Presentation is loading. Please wait.

Presentation is loading. Please wait.

What’s Going on With These Darn Prices! Managing the Opportunities (Kevin Bernhardt, UWEX) August 2008.

Published byPrimrose Johnston Modified over 9 years ago

Similar presentations

Presentation on theme: "What’s Going on With These Darn Prices! Managing the Opportunities (Kevin Bernhardt, UWEX) August 2008."— Presentation transcript:

1 What’s Going on With These Darn Prices! Managing the Opportunities (Kevin Bernhardt, UWEX) August 2008

2 View From 10,000 Feet – Global Situation (Kevin) View From the Top of the Oil Rig – Oil prices and Biofuels (Alan) View From the Farm gate (Kevin)

3 Farm & Risk Management Team © 2008 Sources: Websites The Oil Drum: http://www.theoildrum.com/story/2006/10/5/215316/408http://www.theoildrum.com/story/2006/10/5/215316/408 Association for the Study of Peak Oil: http://aspo-usa.com/http://aspo-usa.com/ Oil Market Report: http://omrpublic.iea.org/http://omrpublic.iea.org/ Now and Future: http://www.nowandfutures.com/index.htmlhttp://www.nowandfutures.com/index.html WTRG Economics: http://www.wtrg.com/http://www.wtrg.com/ World Bank Group: http://ddp-ext.worldbank.org/ext/DDPQQ/member.do?method=getMembershttp://ddp-ext.worldbank.org/ext/DDPQQ/member.do?method=getMembers Farm Foundation: http://www.farmfoundation.org/http://www.farmfoundation.org/ USDA Economic Research Service: http://www.ers.usda.gov/http://www.ers.usda.gov/ Trading Charts, Inc: http://futures.tradingcharts.com/http://futures.tradingcharts.com/ CHOICES: http://www.choicesmagazine.org/magazine/issue.phphttp://www.choicesmagazine.org/magazine/issue.php Foreign Agricultural Service: http://www.fas.usda.gov/default.asphttp://www.fas.usda.gov/default.asp

4 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 2008. http://www.ers.usda.gov/Publications/WRS0801 /http://www.ers.usda.gov/Publications/WRS0801 / Bahn, Henry. “Commodity Prices Rock World Markets: Structural Shift or Short Term Adjustments?” Choices, AAEA, 2 nd qrt 2008 23(2). http://www.choicesmagazine.org/magazine/issue.php http://www.choicesmagazine.org/magazine/issue.php Westhoff, Pat. “Farm Commodity Prices: Why the Boom and What Happens Now?” Choices, AAEA, 2 nd qrt 2008 23(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 2008 23(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 2008 23(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 2008 23(2). Abbott, Philip C., Christopher Hurt, and Wallace E. Tyner. “What’s Driving Food Prices?” Issue Report from the Farm Foundation, July 2008. http://www.farmfoundation.org/news/templates/template.aspx?articleid=404&zoneid=26 http://www.farmfoundation.org/news/templates/template.aspx?articleid=404&zoneid=26 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.

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

6 Farm & Risk Management Team © 2008 6 My Motivation (Nominal Corn Prices) Source: USDA

7 First, A Quick Reminder of Economic Basics P Q P* D S

8 Farm & Risk Management Team © 2008 Law of Price Determination Demand: If the demand for a good increases, then ceritus paribus the price for that good will increase and visa versa. D S P Q P D' P'

9 Farm & Risk Management Team © 2008 Law of Price Determination Supply: If the supply for a good increases, then ceritus paribus the price for that good will decrease and visa versa D S P Q P S’ P' Individual Supply = MC

10 Farm & Risk Management Team © 2008 Law of Price Determination D S’ P Q P’ S P D'

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

12 Farm & Risk Management Team © 2008 Demand Population Income Changing Tastes and Preferences Prices of Complimentary and Substitute Goods Value of the Dollar Trade

13 Farm & Risk Management Team © 2008 Supply Anything that changes the physical capacity to produce – Technology (productivity gains) – Weather – Factors of production (water, labor, etc) Changes in input prices Trade (domestic) Changes in units of production – Institutional (govt) – Switch to other kinds of production – More or less land in production

14 Farm & Risk Management Team © 2008 Food For Thought The world is not ceritus paribus, It’s Dynamic – Multidimensional mess of constantly changing factors, substitutions, and interrelationships. – Add to that the wild card of market psychology. – Long-term trends messed up by short term shocks – The world’s producers and consumers will respond  High prices over time will lead to more supply which will lead to a fall in prices.  However, the structure of the factors of supply and demand, how they change, the volatility of their change, and the importance (elasticity) of change may be different  It’s not the first time!

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

16 Farm & Risk Management Team © 2008 - Past gains from Yield not Area - R&D Funding is down - Why fund R&D with surpluses?

17 Farm & Risk Management Team © 2008

18 Farm & Risk Management Team © 2008

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

20 Farm & Risk Management Team © 2008 Supply Change in stock holding policies – 80’s and 90’s were an era of:  Surpluses  Stability  Free Trade So why go through the expense of holding stocks?

