View From 10,000 Feet? Well, Let’s Just Talk Ag Prices!!! (Kevin Bernhardt UW-Extension and Center...

View From 10,000 Feet?View From 10,000 Feet?

Well, Let’s Just Talk Ag Prices!!!Well, Let’s Just Talk Ag Prices!!!

(Kevin Bernhardt(Kevin BernhardtUW-Extension and Center for Dairy Profitability)UW-Extension and Center for Dairy Profitability)

October 2008October 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 2008It’s July 20083

Dec Corn @ $7.75+ Nov SB @ $16 +

Dec Milk @ $21 Dec Beef @ $115


© 2008

4

0

0.5

1

1.5

2

2.5

3

3.5

1860 1880 1900 1920 1940 1960 1980 2000

Must be a New Era(Nominal Corn Prices)

Source: USDA


© 2008

Prices – A Perfect Storm


© 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


© 2008

World Wheat and Course Grain Ending Stocks

050

100150200250300350400450500

197

9/80

198

2/83

198

5/86

198

8/89

199

1/92

199

4/95

199

7/98

200

0/01

200

3/04

200

6/07

Ending Stocks


© 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.


© 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


© 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.


© 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


© 2008

Where is Population Growth

Source: World Bank Group:


© 2008

Where’s the Population

Pop. (bil) % of World Rank

World 6.667

China 1.330 19.9 1

India 1.148 17.2 2

Indonesia .238 3.6 6

Bangladesh .154 2.3 9

Nigeria .138 2.1 11

EU .491 7.4 4

U.S. .303 4.5 5

45.1

Source: U.S. Bureau of Census


© 2008

Demand

• Income– Growing at a faster rate– Growing especially in middle income countries

and in Asia


© 2008

Gross National Income per Capita

0

1000

2000

3000

4000

5000

6000

7000

8000

1962 1967 1972 1977 1982 1987 1992 1997 2002

World



© 2008


0

5000

10000

15000

20000

25000

30000

35000

40000

1962 1968 1974 1980 1986 1992 1998 2004

High income

High Income people don’t eat more food when they get

more money – they buy boats!



© 2008


0

200

400

600

800

1000

1200

1400

1600

1800

2000

1962 1969 1976 1983 1990 1997 2004

Low & middle income

With more income this group buys food and often

more animal protein.



© 2008


0

200

400

600

800

1000

1200

1400

1600

1800

2000

1962 1969 1976 1983 1990 1997 2004

East Asia & Pacific



© 2008

19

Demand, U.S. $ Index

Impact on Price


© 2008

U.S. Corn and Soybean Exports (1980-2008 MY (Sept-Aug) Thousand MT)

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1980 1985 1990 1995 2000 2005

CornSoybeans

Source: USDA/FAS PS&D data


© 2008

U.S. Beef and Pork Exports (1980-2008, Calendar Year, TMT)

0

200

400

600

800

1000

1200

1400

1600

1800

1980 1985 1990 1995 2000 2005

BeefPork20082008

Source: USDA/FAS PS&D data


© 2008

Demand

• Oil Prices!!!– Increased Income

Bicycle to carIncreased demand for oil

• Increased input cost on Agriculture• Ethanol is profitable

+ Increased demand for corn Changing T&P


© 2008

Impact on Price


© 2008

Demand

• Hedge and Index Funds

Impact on Price

SUPPLYSUPPLY• Productivity has slowed• World stocks are tight: Policy• World stocks are tight: Weather shocks• Increasing Input Prices• CRP and etc.• Switch in production

DemandDemand• Population• Per capita income• US dollar decline• Oil prices (ethanol demand)• Hedge and Index Funds• Price of other goods

Impact on Price


© 2008

Prices – A Perfect Storm

27

Its Not July Its Not July AnymoreAnymore


© 2008

28

Demand, U.S. $ Index


© 2008

U.S. Blended Motor Gasoline Consumption

30

Source: U.S. Department of Energy, Energy Information Administration


© 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 AnymoreIt’s Not July Anymore32

Dec Corn @ $7.75+ Nov SB @ $16 +

Dec Milk @ $21 Dec Beef @ $115

Now $3.85

Now $14.28

Now $8.93

Now $88.77

Net Returns Above VC33

Source: USDA, World Agricultural Outlook Board


© 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 permanentWhat changes are permanent- Long vs Short term trends- Long vs Short term trends


© 2008

Nominal Corn Prices(Future Range Based on Average of Prior Periods)

0

1

2

3

4

5

6

1860 1880 1900 1920 1940 1960 1980 2000 2020 2040

5.24

4.13

3.14


© 2008

Nominal Corn PricesFuture Range Based on Average of Most Recent Period Change

0

1

2

3

4

5

6

1860 1880 1900 1920 1940 1960 1980 2000 2020 2040

2.25

4.86

4.42


© 2008

Nominal Corn PricesRanges based on all data recent and all periods and no outliers all periods and recent

0

1

2

3

4

5

6

7

8

1973 1993 2013 2033 2053 2073 2093 2113 2133 2153

2.25

4.864.42

6.326.70

4.60

3.00

4.635.26

3.31

4.21

4.01

5.24

4.13

3.14


© 2008

Sources: Websites

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


© 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/

• Bahn, Henry. “Commodity Prices Rock World Markets: Structural Shift or Short Term Adjustments?” Choices, AAEA, 2nd qrt 2008 23(2). http://www.choicesmagazine.org/magazine/issue.php

• Westhoff, Pat. “Farm Commodity Prices: Why the Boom and What Happens Now?” Choices, AAEA, 2nd 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, 2nd 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, 2nd 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, 2nd 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

• 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.


© 2008

Sources: Other

• Extension Outlook Conference, Kansas City, Aug 18-19, 2008.

• Fortenbery, Randy. Presentation to WI Ag Consultants, March 2008.

View From 10,000 Feet? Well, Let’s Just Talk Ag Prices!!! (Kevin Bernhardt UW-Extension and Center...

Documents

Transcript of View From 10,000 Feet? Well, Let’s Just Talk Ag Prices!!! (Kevin Bernhardt UW-Extension and Center...