The outlook for agricultural markets in the next decade: focus on price variability Jacinto Fabiosa Co-Director, FAPRI (515) 294-6183 jfabiosa@iastate.edu FAPRI Food and Agricultural Policy Research Institute - ISU
Presentation Plan Characterize the Sources of Price Variability Weather and Yield variability New varieties and production systems Climate change and extreme weather events Crude oil price variability and volatility and spillover to agricultural sector Grains prices Feed costs Price volatility under a low stock regime Price volatility with policy induced demand inflexibility Main Outlook update results and drivers Wildcards and Emerging Issues
Corn Yields of Illinois County County Yield (bush 0 50 100 150 hels per acre) 1980 1983 1988 1991 2002 1980 1990 2000 2010 Year
Drought Index and Yield Deviation Relative Yield Deviation -1 -.75 -.5 -.25 0.25 0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 Drought Index
Crop Losses and Drought Index Corn Bushels Loss 0 20 40 60 Corn Percent Loss 0.1.2.3.4.5.2.7 1.2 1.7 2.3 2.8 3.5.2.7 1.2 1.7 2.3 2.8 3.5 Soybean Bushels Loss 0 5 10 15.2.7 1.2 1.7 2.3 2.8 3.5 Soybean Percent Loss 0.1.2.3.2.7 1.2 1.7 2.3 2.8 3.5 1980-1989 2000-2008
Drought Tolerance Results Regression results show that corn is becoming less susceptible to drought measured both by bushel loss and percentage loss. For soybeans, constant bushel loss is not rejected but the degree of drought tolerance measured in percentage term is decreasing over time. Reasons Focus on drought tolerance by seed companies is recent. The other large change common to both corn and soybeans is that a greater proportion of both crops is being managed by larger and perhaps more able managers. Better management leads to more timely field operations, which could result in increasing drought tolerance.
Drought Occurrence Intergovernmental Panel on Climate Change Fourth Assessment Report (IPCC, 2007), Since 1950, the number of heat waves has increased and widespread increases have occurred in the numbers of warm nights. The extent of regions affected by droughts has also increased as precipitation over land has marginally decreased while evaporation has increased due to warmer conditions.
Energy and Ag Commodity Market Integration Emergence and expansion of the ethanol sector was associated with a fundamental transformation of the integration of the energy and agricultural sectors. Correlation of energy and ag commodity prices Dramatic increase in correlation. Becoming statistically significant. Correcting anomalous correlation. Spillover of crude price volatility to the ag sector prices.
EISA RFS Billion gal 40 30 20 15 corn 10 0 2009 2013 2018 2022 Total Advanced Cellulosic Biodiesel
Biofuel Policy Instruments RFS Tax Credit and Import Duty Tax credit (federal motor tax) Ethanol of $0.45/gallon Biodiesel of $1.00 per gallon Import duty to expire on 2008 2.5% ad valorem $0.54/gal specific TRQ for CBI At least 50% locally produced feedstock Maximum of 60 million gallons or 7% of consumption
U.S. Corn Ethanol Production and Revenue USD per gal 2.0 Billion gal 20 1.5 15 1.0 10 0.5 5 0.0 2003 2005 2007 2009 2011 2013 Production Net Revenue FCU FCL Mandate 0
Biofuel Mandate (target) Country Units Ethanol Biodiesel Combined EU % 4 (2015) % 6 (2020) Brazil % 25 (2006) 2 (2008) 10 (2010) Argentina % 5 (2010) Canada % 5 (2010) India % 5 (2007) 10 (2012) China % 15 (2020) US bg 36 (2022) 1 (2012)
Crude Oil Corn and Wheat Prices
U.S. Area Allocation Million Acres 90 80 70 60 50 2000 2002 2004 2006 2008 2010 2012 2014 Corn Soybeans
Energy and Ag Commodity Price Correlation Crude Corn Soymeal DDGS Crude 1 1.000-0.117 0.183-0.252 2 1.000 0.877 0.909 0.834 Corn 1 1.000 0.633 0.753 2 1.000 0.917 0.957 Soymeal 1 1.000 0.650 2 1.000 0.891
Significance of Energy and Ag Commodity Price Correlation Crude Corn Soymeal DDGS Pre-boom Rho 1.000-0.117 0.183-0.252 S(rho) (0.149) (0.024) (0.002 Post-boom Rho 1.000 0.877 0.909 0.834 S(rho) <.0001 <.0001 <.0001
Crude Oil Price Volatility 03/03 Iraq Invasion 12/08 Surge
Oil Price Volatility Scalping (SC) Quick change in contract position Oil Stock (OS) Speculation (SP) Non-commercial position Mean RMSE Scalping 0.0031 0.0002 Oil Stock -0.0034 0.0004 Speculation 0.0029 0.0003
Crude Oil Price Volatility Spillover Oil-Corn Oil-Wheat Corn-Wheat Spillover Parameter First -0.05 (0.06) Second 0.13 (0.09) -0.07 (0.05) 0.04 (0.05) 0.04 (0.05) 0.16 (0.17)
Crude Oil and Feed Cost 16 16 Feed Cost ($/cwt) Feed Cost ($/cwt) 12 12 8 8 4 4 0 Crude Price ($/barrel) 0 20 40 60 80 100 120 0 Crude Price ($/barrel) 0 20 40 60 80 100 120 140 160 First (rho=0.02) Second (rho=0.89)
Energy impacts via biofuels S1 So S1 So p1 po p2 p1 po Do Do D1
Inflexibility of biofuel demand and price volatility S 1 S 0 p 2 p 1 p 0 RFS D 0
Corn and Oil Price Variability 25 20 Corn Coeff Var (%) Corn 2017 2015 15 2009 10 Crude Oil 20 25 30 35 40 45 50
Outlook Update Deeper recession. Continuing weakness of the US dollar. Higher crude oil price.
