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Introduction

Istheresomemajordrivingforcethatis

behindallthelargerecentcommodityprice

increasesorisitaperfectstormofindividual

commoditysupplyanddemandcircumstances

thatjusthappenedtocometogetheratthe

sametime,orisitacombinationoffactors?

Itisclearlyacombination.

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Introduction

Themajorthemesinouranalysisare:

supplyandutilizationshiftedfromsurplustoshortagebutdiffersbycommodityinrelative

importanceandunderlyingcauses

thelinkagesofsurgingcommoditypriceswiththefallingUS$exchangerate

thenewlinkagebetweenenergyandagriculturalmarketsevidencedbybiofuels growth.

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Introduction

Inconductingthisassessmentwehave

reviewedovertwodozenreports,articles,andstudiesplusnumerousotherpressreleases,opedarticles,andothersimilarshortpieces.

Inthispresentation,Iwillpointoutwhereweagreeandwherewedifferfrommainstreamthinking.

IntheQ&A,wecangointogreaterdetailonwhatpointsandissuesinterestyoumost.

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Supply

and

Utilization

Growingfooddemandanddietarytransitiontomoreanimalproteinindevelopingcountrieshasresultedinglobalconsumptionincreasingfasterthanproduction.ManypreviousstudiesfocusonChinaandIndia.

wehavemovedfromsurplusinthe80sand90stoshortageinrecentyears.

thesupplyshocksin2007wereontopofverylowstockstouseratiosthatemergedoverthepastfourtoeightyearsdependingoncommodity.

IndiaandChinaarenotsignificanttradersofagricultural

commodities.

The

fact

that

consumption

has

been

growing

atagoodpaceinChinaandIndiaisnotamajorfactorindeterminingworldcommoditypricesbecausetheytradelittleinagriculturalcommodities.

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Stocks-to-Use Ratio for Total Grains in

the World (1960-2009)

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Global

Production

Shortfalls

Weatherandcropdiseaseissuesin20062007

madeanalreadydifficultsituationworse.Theshockshadlargepriceimpactsbecausethe

stockstouseratiowasalreadyverylow. Under

normal

circumstances,

these

shocks

would

have

hadaminorimpactonprices.

Thereactionsofmanytraderstoisolatetheirdomesticmarketsmadethesituationmuchworse. Thisisparticularlythecaseforrice,whichissothinlytraded.

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China Rice Production/Consumption/Trade

(1,000 mt)

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India Rice Production/Consumption/Trade

(1,000 mt)

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China Wheat Production/Consumption/Trade

(1,000 mt)

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India Wheat Production/Consumption/Trade

(1,000 mt)

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China All Oils:

Production/Consumption/Trade (1,000 mt)

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Agricultural

Research Lowerinvestmentinagriculturalresearchand

application

of

existing

technology

has

led

to

lowergrowthinproductivityincommodityproduction.Theworldwasinagriculturalsurplusinthe1980sand

1990s

and

invested

less

in

agricultural

research.

The

surplusmentalitydidnotchangeaswemovedfromsurplustoshortageattheturnofthecentury.

Everyoneagreesthatweneedtoincreaseinvestment

in

agricultural

research.

No

one

should

believe

that

thischangewillbeaquickfix.

Shorttermsolutionswillrelyonpolicychangesandmorewidespreadadoptionofexistingtechnology.

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Global

Potential

Supply

Response Thereisalargepotentialsupplyresponsethatcouldcomefrom

developingcountryfarmersincreasingtheirproductionand

productivity

in

response

to

the

higher

prices.

Thus,

for

some

poor

farmersinsomeregions,highercommoditypricescouldbean

engineofeconomicdevelopment.

IFPRIandFAOhavearguedthatmostpoorfarmersarenetbuyers.

That

is

true

in

some

regions.

But

even

then,

if

agricultural

wages

increase,someofthesefarmerscouldstillbebetteroff.

Shorttermpolicymeasuressuchastargetedfoodprogramsthatstillpermitworldpricestobetransmittedtodevelopingcountry

farmers

are

key.

We

need

policy

measures

that

handle

the

short

termfoodproblemswithoutdestroyinglongertermpotentialfor

economicgainfordevelopingcountryfarmers.

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Speculation

in

Commodity

Markets Thetwoquestionsarewhethertheincreased

speculativeactivityincreasedpricevolatility,

andifitincreasedtheoveralllevelofprices.

Volatilityhasincreased,inpartduetotheincreased

volume

being

traded.

Thereislittleevidencefromexistingresearchthatthelevel ofcommoditypricesisaffected

bytheincreasedamountofspeculative

activity.

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Deflated Commodity Prices and Indices, 1970-2008

(2002 = 1)

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US$

Depreciation Fortheperiod2002to2008nominaldollarpercent

increasesforcorn,soybeansanditsproducts,wheat,andrice,aswellascrudeoilandgoldaretypicallymorethanthreetimesequivalentchangesinother,deflatedcurrencies.

