impact farm assetsevidence emerges that land value increases also impact farm assets– the appreciation of the dollar distorts market signals the appreciation of the dollar distorts market signals
Is the commodity price boom a new phenomenon?Is the commodity price boom a new phenomenon?
Ag commodity price booms have happened in the recent past Ag commodity price booms have happened in the recent past – the post-1973 period is the most characteristic, caused by the oil shockthe post-1973 period is the most characteristic, caused by the oil shock– grain market have faced 4 other price surges post-1973grain market have faced 4 other price surges post-1973– In all previous cases, supply adjustments subsequently lowered prices In all previous cases, supply adjustments subsequently lowered prices
In real terms, agricultural prices are below their previous peaks – energy prices and metals/minerals have long exceeded their post-1973 peaks – food and agricultural commodities follow a downward trend in real terms – different agricultural commodities reflect very different patterns – some agricultural commodities continue a rather steady path
Agriculture and food are not leading, but following the Agriculture and food are not leading, but following the ""price boomprice boom"" – since early 2004, agriculture and food indexes lag behind other indexessince early 2004, agriculture and food indexes lag behind other indexes– the terms of trade for agriculture have deterioratedthe terms of trade for agriculture have deteriorated– energy and fertiliser costs affect production costs energy and fertiliser costs affect production costs – evidence emerges that land value increases also impact farm assetsevidence emerges that land value increases also impact farm assets– the appreciation of the dollar distorts market signals the appreciation of the dollar distorts market signals
AGRI G1 High food prices 6
Real commodity price indexes (1960-2007)Real commodity price indexes (1960-2007)
2000 =100 in constant prices
0
75
150
225
300
375
450
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
Source: WB
Agriculture Food Energy Fertilisers Metals/minerals
AGRI G1 High food prices 7
Real food price indexes (1960-2007)Real food price indexes (1960-2007)
Real sugar/cotton price evolution (1960-2007)Real sugar/cotton price evolution (1960-2007)
Constant 1990 cents/kg
0
100
200
300
400
500
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
Source: WB
0
30
60
90
120
150
Cotton (left axis) Sugar (right axis)
AGRI G1 High food prices 14
Real crop price Real crop price indexesindexes (1960-2007) (1960-2007)
1990 = 100
0
100
200
300
400
500
600
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
Source: WB
Wheat Rice Maize Soybeans
AGRI G1 High food prices 15
Real food oil price Real food oil price indexesindexes (1960-2007) (1960-2007)
1990 = 100
0
100
200
300
400
500
600
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
Source: WB
Soybean oil Palm oil
AGRI G1 High food prices 16
Real cotton/sugar price Real cotton/sugar price indexesindexes (1960-2007) (1960-2007)1990 = 100
0
100
200
300
400
500
600
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
Source: WB
Cotton Sugar
AGRI G1 High food prices 17
Is the commodity price boom a new phenomenon?Is the commodity price boom a new phenomenon?
Ag commodity price booms have happened in the recent past Ag commodity price booms have happened in the recent past – the post-1973 period is the most characteristic, caused by the oil shockthe post-1973 period is the most characteristic, caused by the oil shock– grain market have faced 4 other price surges post-1973grain market have faced 4 other price surges post-1973– In all previous cases, supply adjustments subsequently lowered pricesIn all previous cases, supply adjustments subsequently lowered prices
In real terms, agricultural prices are below their previous peaks In real terms, agricultural prices are below their previous peaks – energy prices and metals/minerals have long exceeded their post-1973 peaks energy prices and metals/minerals have long exceeded their post-1973 peaks – food and agricultural commodities following a downward trend in real terms food and agricultural commodities following a downward trend in real terms – different agricultural commodities reflecting different very different patterns different agricultural commodities reflecting different very different patterns – some agricultural commodities continue a rather steady pathsome agricultural commodities continue a rather steady path
Agriculture and food are not leading, but following the "price boom" – since early 2004, agriculture and food indexes lag behind other indexes– the terms of trade for agriculture have deteriorated– energy and fertiliser costs affect production costs – evidence emerges that land value increases also impact farm assets– the appreciation of the dollar distorts market signals
AGRI G1 High food prices 18
More recent trend of commodity prices (2000-07)More recent trend of commodity prices (2000-07)
… US$ = 1 € ... US$ = 1 CAN $ ... US$ = 1 AUS $ ... US$ = 1 BRA Real
AGRI G1 High food prices 20
Wheat price and exchange rates (2000-07)Wheat price and exchange rates (2000-07)
price per mt
0
100
200
300
400
500
Jan
-00
May
-00
Sep
-00
Jan
-01
May
-01
Sep
-01
Jan
-02
May
-02
Sep
-02
Jan
-03
May
-03
Sep
-03
Jan
-04
May
-04
Sep
-04
Jan
-05
May
-05
Sep
-05
Jan
-06
May
-06
Sep
-06
Jan
-07
May
-07
Sep
-07
Jan
-08
US $ per mt € per mt CAN $ per mt AUS $ per mt
AGRI G1 High food prices 21
What are the factors behind the recent price hike?
The recent commodity price is partially attributed to demand factors – role of strong economic growth in China/India has been going on for years– clear impact in upward price pressure in certain markets– but why did the highest price increases occur where global demand stagnates?
