FAPRI Outlook Prospects for the Next Decade: The New Ag/Energy Nexus William H. Meyers Professor of Agricultural Economics and Co-Director, FAPRI University of Missouri LINK Meeting Saint Petersburg, Russia 4 June 2009

Outline A new and market environment with stronger agriculture and energy linkages Recent grain market developments FAPRI projections of global market prospects Highlights of results Key movers and shakers Main uncertainties Challenges and opportunities Policy priorities Short term Long term

Why did prices rise, then decline? Can it ALL happen again? Why prices rose Why prices fell Reduced grain production in Europe, Australia Economic growth in Asia and elsewhere Weaker dollar Higher petroleum prices Rapid biofuel expansion Policy interventions Speculation rose Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown Stronger dollar Lower petroleum prices Slower biofuel growth Many interventions stop Speculation declined

Corn and petroleum prices

Grain production, million metric tons (WASDE May 12, 2009)

Grain stocks, million metric tons (WASDE May 12, 2009)

Grain stocks to use ratios (WASDE May 12, 2009)

World grain stocks and real prices, Oct 2008

World grain stocks and real prices (WASDE May 12, 2009)

FAPRI-Missouri/ISU - Consortium IHS Global Insight U.S. and Global Macro Texas A&M University AFPC Representative Farms - 1989 University of Missouri U.S. Agriculture ___FAPRI est. 1984____ Iowa State University CARD World Agriculture Texas Tech Cotton - 2003 Arizona State NFAPP Fruit & Veg. - 1995 Univ. of Wisconsin Dairy - 2003 United Nations-Project LINK Global Macro University of Arkansas AFAPC World Rice - 1990

Historical and projected real commodity prices, 2007$ Not magic or crystal ball Combination of historical behavior and expert judgment, broad review and consultation with other analysts Models keep things in balance Price path? Don t know because we don’t know oil price or economic rebound etc

Why do projections differ?

Key elements of baseline assumptions Macroeconomic Variables Agricultural Policies Technology Normal Weather

Macroeconomic drivers: GDP 2009 recession and rapid recovery (IHS GI) Strong global outlook from 2011 onward 3.3 % average annual GDP growth rate India and China average 7.8 and 8.2%, respectively

Real GDP growth rates

Macroeconomic drivers: exchange rate U.S. Dollar strengthens in 2009 Real depreciation of $ resumes in 2010 against many currencies Most Asian currencies appreciate in real terms against the U.S. dollar China experiences significant real appreciation

Exchange rate, major trading partners, FC/US$

Macroeconomic drivers: oil price Projected petroleum prices in the near term are well below forecasts made in 2008 Below $60/barrel through 2010 then increases to $80/barrel as global economy recovers and demand grows

Petroleum price forecasts from IHS Global Insight *NYMEX July futures, 5/27/09

Global macro drivers: income Economic recovery fuels next 10 years growth Dairy product consumption increases 13 kg per capita (milk equivalent) from 2008 to 2018 Per capita meat increases 5.6 kg Per capita vegetable oil increases 3.1 kg Food grain consumption per capita declines Production of meats increases 38.6 mmt or 18% Trade in meats increases 4.1 mmt or 24.3%

Changes in per capita food consumption 2008-2018

World meat production and trade

Dairy product consumption in Asia

Meat production and feed use

World grain prices The world wheat price was $144.9 per mt in 2003/04, and it is projected to decrease in 2004/05 to $140.8 per mt with the recovery in area and production, particularly in the EU-15, Eastern European, and FSU countries. The average annual growth rate of the wheat price is 0.24%. The stocks-to-use ratio was 21.5% in 2003/04, and it is projected to continue its downward trend though at a slower pace, reaching 18.7% in 2013/14. Drought and dry conditions reduced the EU-15 wheat harvest in 2003/04 to 91 mmt. A recovery of 11.7 mmt is projected in 2004/05 with the aid of a lower set-aside rate. Production in the EU-15 reaches 107.2 mmt in 2013/14. Although Argentine producers partly switch to soybeans in 2004/05, production resumes later and reaches 20.9 mmt in 2013/14. Canadian production is projected to reach 30.7 mmt in 2013/14, with Australian production at 28.3 mmt in 2013/14. Driven by strong consumption demand, coupled with recent drought in India and decreased area in China, global rice stocks in 2003 dropped to their lowest levels in 20 years. The stocks-to-use ratio was at a record low of 20.1%. Consequently, international rice prices broke the $200 mark in 2003 after three years of weakness. Over the baseline, the rice stocks-to-use ratio remains low, and the international (Thai) price trends upward, reaching $326 per mt by 2013. Still recovering from recent drought in India, world rice area gains 3.0 mha in 2004. Over the next decade, global rice area grows only slightly, at 0.3% annually, ranging between 153 mha to 155 mha. Thus, yield growth is expected to be the main source of the growth in rice output over the same period. The world rice yield improves an average of 1.0% annually over the baseline as a result of continued development and adoption of higher-yielding varieties. In 2003/04, large releases of stocks increased supply much more than demand, causing a drop in the corn price. In 2004/05, stocks are released at a lower rate, putting pressure on the supply despite increasing production. Thus, the corn price increases in 2004/05 by 1.6% to $105.2 per mt. The stocks-to-use ratio was 10.5% in 2003/04; it decreases to 8.8% in 2013/14.

