View From 10,000 Feet? Well, Let’s Just Talk Ag Prices!!! (Kevin Bernhardt UW-Extension and Center for Dairy Profitability) October 2008

Farm & Risk Management Team © 2008 Half Hour to Solve the Future of Ag Prices! July 2008 October 2008 The Future with respect to Prices The Future with respect to Farm Management and Marketing 2

It’s July Dec $7.75+ Nov $16 + Dec $21 Dec $115

Farm & Risk Management Team © Must be a New Era (Nominal Corn Prices) Source: USDA

Farm & Risk Management Team © 2008 Prices – A Perfect Storm

Farm & Risk Management Team © 2008 Supply Growth Rate in Productivity slowed – R & D funding down – Non-farm uses for land – Constraints on factors of production (water) – Climate Change?? Impact on Price

Farm & Risk Management Team © 2008 World Wheat and Course Grain Ending Stocks

Farm & Risk Management Team © 2008 Supply Weather Shocks – 2006  Russia and Ukraine  Australia  South Africa – 2007  SE Europe  Russia and Ukraine  Turkey, Australia, Argentina, etc. Impact on Price Historically, two successive years of lower global production occurs about once per decade.

Farm & Risk Management Team © 2008 Supply Change in stock holding policies – 80’s and 90’s were an era of:  Surpluses  Stability  Free Trade – Not a big impact, but it exacerbates impact of any short falls Why go through the expense of holding stocks? Impact on Price

Farm & Risk Management Team © 2008 Supply Higher Oil Prices – Direct Affect: Higher energy costs for transportation, drying, etc. – Indirect: Higher fertilizer costs and fuel surcharges on other inputs Impact on Price Likely have not felt the full impact of this yet.

Farm & Risk Management Team © 2008 Demand Population – Growth rate is slowing, but in absolute number of mouths to feed the world is growing at about 75 million per year  That’s ¼ of US population per year  That’s almost 1 billion more people in next 12 years

Farm & Risk Management Team © 2008 Where is Population Growth Source: World Bank Group:

Farm & Risk Management Team © 2008 Where’s the Population Pop. (bil)% of WorldRank World6.667 China India Indonesia Bangladesh Nigeria EU U.S Source: U.S. Bureau of Census

Farm & Risk Management Team © 2008 Demand Income – Growing at a faster rate – Growing especially in middle income countries and in Asia

Farm & Risk Management Team © 2008 Gross National Income per Capita Source: World Bank Group:

Farm & Risk Management Team © 2008 Gross National Income per Capita High Income people don’t eat more food when they get more money – they buy boats! Source: World Bank Group:

Farm & Risk Management Team © 2008 Gross National Income per Capita With more income this group buys food and often more animal protein. Source: World Bank Group:

Farm & Risk Management Team © 2008 Gross National Income per Capita Source: World Bank Group:

Farm & Risk Management Team © Demand, U.S. $ Index Impact on Price

Farm & Risk Management Team © 2008 U.S. Corn and Soybean Exports ( MY (Sept-Aug) Thousand MT) Source: USDA/FAS PS&D data

Farm & Risk Management Team © 2008 U.S. Beef and Pork Exports ( , Calendar Year, TMT) Source: USDA/FAS PS&D data

Farm & Risk Management Team © 2008 Demand Oil Prices!!! – Increased Income  Bicycle to car  Increased demand for oil Increased input cost on Agriculture Ethanol is profitable + Increased demand for corn Changing T&P

Farm & Risk Management Team © 2008 Impact on Price

Farm & Risk Management Team © 2008 Demand Hedge and Index Funds Impact on Price

SUPPLY Productivity has slowed World stocks are tight: Policy World stocks are tight: Weather shocks Increasing Input Prices CRP and etc. Switch in productionDemand Population Per capita income US dollar decline Oil prices (ethanol demand) Hedge and Index Funds Price of other goods Impact on Price

