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Prospects for Grain Prices

Prospects for Grain Prices . Ulrich Koester University of Kiel Germany. Outline. Introduction: Hot topic: Most recent price changes on the wheat market in US$ Historical perspective Causes of price movements Specifics of recent price drop Causes of uncertainties

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Prospects for Grain Prices

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  1. Prospects for Grain Prices Ulrich Koester University of Kiel Germany

  2. Outline Introduction: Hot topic: Most recent price changes on the wheat market in US$ Historical perspective Causes of price movements Specifics of recent price drop Causes of uncertainties Likely development: Short-, medium and long-term Summary

  3. The recent bubble on the wheat and corn market 2007/2008 Source: CBOT, SRW prices

  4. Index of real corn and wheat prices, 1866-2008 Note: Prices through 2007 are marketing year averages. The 1866-1908 wheat prices are weighted by production; the 1909-2007 prices are weighted by sales. The 2008 wheat and corn prices are the November 2008 WASDE season average, mid-point of range. Due to lack of another consistent deflator, prices deflated by BLS calendar year CPI for all urban consumers. Sources: Carter, et al. editors (2006), USDA NASS Agricultural Prices, USDA WASDE and BLS “CPI- All Urban Consumers. Quoted in Sumner (2008)

  5. Typical sequences of a spike Initial production shortfall for some consecutive years Low stocks as percentage of annual consumption Significant change in expectations, partly due to misleading projections of the production potential Change in Government policies Speculation

  6. Causes of the last price hike • Short-fall in production due to bad weather for three consecutive years • Low level of stocks, decline from nearly 25 % in Dec. 2005 to below 18 % in May 2008 • Birth of two new fundamental: • The market for biofuel • The importance of the oil • Significant uncertainty • Speculation • Unknown level of privately held stocks • Increase of public held stocks in some countries

  7. Development of world production and world consumption for wheat 1000 MT

  8. Impact of biofuel support removal on world commodity prices Source: OECD, 2008, Biofuel Support Policies an Economic Assessment. Paris

  9. Additional specifics of the last spike • Distribution of stocks across exporting and importing countries • Behavior of some governments • Inaccurate estimates and projections of short-term production, consumption and stocks • Macroeconomic factors • Financial expansion • New financial instruments, also on the futures markets for grain • Devaluation of the US Dollar

  10. Specifics of the dramatic price drop since July • Change in information about short-term production and demand • Financial crisis • Return to normal situation or over-shooting? • Overshooting likely

  11. Sources of main uncertainties for projections • Adjustment of the agricultural sector • Oil price • Macroeconomic effects: Financial and economic crisis; growth rates and exchange rates • Government policies • Biofuel • How to cope with a worldwide production shortfall • Investment in the agricultural sector • Technological change

  12. Area harvested and production of wheat: Change in percent from 2007/08 to 2008/09 (estimates) 24% 26 % 11.8%

  13. Forecast of short and medium-term price movements Main determinants • Production potential has been mobilized and is likely to be exploited even at lower prices • Demand will increase less than under normal conditions due to worldwide recession • Wheat prices may stay around US$ 140 to 180 per MT for the next three to four years • Prices in most national currencies will likely be below the level of 2006 • Future prices on the market in Chicago may serve as a good judgment given present information.

  14. CBOT Wheat Futures 2008 to 2011

  15. Long-term projections • Fundamentals play a key role • Price of oil • Effect on the supply side • Effect on the demand side • Growth of production • Investment in agriculture • Expansion of crop area • Growth of yields • Growth of demand

  16. Selected official long-term projection OECD/FAO produced in 2007 FAPRI January 2008 Very uncertain, but likely too optimistic due to misjudgment of capability to adjust and possibly overrating the effect of the oil price

  17. OECD-FAO Projections: Wheat Likely too high OECD-FAO Agricultural Outlook, 2008-2017

  18. OECD Projections: Coarse Grains (2007) OECD-FAO Agricultural Outlook, 2008-2017

  19. FAPRI Projections of US Crop Prices from January 2008 Projections are very uncertain mainly due to uncertainty related to oil prices Actual wheat prices were 2008 US$ 12.4 per Bushel in March and less than US$ 5 per Bushel in early Dec. 2008

  20. Projections of world oil prices, 2010-2030 (in 2006 US$ per barrel) Source: : http://www.eia.doe.gov/oiaf/aeo/forecast.html

  21. Summary • The last bubble on the grain market was larger (in relative terms) than other bubbles in the past. • The sequence of the bubble was the same as in the past. • It is likely that the available production potential is significantly higher than assumed in most projections. • Uncertainty about future prices is extremely high

  22. Summary • It is likely that prices in the short and medium term will not be significantly higher than US$ 150 to 200 per MT in real terms and likely lower than in 2006 in national currencies • Long-term price projection are very uncertain, however, it is unlikely that prices will be above US$ 200MT if prices of oil will develop as projected.

  23. Additional information for discussion

  24. World Wheat: Ending stocks as percentage of annual consumption

  25. Ending stocks in percent of domestic consumption of wheat

  26. Wheat prices and share of stocks as percent of annual consumption US Export FOB Price for Hard Red Winter. Source: USDA, PSD-Datenbank, 2008. IMF, 2008.

  27. Domestic wheat consumption and ending stocks; annual changes in percent 2007 to 2008

  28. Production of wheat 2007/2008

  29. The impact of speculation on futures markets Source: Corn Futures Net Positions from CFCT (COT) reports; Quoted in Carter et al. 2008

  30. Development of production, consumption, storage and imports of weat. China in 1000 MT Source:: USDA, PSD-Datenbank, 2008.

  31. Projection below Average deviation Min und max. above of actual data deviation (2) in % in Mio T. in Mio. T. in Jahren Production World 0.6 3.1 -8.3 6.4 18 8 USA 0.1 0.1 -0.2 0.1 11 6 Foreign 0.7 3.1 -8.3 6.4 18 8 Export World 3.3 3.7 -14 5.2 18 8 USA 4.1 1.3 -3.9 2.7 14 12 Foreign 4.3 3.6 -12.6 5.6 20 6 Domestic consumption World 0.9 4.7 -14.3 11 16 10 USA 3.8 1.1 -2.6 3 9 17 Foreign 0.9 4.5 -14.8 8.6 17 9 Ending stocks Welt 3.9 4.9 -11.5 8.1 18 8 USA 7.9 1.7 -4.6 3.3 15 11 Foreign 4.1 4.1 -10.3 9.8 18 8 Accuracy of short-term projections of quantities Source:USDA, various years

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