Growth in Real GDP - developing Percent 9 6 3 0-3 -6-9 2002 2004 2006 2008 2010 2012 2014 2016 2018 2007 2008 2009
Growth in Real GDP - developed Percent 9 6 3 0-3 -6-9 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2007 2008 2009
Growth in Real GDP - world Percent 9 6 3 0-3 -6-9 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2007 2008 2009
Selected Exchange Rate LC per USD 7 6 5 4 3 2 1 0 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Australia Argentina Brazil European Union Canada
Selected Exchange Rate 140 120 100 80 60 40 20 0 LC per USD 1996 1999 2002 2005 2008 2011 2014 2017 Japan China 10 8 6 4 2 0
Crude Oil Price (WTI) USD per bar 120 100 80 60 40 20 0 1997 2000 2003 2006 2009 2012 2015 2018 2008 J 2009 N 2009 NX 2009-11-13-09
US Corn Price 5.0 USD per bu 4.0 3.0 2.0 1.0 0.0 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Aug-09 Jan-09 CBOT
US Wheat Price 8.0 USD per bu 6.0 4.0 2.0 0.0 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Aug-09 Jan-09 CBOT
US Soybean Price 12.0 USD per bu 10.0 8.0 6.0 4.0 2.0 0.0 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Aug-09 Jan-09 CBOT
US Soybean Meal Price USD perton 400 350 300 250 200 150 100 50 0 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Aug-09 Jan-09
US Soybean Oil Price 60 USD percwt 50 40 30 20 10 0 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Aug-09 Jan-09
US Cattle Price 120 USD per cwt 100 80 60 40 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Aug-09 Jan-09
US Hog Price 80 USD per cwt 60 40 20 0 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Aug-09 Jan-09
US Poultry Price 100 USD per cwt 80 60 40 20 0 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Aug-09 Jan-09
US Biofuel Prices 5.0 USD per gal 4.0 3.0 2.0 1.0 0.0 1993 1996 1999 2002 2005 2008 2011 2014 Ethanol Biodiesel
US Ethanol S & U and Price Million gal 18 16 14 12 10 8 6 4 2 USD per gal 3.0 2.5 2.0 1.5 1.0 0.5 0 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Production Consumption Price Import Stock 0.0
US Biodiesel Supply and Utilization Million gal 1,200 900 600 300 Million gal 400 300 200 100 0 0 2005 2007 2009 2011 2013 Production Consumption Net Exports -100
US Corn Utilization Share by End- use Percent 100 80 60 40 20.80 16.98 9.49 6.19 16.36 16.32 10.44 32.28 38.17 20 51.78 41.87 39.31 0 2003 2009 2014 Feed Fuel Alcohol Export Others
US Soybean Oil Utilization Share by End- use Percent 100 80 5.26 15.73 13.23 60 40 93.74 72.76 67.87 20 0 1.00 11.51 18.90 2003 2009 2014 Biodiesel Food Exports
Crude Oil and Corn Prices 2016/2017 Corn Price (USD per bu) 8 4 0 90 percentile 10 percentile 0 25 50 75 100 125 150 175 200 225 250 Crude Price (USD per barrel)
Practical Application Cost of government program can give estimates of level of government costs and likelihood of occurrence. Counter cyclical payments Load deficiency payments WTO compliance can give estimates of likelihood of exceeding WTO amber cox domestic support commitment. Amber box
What are the wild cards? Will there be new developments GMO crops and their widespread acceptance? Will there be advances in second generation biofuel feedstocks technology and will they commercially feasible? What are the likely impacts of on-going climate change negotiations and legislations. Will a multilateral trade agreement on agriculture be reached? When? How deep will the reforms be?
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