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 Grains Real 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 Oils Real 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 Products Real 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 Foodstuffs Real Price and Trend Real price is the CRB Commodity Price Index for foodstuffs, adjusted for inflation by the U.S. GDP deflator.

7 Selected real agricultural prices Commodity or index Average annual percentage change, 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

8 Percent Population growth rates Period averages Source: USDA/ERS International Macroeconomic Data Set

9 Percent Percapita income growth rates Period averages Source: USDA/ERS International Macroeconomic Data Set

10 Increased Income Raises the Demand for Food Source: Seale, Regmi & Bernstein United States Additional food expenditure given a 10% increase in income Russia

11 Much Increased Demand Goes to High-Valued Products Source: Seale, Regmi & Bernstein Additional food expenditure given a 10% increase in income

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 Prices Deviation 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 Consumption Deviation from trend Source: USDA/ERS International Macroeconomic Data Set, USDA/FAS PS&D database

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 $/Barrel Oil Prices, Refinery Acquisition Price Source: USDA Long-term Agricultural Projections to 2016, February 2007,

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,

23 Source: USDA Long-term Agricultural Projections to 2016, February 2007, U.S. Corn Use

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 area 2006 projections compared to 2007 projections Source: USDA Long-term Agricultural Projections to 2016, February 2007, Million acres corn Million acres soybeans

27 $/bushel Nominal farm gate prices Source: USDA Long-term Agricultural Projections to 2016, February 2007,

28 Cents/lb Nominal wholesale prices, livestock Source: USDA Long-term Agricultural Projections to 2016, February 2007,

29 $/bushel Real farm gate prices Source: USDA Long-term Agricultural Projections to 2016, February 2007,

30 Cents/lb Real wholesale prices, livestock Source: USDA Long-term Agricultural Projections to 2016, February 2007,

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.