Farm & Risk Management Team © 2008 Prices – A Perfect Storm

27 Its Not July Anymore

Farm & Risk Management Team © Demand, U.S. $ Index

Farm & Risk Management Team © 2008

Farm & Risk Management Team © 2008 U.S. Blended Motor Gasoline Consumption 30 Source: U.S. Department of Energy, Energy Information Administration

Farm & Risk Management Team © 2008 Anything Else Happen Since July? A Dow that fell and rose by record levels within a week A potential world-wide financial collapse A $700 billion dollar bailout from Congress Similar actions by other countries Favre’s playing for the Jets 31

It’s Not July Anymore 32 Dec $7.75+ Nov $16 + Dec $21 Dec $115 Now $3.85 Now $14.28 Now $8.93 Now $88.77

Net Returns Above VC 33 Source: USDA, World Agricultural Outlook Board

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Farm & Risk Management Team © 2008 What About Tomorrow? Productivity World stocks: Policy World stocks: Weather shocks Increasing Input Prices CRP and etc. Switch in production Population Per capita income US dollar decline Oil prices (ethanol demand) Hedge and Index Funds Impact on Price What changes are permanent - Long vs Short term trends -What changes are permanent - Long vs Short term trends

Farm & Risk Management Team © 2008 Nominal Corn Prices (Future Range Based on Average of Prior Periods)

Farm & Risk Management Team © 2008 Nominal Corn Prices Future Range Based on Average of Most Recent Period Change

Farm & Risk Management Team © 2008 Nominal Corn Prices Ranges based on all data recent and all periods and no outliers all periods and recent

Farm & Risk Management Team © 2008 Ethanol, A Fundamental Change 39

Farm & Risk Management Team © 2008 Ethanol, A Fundamental Change 40

Farm & Risk Management Team © 2008 We’ve Hitched Ourselves to the Oil Train 41 Oil’s Volatility As Well

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Farm & Risk Management Team © 2008 Sources: Websites The Oil Drum: Association for the Study of Peak Oil: Oil Market Report: Now and Future: WTRG Economics: World Bank Group: Farm Foundation: USDA Economic Research Service: Trading Charts, Inc: CHOICES: Foreign Agricultural Service:

Farm & Risk Management Team © 2008 Sources: Written Articles Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices. USDA/ERS, July / / Bahn, Henry. “Commodity Prices Rock World Markets: Structural Shift or Short Term Adjustments?” Choices, AAEA, 2 nd qrt (2). Westhoff, Pat. “Farm Commodity Prices: Why the Boom and What Happens Now?” Choices, AAEA, 2 nd qrt (2). Lawrence, John D., James Mintert, John D. Anderson, and David P. Anderson. “Feed Grains and Livestock: Impacts on Meat Supplies and Prices.” Choices, AAEA, 2 nd qrt (2). Irwin, Scott H., Philip Garcia, Darrel L. Good and Eugene L. Kunda. “Recent Convergence Performance of CBOT Corn, Soybean, and Wheat Futures Contracts.” Choices, AAEA, 2 nd qrt (2). Mark, Darrell R., B. Wade Brorsen, Kim B. Anderson, and Rebecca M. Small. “Price Risk Management Alternatives for Farmers in the Absence of Forward Contracts with Grain Merchants.” Choices, AAEA, 2 nd qrt (2). Abbott, Philip C., Christopher Hurt, and Wallace E. Tyner. “What’s Driving Food Prices?” Issue Report from the Farm Foundation, July Fortenbery, T. Randall and Hwanil Park. “The Effect of Ethanol Production on the U.S. National Corn Price.” Univ. of WI-Madison Dept. of Ag and Applied Econ: Staff Paper no. 523, April 2008.

Farm & Risk Management Team © 2008 Sources: Other Extension Outlook Conference, Kansas City, Aug 18-19, Fortenbery, Randy. Presentation to WI Ag Consultants, March 2008.