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

22 Farm & Risk Management Team © 2008

23 Farm & Risk Management Team © 2008 Supply Change in stock holding policies  By itself, limited impact  Exacerbates impact of any short falls Impact on Price

24 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.

25 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 Leads to increased marginal costs – Shifts in practices, shifts to alternative uses,  Lower production Shorter supply and higher prices Impact on Price Likely have not felt the full impact of this yet.

26 Farm & Risk Management Team © 2008 Supply Recap Productivity has slowed World stocks are tight: Policy World stocks are tight: Weather shocks Increasing Input Prices CRP and etc. Switch in production Impact on Price

27 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

28 Farm & Risk Management Team © 2008

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

30 Farm & Risk Management Team © 2008 Where’s the Population Pop. (bil)% of WorldRank World6.667 China1.33019.91 India1.14817.22 Indonesia.2383.66 Bangladesh.1542.39 Nigeria.1382.111 EU.4917.44 U.S..3034.55 45.1 Source: U.S. Bureau of Census

31 Farm & Risk Management Team © 2008 Population Distribution - China

32 Farm & Risk Management Team © 2008 Population Distribution - US

33 Farm & Risk Management Team © 2008 Population Distribution - India

34 Farm & Risk Management Team © 2008 Demand Population Impact on Price

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

36 Farm & Risk Management Team © 2008 Gross National Income per Capita At what point does the elasticity for food demand change? Source: World Bank Group:

37 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:

38 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:

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

40 Farm & Risk Management Team © 2008 More Income  Changing Diet

41 Farm & Risk Management Team © 2008 World Meat & Poultry Consumption (1000 MT) Source: USDA

42 Farm & Risk Management Team © 2008 Internet Users (per 100 people) Source: World Bank Group

43 Farm & Risk Management Team © 2008 Demand Income – Growing at a faster rate – Growing especially in middle income countries and in Asia – More people with higher incomes not only demand more and different food, but also more energy. – Income growth can slow, even go negative, but at some point elasticity for food demand changes. Impact on Price

44 Farm & Risk Management Team © 2008 Demand Decline of the U.S. dollar

45 Farm & Risk Management Team © 2008

46 Farm & Risk Management Team © 2008 USD:Euro 46

47 Farm & Risk Management Team © 2008

48 Farm & Risk Management Team © 2008 Demand Decline of the U.S. dollar – You are holding lots of dollars – Because of the value of the dollar, US goods are relatively cheap – So what do you do?  Buy U.S. commodities

49 Farm & Risk Management Team © 2008 Corn and Soybean Exports (TMT) Source: USDA/FAS PS&D data

50 Farm & Risk Management Team © 2008 Beef and Pork Exports (TMT) Source: USDA/FAS PS&D data

51 Farm & Risk Management Team © 2008 45% dollar depreciation since 2002 – At 2002 levels oil price at $75/b (Hurt) High dollar reserves coupled with dollar depreciation – $6.00/bu corn becomes $3.30 corn

52 Farm & Risk Management Team © 2008 Demand Decline of the U.S. dollar Impact on Price

53 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

54 Farm & Risk Management Team © 2008

55 Farm & Risk Management Team © 2008

56 Farm & Risk Management Team © 2008 56 Through Aug 2007

57 Farm & Risk Management Team © 2008 Forecasted Oil Exports

58 Farm & Risk Management Team © 2008 Demand Oil Prices!!! Impact on Price

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

60 Farm & Risk Management Team © 2008 Demand Prices of Complimentary and Substitute Goods – If pork is profitable, then demand for feed will be greater – Lots of give and take here Impact on Price

61 Farm & Risk Management Team © 2008 Recap Productivity has slowed World stocks are tight: Policy World stocks are tight: 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 Price of other goods Impact on Price

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

63 Farm & Risk Management Team © 2008 Food For Thought The world is not ceritus paribus – The world’s producers and consumers will respond  High prices over time will lead to more supply which will lead to a fall in prices.  High profitability will lead to technological innovation  High prices will lead consumers to substitute, conserve, etc. Facing the guillotine is a great way to focus the mind (source unknown)

64 Farm & Risk Management Team © 2008 What About Tomorrow? Productivity has slowed World stocks are tight: Policy World stocks are tight: 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 Price of other goods Impact on Price What changes are permanent - Long vs Short term trends -What changes are permanent - Long vs Short term trends

65 Source: USDA-FSA

66 Farm & Risk Management Team © 2008 CRP Contract Expiration (Acres) Contracts expire on September 30 Source: USDA-FSA

67 And Here’s Alan

Download ppt "What’s Going on With These Darn Prices! Managing the Opportunities (Kevin Bernhardt, UWEX) August 2008."

Similar presentations

Agricultural Land Use Lori Lynch, Professor Agricultural and Resource Economics University of Maryland.

