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Patrick Westhoff ([email protected]) FAPRI (www.fapri.missouri.edu) University of Missouri National Farm Business Management Conference, St. Louis, June 15, 2009 How we got here Why the boom and bust in commodity prices? What has it meant to the farm sector? Where we might be going Macroeconomy Agricultural markets FAPRI’s role in the farm policy process Jun 08: $7.08 Dec 08: $3.64 Aug 08: $95.80 Sep 08: $62.60 Feb 09: $78.80 Nov 08: $40.70 Jul 08: $19.40 Feb 09: $11.60 Jul 08: 0.9% Apr 09: -0.2% WHY PRICES ROSE Reduced grain production in Europe, Australia Decline in production from 2004-2007: 73 mmt Increase in US exports, 2004/05-2007/08: 21 mmt Source: USDA’s PSD Online, January 2009 WHY PRICES ROSE Reduced grain production in Europe, Australia WHY PRICES FELL Sharp increase in global grain production in 2008 Increase in production, 2007-2008: 81 mmt Decline in US exports, 2007/08-2008/09: 25 mmt Source: USDA’s PSD Online, January 2009 WHY PRICES ROSE Reduced grain production in Europe, Australia Economic growth in Asia and elsewhere WHY PRICES FELL Sharp increase in global grain production in 2008 WHY PRICES ROSE Reduced grain production in Europe, Australia Economic growth in Asia and elsewhere WHY PRICES FELL Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown WHY PRICES ROSE Reduced grain production in Europe, Australia Economic growth in Asia and elsewhere Weaker dollar WHY PRICES FELL Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown WHY PRICES ROSE Reduced grain production in Europe, Australia Economic growth in Asia and elsewhere Weaker dollar WHY PRICES FELL Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown Stronger dollar WHY PRICES ROSE WHY PRICES FELL Reduced grain production in Europe, Australia Economic growth in Asia and elsewhere Weaker dollar Higher petroleum prices Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown Stronger dollar WHY PRICES ROSE WHY PRICES FELL Reduced grain production in Europe, Australia Economic growth in Asia and elsewhere Weaker dollar Higher petroleum prices Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown Stronger dollar Lower petroleum prices 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 Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown Stronger dollar Lower petroleum prices 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 Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown Stronger dollar Lower petroleum prices Slower biofuel growth Source: FAPRI-MU projections, Jan. 2009 Note: Assumes current tax credits and tariffs extended Source: Renewable Fuels Association. Note: Idle nameplate capacity (1.8 billion gallons on 6/9/09) was not reported in 2007 or 2008. 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 response Speculation Sharp increase in global grain production in 2008 Financial crisis and world economic slowdown Stronger dollar Lower petroleum prices Slower biofuel growth Policy response Speculation 2007 2008 2009 2010 US real GDP growth (%) 2.0 1.1 -3.7 1.4 US inflation rate (%) 2.9 3.8 -1.9 1.5 US unemployment (%) 4.6 5.8 9.2 10.2 Federal funds rate (%) 5.0 1.9 0.1 0.2 30-yr. mortgage rate (%) 6.3 6.0 4.9 5.0 WTI oil price ($/barrel) 72 100 38 48 Federal budget deficit (bil. $) 162 455 1,905 1,678 Current account deficit (bil. $) 731 672 395 571 Exchange rate index (2000=100) 77 73 82 78 *NYMEX July futures, 6/10/09 Source: FAPRI 2008 stochastic baseline. Futures, 6/6/08, March 2009 contracts: NYMEX petroleum: $136.93-$5.00 basis; CBOT corn: $6.92-$0.40 basis Source: FAPRI 2008 stochastic baseline. Futures, 2/17/09, March 2009 contracts: NYMEX petroleum: $34.97-$3.00 basis; CBOT corn: $3.49-$0.25 basis Source: FAPRI 2008 stochastic baseline. Source: EISA 2007, Biodiesel RFS assumed constant after 2012 Notes: RFS adjusted for shortfall in cellulosic production relative to mandate; one gallon of biodiesel assumed to count as 1.5 gallons of biofuel Source: FAPRI projections, Jan. 2009. Assumes tariffs and tax credits extended Source: FAPRI January 2009 baseline. Note: Assumes no intermediate (e.g., E-15) blends are permitted. Source: FAPRI baseline projections, Jan. 2009 Actual 2008/09 exports will be higher, resulting in lower stocks Source: FAPRI baseline projections, Jan. 2009 *Futures line uses USDA estimate for 2008/09. For later years, December Chicago futures less $0.30/bu. assumed basis. *Futures line uses USDA estimate for 2008/09. For later years, November Chicago futures less $0.30/bu. assumed basis. Source: FAPRI projections, Jan. 2009. Notes: Variable expenses exclude land and other fixed costs. Payments include loan program benefits and ACRE payments (on a per-planted acre basis) and direct and countercyclical payments (on a per-base acre basis) Source: FAPRI projections, Jan. 2009. Notes: Variable expenses exclude land and other fixed costs. Payments include loan program benefits and ACRE payments (on a per-planted acre basis) and direct and countercyclical payments (on a per-base acre basis) Source: FAPRI baseline projections, Jan. 2009 Source: FAPRI baseline projections, Jan. 2009 and USDA Prospective Plantings, Mar. 2009 2006 2007 2008 2009 Corn 78.3 93.5 86.0 85.0 Soybeans 75.5 64.7 75.7 76.0 Wheat 57.3 60.5 63.1 58.6 9 other crops* 38.5 37.3 34.0 31.4 12 major crops 248.5 252.9 258.9 251.0 Hay 60.6 61.0 60.1 60.3 CRP 36.0 36.8 34.7 33.7 Double-crop soybeans 3.7 5.1 7.2 5.3 12 crops + hay + CRP – double crop soybeans 341.5 345.7 346.4 339.7 *Upland cotton, sorghum, barley, oats, rice, sunflowers, peanuts, sugar beets and sugar cane 156 bu/a 41.8 bu/a Source: FAPRI baseline projections, Jan. 2009. Current conditions might suggest lower 2009 corn yields are likely. Source: FAPRI 2009 stochastic baseline. 