Agricultural Products: Steady and Unsteady Demand

1. Agricultural Products: Steady and Unsteady Demand 2007 Agrifood Complex Outlook Conference September 19, 2007 David Stallings World Agricultural Outlook Board U.S. Department of Agriculture

2. Outline • The curse of abundance • Long-term increases in demand • Population • Income growth and food demand • Short-term problems and opportunities in food demand • Exchange rates and liquidity crises • Will energy save agriculture? • Income growth and petroleum prices • Bioenergy, agriculture, and food

3. GrainsReal Price and Trend Real price is the CRB Commodity Price Index for grains, adjusted for inflation by the U.S. GDP deflator.

4. Fats and OilsReal Price and Trend Real price is the CRB Commodity Price Index for fats and oils, adjusted for inflation by the U.S. GDP deflator.

5. Livestock ProductsReal Price and Trend Real price is the CRB Commodity Price Index for livestock and products, adjusted for inflation by the U.S. GDP deflator.

6. FoodstuffsReal Price and Trend Real price is the CRB Commodity Price Index for foodstuffs, adjusted for inflation by the U.S. GDP deflator.

7. Average annual percentage change, Commodity or index 1947-2006 Corn, Number 2 yellow, Chicago -2.59 Wheat, Hard Red Winter, Kansas City -2.45 Soybeans, Number 1 yellow, Central Illinois -2.00 Soybean Oil, crude, Decatur -2.63 Live Cattle -1.57 Lean hogs -1.80 Upland cotton -2.52 CRB Foodstuffs Index -2.11 CRB Textiles Index -2.06 Selected real agricultural prices

8. Population growth ratesPeriod averages Percent Source: USDA/ERS International Macroeconomic Data Set

9. Percapita income growth ratesPeriod averages Percent Source: USDA/ERS International Macroeconomic Data Set

10. Increased Income Raises the Demand for Food Additional food expenditure given a 10% increase in income Russia United States Source: Seale, Regmi & Bernstein 2003 http://www.ers.usda.gov/publications/tb1904/

11. Much Increased Demand Goes to High-Valued Products Additional food expenditure given a 10% increase in income Source: Seale, Regmi & Bernstein 2003 http://www.ers.usda.gov/publications/tb1904/

12. Long-run real prices: Down • Despite rising income and population, the relative prices of basic food and feedstuffs have continued to fall. • The reasons: • Productivity increases, • Competition, • Better management and inventory control, and • Freer trade.

13. Some deviations from trend • Exchange rate effects • A persistent rise or fall in the value of the U.S. dollar • Traded feed and foodstuffs are priced in dollars • Relative prices change • Financial crises and recovery • Affects transitory income growth • No effect on overall trend

14. The Value of the Dollar and Foodstuff PricesDeviation from trend Real price is the CRB Commodity Price Index for foodstuffs, adjusted for inflation by the U.S. GDP deflator. Real weighted-average dollar from USDA/ERS Agricultural Exchange Rate Data Set.

15. Thailand: Income and Poultry Meat ConsumptionDeviation from trend Source: USDA/ERS International Macroeconomic Data Set , USDA/FAS PS&D database

16. Suppose there is another source of food demand? Energy

17. China Oil Consumption and World Oil Prices Source: Haver Analytics

18. Percent of World Oil Consumption Period Averages Source: U.S. Department of Energy, Energy Information Agency

19. Oil Prices, Refinery Acquisition Price $/Barrel Source: USDA Long-term Agricultural Projections to 2016, February 2007, http://www.usda.gov/oce/commodity/ag_baseline.htm.

20. U.S. Ethanol Distilleries

21. U.S. Biodiesel Manufacturers

22. U.S. corn used in ethanol production Source: USDA Long-term Agricultural Projections to 2016, February 2007, http://www.usda.gov/oce/commodity/ag_baseline.htm.

23. U.S. Corn Use Source: USDA Long-term Agricultural Projections to 2016, February 2007, http://www.usda.gov/oce/commodity/ag_baseline.htm.

24. U.S. Biodiesel Production

25. EU Industrial Use of Vegetable Oil Million Tons 7% of global vegetable oil production

26. Corn and soybean planted area2006 projections compared to 2007 projections Million acres soybeans Million acres corn Source: USDA Long-term Agricultural Projections to 2016, February 2007, http://www.usda.gov/oce/commodity/ag_baseline.htm.

27. Nominal farm gate prices $/bushel Source: USDA Long-term Agricultural Projections to 2016, February 2007, http://www.usda.gov/oce/commodity/ag_baseline.htm.

28. Nominal wholesale prices, livestock Cents/lb Source: USDA Long-term Agricultural Projections to 2016, February 2007, http://www.usda.gov/oce/commodity/ag_baseline.htm.

29. Real farm gate prices $/bushel Source: USDA Long-term Agricultural Projections to 2016, February 2007, http://www.usda.gov/oce/commodity/ag_baseline.htm.

30. Real wholesale prices, livestock Cents/lb Source: USDA Long-term Agricultural Projections to 2016, February 2007, http://www.usda.gov/oce/commodity/ag_baseline.htm.

31. Conclusion • Historically, we see agricultural and food price declines after adjustment for inflation. • Short-term fluctuations in demand occur with exchange rate and adverse income changes • Recently, solid economic growth underpins demand for agricultural commodities and energy. • Sustained high petroleum product prices maintain profitability of ethanol production. • Corn acreage displaces soybeans. • Farm crop and livestock prices increase. • Nonetheless, the long-term price trend is negative, for crops and livestock.