Agricultural Land Use Lori Lynch, Professor Agricultural and Resource Economics University of Maryland.
FY 2014 U.S. Agricultural Trade Forecasts Changes to FY 2014 Forecasts Exports $6.9 billion to $149.5 billion Imports $0.5 billion to $110.5 billion Surplus.

FY 2014 U.S. Agricultural Trade Forecasts Changes to FY 2014 Forecasts Exports $6.9 billion to $149.5 billion Imports $0.5 billion to $110.5 billion Surplus.
2014-15 Market Perspective or.

Market Perspective or.
“Agricultural productivity and the impact of GM crops: What do we know?” Ian Sheldon Andersons Professor of International Trade.

“Agricultural productivity and the impact of GM crops: What do we know?” Ian Sheldon Andersons Professor of International Trade.
1 Food Commodity Prices: Past Developments and Future Prospects Ron Trostle Economic Research Service U.S. Department of Agriculture ? USDA Outlook Forum.

1 Food Commodity Prices: Past Developments and Future Prospects Ron Trostle Economic Research Service U.S. Department of Agriculture ? USDA Outlook Forum.
First Generation Biofuels Compete

First Generation Biofuels Compete
IFIF/FAO Business Meeting - Rome 2006 Agriculture and the Animal Feed Industry.

IFIF/FAO Business Meeting - Rome 2006 Agriculture and the Animal Feed Industry.
Agricultural Trade Outlook August 2011 Philip Abbott.

Agricultural Trade Outlook August 2011 Philip Abbott.
October 2008 Paul Braks Food & Agribusiness Research and Advisory Grain markets in motion Impact of volatile commodity prices on the agri-food value chain.

October 2008 Paul Braks Food & Agribusiness Research and Advisory Grain markets in motion Impact of volatile commodity prices on the agri-food value chain.
Photos courtesy of USDA Jason Henderson Branch Executive Federal Reserve Bank of Kansas City Omaha Branch May 14, 2008 U.S. AGRICULTURE: What Goes Up Must.

Photos courtesy of USDA Jason Henderson Branch Executive Federal Reserve Bank of Kansas City Omaha Branch May 14, 2008 U.S. AGRICULTURE: What Goes Up Must.
Department of Economics Crops & Biofuels: Policies, Outlooks, and Debates Chad Hart Iowa State University 515-294-9911 Iowa Farm Bureau.

Department of Economics Crops & Biofuels: Policies, Outlooks, and Debates Chad Hart Iowa State University Iowa Farm Bureau.
1 Food commodity prices: History & prospects Ron Trostle Economic Research Service U.S. Department of Agriculture ? USDA Outlook Forum February 20, 2014.

1 Food commodity prices: History & prospects Ron Trostle Economic Research Service U.S. Department of Agriculture ? USDA Outlook Forum February 20, 2014.
Commodity Marketing Activity Chapter #2. Supply and Demand n Supply: quantity of a commodity the producers are willing to provide at a given price n If.

Commodity Marketing Activity Chapter #2. Supply and Demand n Supply: quantity of a commodity the producers are willing to provide at a given price n If.
Commodity Market Outlook WBFI Annual Meeting T. Randall Fortenbery Professor School of Economic Sciences Washington State University.

Commodity Market Outlook WBFI Annual Meeting T. Randall Fortenbery Professor School of Economic Sciences Washington State University.
Overview of the Global Oilseed Markets Annual Meeting National Cottonseed Products Association Santa Fe, New Mexico May 4, 2009 John Baize.

Overview of the Global Oilseed Markets Annual Meeting National Cottonseed Products Association Santa Fe, New Mexico May 4, 2009 John Baize.
The Global Food Security Challenge (www.worldbank.org/wdr2008) GLDN for ECA, Dec 18th.

The Global Food Security Challenge ( GLDN for ECA, Dec 18th.
Reaching Global Markets Fulfilling Your Needs USDA Agricultural Outlook Forum Thierry Murad 25 February 2011.

Reaching Global Markets Fulfilling Your Needs USDA Agricultural Outlook Forum Thierry Murad 25 February 2011.
World Feed and Food Supply and Demand Governors’ Agriculture, Energy, and Sustainability Roundtable Governors’ Biofuels Coalition Washington, DC January.

World Feed and Food Supply and Demand Governors’ Agriculture, Energy, and Sustainability Roundtable Governors’ Biofuels Coalition Washington, DC January.
Global Policy Analysis Division Office of Global Analysis Mike Dwyer Director, Global Policy Analysis Office of Global Analysis Foreign Agricultural Service.

Global Policy Analysis Division Office of Global Analysis Mike Dwyer Director, Global Policy Analysis Office of Global Analysis Foreign Agricultural Service.
1 Factors Affecting Global Agricultural Markets Over Next 10 Years Implications for prices and U.S. farm income Michael J. Dwyer Director of Global Policy.

1 Factors Affecting Global Agricultural Markets Over Next 10 Years Implications for prices and U.S. farm income Michael J. Dwyer Director of Global Policy.

Similar presentations

Ads by Google