2007/08 2008/09 2009/10 Comments Production 13.04 12.10 11.94 Weather Feed use 5.94 5.35 5.15 Weak livestock sector, ethanol coproduct feeds Ethanol use 3.03 3.75 4.10 RFS & oil prices Other domestic use 1.34 1.29 1.31 HFCS weak Exports 2.44 1.75 1.90 Global demand, foreign crops Ending stocks 1.62 1.60 1.09 Projected decline very important Farm price 4.20 4.10-4.30 3.90-4.70 Actual uncertainty even greater 2007/08 2008/09 2009/10 Comments Production 2.68 2.96 3.20 Weather Crush 1.80 1.65 1.68 Squeezed out by export demand Other domestic use 0.09 0.17 0.17 Exports 1.16 1.25 1.26 Argentine crop, demand from China Ending stocks 0.21 0.11 0.21 2008/09 stocks very tight; 2009/10 very uncertain Farm price ($/bu.) 10.10 10.00 9.00-11.00 Actual uncertainty even greater 2007/08 2008/09 2009/10 Comments Production 2.05 2.50 2.02 Lower 2009 area and yield Food and seed use 1.04 1.00 1.03 Milling yields back to normal in 2009/10 Feed use 0.02 0.25 0.22 Will be sensitive to relative prices of feed wheat and corn Exports 1.26 1.01 0.90 Recovery of competing supplies Ending stocks 0.31 0.67 0.65 Stocks appear adequate Farm price ($/bu.) 6.48 6.85 4.90-5.90 Actual uncertain even greater 2007/08 2008/09 2009/10 Comments Production 19.21 12.82 13.25 Weather—assumes less abandonment in 2009 than 2008 Domestic use 4.59 3.55 3.50 Many mills shut this year Exports 13.65 12.70 10.80 World economy, China decisions Ending stocks 10.04 6.60 5.60 Stocks down, but still high Farm price (cents/lb.) 59.3 49.0 48-60 Actual uncertain even greater 2008 2009 2010 Comments Production 26.7 26.6 26.1 Reduced slaughter in 2010 Imports 2.5 2.8 3.0 Recovers to 2007 level Exports 1.9 1.7 1.9 World economy, restrictions Domestic use 27.3 27.7 27.3 Hard to push more consumption in weak economy Nebraska fed steers ($/cwt) 92.27 84-87 87-94 Too much supply this year for demand 2008 2009 2010 Comments Production 23.4 22.8 22.4 Weak returns lower production Imports 0.8 0.8 0.8 Exports 4.7 4.2 4.5 World economy, China production Domestic use 19.4 19.4 18.8 Hard to push more consumption in weak economy Barrows and gilts, 5152% lean ($/cwt) 47.84 43-45 48-51 Reduced supplies eventually result in some price recovery 2008 2009 2010 Comments Production 36.5 35.0 35.5 Response to high feed costs, weak demand Imports 0.1 0.1 0.1 Exports 7.0 6.4 6.3 World economy Domestic use 29.6 28.8 29.3 Reduced consumption makes room for beef, pork 12-city wholesale price (cents/lb.) 79.7 80-83 80-87 Reduced supplies allow some recovery 2008 2009 2010 Comments Production 190.0 187.5 186.4 Response to high feed costs, lower prices Commercial exports (skim solids basis) 26.6 19.9 23.1 Weak global economy, renewed competition Net removals (skim solids basis) 1.3 2.8 0.1 Some price support activity this year Commercial use (skim solids basis) 163.7 167.8 166.8 Need low prices to get big increase All milk price 18.29 11.9512.35 15.1016.10 Recovery requires less production, stronger use For 25 years, FAPRI has analyzed agricultural markets and policies for Congress and other decision makers Our approach Provide objective analysis Don’t endorse or oppose policies Address the questions decision makers care about Make analysis available when it’s needed 2008 Farm Bill work Changes in target prices, loan rates, etc. ACRE program Biofuel policies (latest—May 2009) International work WTO-related issues Policy issues in Europe, Korea, Mexico, S. Africa November: preliminary world baseline December: DC baseline review January: revised world baseline February: stochastic baseline (500 futures) March: release baseline in DC, Missouri April-October: policy analysis, model work July or August: baseline update if needed In response to Congressional request First priority to Congressional Agriculture Committees (e.g., farm bill work) Requests from other members and staffs (e.g., recent ethanol policy analysis) As part of grant-funded projects U.S. agencies (USDA, Dept. of Energy, EPA…) International agencies (OECD, FAO, agencies in Ireland, UK, S. Africa, Mexico, and S. Korea) And a few on our own initiative Be as objective and fair as possible We’ve worked with Democrats and Republicans, House and Senate, aggies and urban members Avoid partisanship, endorsing or opposing specific policies Know how to be useful Pay attention to what’s happening on the Hill Deliver results when they’re needed Recognize some important work will never show up in a public report—phone calls, e-mails matter Farm markets remain very volatile, but most likely case is that crop prices remain above pre-2007 levels but below 2008 peaks Future depends on economic recovery, oil markets, weather, and much more Analysis of policy, market alternatives likely to be of continued interest To contact me: [email protected] FAPRI-Missouri website: www.fapri.missouri.edu