Crop outlook: world feed grain outlook overview Growth in livestock sector drives the increase in demand for feed grains. Feedstock use for ethanol production boosts demand Stronger prices increase area and, with yield growth, production increases. Increase in area grows supply in the short-run, while yield improvement is the major source of growth in the long-run.

World corn use and per capita consumption

World corn area and yield

World corn stocks-to-use ratio vs. price

World food grain outlook overview Food grain per capita consumption declines with growth in income as consumers “trade-up” to protein rich products. With declining per capita consumption, demand growth comes mainly from population growth. Growth in consumption in regions such as Asia, Africa, and the Middle East fuels growth in trade and strengthen food grain prices. Long-run production growth driven by yield improvement.

World wheat feed and food consumption

World wheat area and yield

World wheat stocks-to-use ratio vs. price

World rice production, use, and per capita consumption

World rice area and milled yield

World oilseed outlook overview Oilseed sector grows with strong demand for both oil and meal products driven by population and income growth, expansion of the livestock sector China soybean imports grow by nearly 60 % from 2008 to 2018 Increasing interest in renewable fuels and biodiesel mandates drives increase in industrial use of vegetable oil and their prices. Room for area expansion in South America dampens price growth in the next decade.

World vegetable oil consumption

World soybean area and yield

World oilseed prices World oilseed prices climbed strongly in 2003/04 as demand grew faster than supply. All oilseed prices are expected to fall significantly next year under the pressure of record supplies. Another price decline is expected for the 2005/06 season. Oilseed prices recover slightly after that before settling on a declining path for the remainder of the outlook period as production expansion outpaces demand growth. In the long run, prices are expected to keep their established relationships. World soybean production reaches 273 mmt by 2013/14, an increase of 37% over the current year. In 2009/10, Brazil overtakes the U.S. as the largest soybean producer in the world. At the end of the outlook period it holds a 35% share. The U.S share drops to 30%. World soybean production becomes even more concentrated: the top three producer countries increase their production share from 82% to 85%.

World vegetable oil prices World oilseed prices climbed strongly in 2003/04 as demand grew faster than supply. All oilseed prices are expected to fall significantly next year under the pressure of record supplies. Another price decline is expected for the 2005/06 season. Oilseed prices recover slightly after that before settling on a declining path for the remainder of the outlook period as production expansion outpaces demand growth. In the long run, prices are expected to keep their established relationships. World soybean production reaches 273 mmt by 2013/14, an increase of 37% over the current year. In 2009/10, Brazil overtakes the U.S. as the largest soybean producer in the world. At the end of the outlook period it holds a 35% share. The U.S share drops to 30%. World soybean production becomes even more concentrated: the top three producer countries increase their production share from 82% to 85%.

World Protein Meal Prices World oilseed prices climbed strongly in 2003/04 as demand grew faster than supply. All oilseed prices are expected to fall significantly next year under the pressure of record supplies. Another price decline is expected for the 2005/06 season. Oilseed prices recover slightly after that before settling on a declining path for the remainder of the outlook period as production expansion outpaces demand growth. In the long run, prices are expected to keep their established relationships. World soybean production reaches 273 mmt by 2013/14, an increase of 37% over the current year. In 2009/10, Brazil overtakes the U.S. as the largest soybean producer in the world. At the end of the outlook period it holds a 35% share. The U.S share drops to 30%. World soybean production becomes even more concentrated: the top three producer countries increase their production share from 82% to 85%.

FOB Northern European dairy product prices

Movers, shakers and uncertainties Good weather and yields in 08/09, but costs and poor weather dampen 09/10 growth, except soybeans Price surge has abated, but NOT in some LIFDCs Trade “safeguard” interventions mostly gone Biofuel growth slowed, but policies remain Strong influence of energy markets continue Major uncertainties (stochastic analysis) Oil price US dollar The global financial crisis and impacts on demand growth, trade financing Weather

Oil price distribution

Maize US farm price uncertainty

Wheat US farm price uncertainty

A more uncertain future Road to economic recovery? Timing and size of oil price volatility? Will biofuel policies change? Will other policies be unstable? Wider range of possible outcomes Farmers and agribusiness can easily get on wrong side of output and/or input markets Complicated decision making and planning Larger impacts on low income consumers 48

Challenge and Opportunity Challenge - how to provide safety net measures for the most vulnerable populations Opportunity - higher prices can increase incomes from food production in rural areas where agriculture is the main source of income and employment National and international policy actions need to be considered Short run Long run 49

Spasibo! Contact information: email: meyersw@missouri.edu web: www.fapri.missouri.edu