Exchangerates(orwhatevertheyareasymptomof)

played

a

key

role

in

the

current

price

run

ups.

Forthe1994to1997period,resultsarestrikinglydifferent. Pricechangesinthethreecurrencymeasuresarenearlythesame.Thisisstrongevidence

that

price

run

ups

in

the

mid

1990s

were

largely

driven

bysupplyutilizationfactors,withexchangeratesplayingalmostnorole.

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Agricultural Commodity Price Indices in Various

Currencies, 1990-2008

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Global

Food

Price

Impacts Currentfoodpriceincreasesandthedepreciatingdollar

arebringingstrongerinflationarypressureelsewhereintheworldthanintheUnitedStates.UScoreinflationhas

been

about

2.2%,

while

many

developing

countries

have

ratestriplethat. IntheUnitedStates,foodexpendituresareonly10%of

consumptionexpenditures,andexpendituresoncerealsareasmallfractionoffoodexpenditures. InBangladeshandSriLanka,wherefoodriotshaveoccurred,foodshareofconsumerexpenditureisabove60%,anditishighinmanydevelopingcountries.

Foodinflationandgeneralinflationarehighernowin

countries

that

consume

greater

shares

of

their

budgets

asstaplefoods. Wehaveyettoseethefulltransmissionoffeedgrain

andoilseedpriceincreasesintoanimalproductfooditems.

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Biofuels Biofuels programsintheUSandEU,whichprovide

subsidiesandmandatesforbiofuels leadingtogreater

useofcornandvegetableoilforbiofuels,have

stimulatedincreasesinthepricesofthesecommodities.

TheUSethanolindustrywouldnothavecomeinto

existence

in

the

1980s

without

subsidies.

The

same

is

truefortheUSbiodieselindustry,whichoccurredlater. TheEUbiodieselindustryalsowasmadepossiblebymandatesandsubsidies.

Subsidiesandotherfactorshavecontributedtosubsequentgrowthofbiofuels.

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Biofuels Mostoftheglobalincreaseindemandfor

corninthepastfouryearshascomefromthe

growthinUnitedStates useofcornfor

ethanol.

Muchoftheglobalincreaseinrapeseedoil

(drivenbyEUbiodiesel)isduetobiodiesel.

For

soy

oil,

most

of

the

increase

is

still

food

related.

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World Corn Use - Feed and FSI(1,000mt)

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World Oils: Industrial Use as

Percent of Total

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Biofuels Higheroilpriceshavebeendrivingcornprices.

Higher

crude

leads

to

higher

gasoline,

which

increases

thedemandforethanol,whichprovidesincentivestobuildmoreethanolplants,whichincreasesthedemandforcorn. Highercorndemandleadstohighercornprice.

TheUSethanolsubsidyandimporttariffhavecontributedtoincreasedcornprices. ThelowerUS$hasalsocontributed.

Uptothispoint,theethanolmandateshavenotbeen binding,sohavehadlittleornoimpactoncornpricesorethanolproduction.

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Corn Price Under Alternative Policies

and Oil Prices

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Biofuels Between2004andearlierthisyear,oilwent

from

$40

to

$120,

and

corn

went

from

$2

to

$6,bothtripling.

Ofthe$4increaseinthepriceofcorn,about

$1

is

due

to

the

US

subsidy

and

$3

to

the

highercrudeoilprice.

EvenifchangesaremadeinUSpolicies,corn

priceswouldbeexpectedtoremainhighsolongasthecrudeoilishigh.

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Crude

Oil

Price

Increase Otherstudieshaveconcludedthatasignificant

driverofcurrentcommoditypriceincreasesisthe

priceofcrudeoil. Wearguethatthemajorimpactof

oilpriceincreasessofarhasbeenonthedemand

side,notthesupplyside.

Inotherwords,theinitialpriceincreaseswere

demandpull. Crudeoilpriceincreases

subsequentlyhaveincreasedthecostofproducing

agricultural

commodities

through

increases

in

the

priceoffertilizer,diesel,propane,agricultural

chemicalsandotherinputs.

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Conclusion Webeganthisworkbyaskingifthereweresome

majordrivingforcethatisbehindalltheprice

increasesorisitaperfectstormofindividual

commoditysupplyanddemandcircumstancesthat

justhappenedtocometogetheratthesametime?

Itisacombinationofdiverseandcomplexfactors

involvingcommoditysupplyandutilization,US$

depreciation,andbiofuels.

Thechallengebeforepublicandprivatedecisionmakersistofindpolicyoptionsthatdealwiththe

shorttermeffectscreatedbyrisingfoodprices

withoutcreatinganewsetoflongtermproblems.

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Thecompletereportisavailableat:

www.farmfoundation.org

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Commodity Prices and Indices, 1970-2008

(2002 = 1)