Supply factors seem to have played a major role in a few marketsSupply factors seem to have played a major role in a few markets– food grains and dairy more affected by adverse weather conditions food grains and dairy more affected by adverse weather conditions – food grain and dairy production already shows signs of recoveryfood grain and dairy production already shows signs of recovery– supply in meat markets has been growing faster than demandsupply in meat markets has been growing faster than demand
Policy factors also played a rolePolicy factors also played a role– biofuel policies had an impact not just on markets but on biofuel policies had an impact not just on markets but on expectationsexpectations – export bans give the wrong signals when markets face supply problemsexport bans give the wrong signals when markets face supply problems
What linkages between various factors?What linkages between various factors?– maize/oilseed complex the most crucial for future market price prospects maize/oilseed complex the most crucial for future market price prospects – supply response to meat demand (including feed demand) seems adequate supply response to meat demand (including feed demand) seems adequate
AGRI G1 High food prices 22
Demand growth in China, India and the worldDemand growth in China, India and the world
What are the factors behind the recent price hike?
The recent commodity price is partially attributed to demand factors The recent commodity price is partially attributed to demand factors – role of strong economic growth in China/India has been going on for yearsrole of strong economic growth in China/India has been going on for years– clear impact in upward price pressure in certain marketsclear impact in upward price pressure in certain markets– why have the highest price increases occurred where demand stagnates? why have the highest price increases occurred where demand stagnates?
Supply factors seem to have played a major role in a few markets– food grains and (partly) dairy more affected by adverse weather conditions – food grain and dairy production already shows signs of recovery– supply in meat markets has been growing faster than demand
Policy factors also played a rolePolicy factors also played a role– biofuel policies had an impact not just on markets but on biofuel policies had an impact not just on markets but on expectationsexpectations – export bans give the wrong signals when markets face supply problemsexport bans give the wrong signals when markets face supply problems
What linkages between various factors?What linkages between various factors?– maize/oilseed complex the most crucial for future market price prospects maize/oilseed complex the most crucial for future market price prospects – supply response to meat demand (including feed demand) seems adequatesupply response to meat demand (including feed demand) seems adequate
AGRI G1 High food prices 27
The impact of the Australian droughtsThe impact of the Australian droughts
What are the factors behind the recent price hike?
The recent commodity price is partially attributed to demand factors The recent commodity price is partially attributed to demand factors – role of strong economic growth in China/India has been going on for yearsrole of strong economic growth in China/India has been going on for years– clear impact in upward price pressure in certain marketsclear impact in upward price pressure in certain markets– why have the highest price increases occurred where demand stagnates? why have the highest price increases occurred where demand stagnates?
Supply factors seem to have played a major role in a few marketsSupply factors seem to have played a major role in a few markets– food grains and dairy more affected by adverse weather conditions food grains and dairy more affected by adverse weather conditions – food grain and dairy production already shows signs of recoveryfood grain and dairy production already shows signs of recovery– supply in meat markets has been growing faster than demandsupply in meat markets has been growing faster than demand
Policy factors also played a role– biofuel policies had an ceratin impact in maize and vegetable oil markets – export restrictions give the wrong signals when markets face supply problems
What linkages between various factors?What linkages between various factors?– maize/oilseed complex the most crucial for future market price prospects maize/oilseed complex the most crucial for future market price prospects – supply response to meat demand (including feed demand) seems adequatesupply response to meat demand (including feed demand) seems adequate
AGRI G1 High food prices 36
Developments in the US maize marketDevelopments in the US maize market( change in 2001/02-06/07 period compared to change in 1996/97-2001/02 period )
-10
0
10
20
30
40
50
60
Feed demand Food/Seed/Ind Ethanol Exports Production (3-year avg)
mio mt
2001/1996 2006/2001
AGRI G1 High food prices 37
Developments in vegetable oil marketsDevelopments in vegetable oil markets( change in annual average 2001-07 from annual average 1996-01)
-5
0
5
10
15
20
25
30
World EU US Others
mio mt
Food Demand Biodiesel Demand
AGRI G1 High food prices 38
What are the factors behind the recent price hike?
The recent commodity price is partially attributed to demand factors The recent commodity price is partially attributed to demand factors – role of strong economic growth in China/India has been going on for yearsrole of strong economic growth in China/India has been going on for years– clear impact in upward price pressure in certain marketsclear impact in upward price pressure in certain markets– why have the highest price increases occurred where demand stagnates? why have the highest price increases occurred where demand stagnates?
Supply factors seem to have played a major role in a few marketsSupply factors seem to have played a major role in a few markets– food grains and dairy more affected by adverse weather conditions food grains and dairy more affected by adverse weather conditions – food grain and dairy production already shows signs of recoveryfood grain and dairy production already shows signs of recovery– supply in meat markets has been growing faster than demandsupply in meat markets has been growing faster than demand
Policy factors also played a rolePolicy factors also played a role– biofuel policies had an impact not just on markets but on biofuel policies had an impact not just on markets but on expectationsexpectations – export bans give the wrong signals when markets face supply problemsexport bans give the wrong signals when markets face supply problems
What linkages between various factors?– maize/oilseed complex the most crucial for future market price prospects – supply response to meat demand (including feed demand) seems adequate
AGRI G1 High food prices 39
Annual shifts in US maize/soybeans areaAnnual shifts in US maize/soybeans area