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“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Impacts of future energy price and biofuel production scenarios on
international crop prices, production and trade
*Gerald Schwarz
*Harald von Witzke
**Steffen Noleppa
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida, US
*Humboldt University Berlin, Department for Agricultural Economics and Social Sciences, Chair of International Agricultural Trade and Development
**agripol – network for policy advice GbR
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Outline
Background
Objectives
Review of determinants of world market prices:Energy price and biofuel production
Modelling framework
World market price changes
Impacts on crop production and trade
Conclusions
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Background
Trend of increasing agricultural commodity prices
Reversal of the trend of declining agricultural commodity prices
Many studies on the different factors contributing to the increase in food prices emphasise:
Critical role of levels of energy prices and biofuel production for future agricultural market prices
Increase in real international food and agricultural commodity prices in the decades to come
To what extent will future levels of energy prices and biofuel production contribute to higher prices and affect markets?
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Objectives
Main aim is to analyse the impacts of different scenarios of increasing energy costs and biofuel production on international agricultural market prices and production in key trade regions.
To review the reasons for higher prices in the next few decades than in the past, with an emphasis on the roles of the price of energy and the extent of biofuel production
To quantify the impacts of the determinants of world market prices of selected agricultural commodities for 2016/18 and the potential impacts on supply and trade quantities in main agricultural regions
At this stage: focus on key crop markets
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Determinants of world market prices (1/4) Demand determinants
Continuation of population growth (higher food demand for grains)
Increase in per capita income in developing and newly industrializing countries leads to higher consumption of dairy, meat, and processed foods
Growing consumption of animal products in developing countries also suggests increase in animal feed demand for crops
Expected increase in world demand for key crop commodities:
Source: Own calculations based on FAPRI (2009)
Commodity 2006 (million tonnes)
2018 (million tonnes)
Increase (percent)
Wheat 744 885 19
Corn 837 1046 25
Soybean 279 352 21
Rapeseed 51 69 40
Sunflowers 32 41 24
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Determinants of world market prices (2/4)
Supply determinants
Land reserves for food production limited:
The best and most productive land already is being farmed
Existing land reserves should not be farmed for environmental reasons (e.g. rain forest)
Required growth in productivity difficult to achieve:
Productive potential of existing methods increasingly captured
Lack of agricultural research investment
Water is becoming ever scarcer and more expensive
Expected growth of food supply will be smaller than the rise in demand
However, so far the discussion ignores the impact of rising energy prices
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Determinants of world market prices (3/4)
Energy prices
Agricultural production is rather energy intensive
Close relationship between agricultural commodity and energy prices:
0
50
100
150
200
250
Jan 07 Apr 07 Jul 07 Okt 07 Jan 08 Apr 08 Jul 08 Okt 08
Corn Soybeans Wheat Crude Oil
Source: CRB (2009)
Higher energy prices lead to higher cost of production and thus reduced supply
Food prices will increase with higher energy prices
Different projections of future level of oil price:
• EC (2008): US$ 102 per
barrel in 2017
• OECD (2009): US$ 70 in 2018
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Determinants of world market prices (4/4)
Energy prices and biofuel production
Higher energy prices are an incentive for increased biofuel production
Increased biofuel production on land suitable for food production reduces the availability of food
But only a small share of produced bioenergy is liquid fuel based on grains, sugar cane, oilseeds and other crops
In summary:
Demand growth > supply growth => higher agricultural commodity prices
Specific role of energy prices and biofuel production for food prices:
Impacts of different energy price scenarios?
Impacts of different biofuel production scenarios?
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Modelling framework (1/2)
Model structure
Multi-market, multi-region partial equilibrium model
Static net trade model based on VORSIM/SWOPSIM modelling framework
Cobb-Douglas supply and demand function with separate representation of food and feed demand functions and bioenergy demand (exogenous)
Elasticities are based on SWOPSIM and the FAPRI elasticity database and calibrated for homogeneity and symmetry
Multiplicative shift factors in supply and demand functions capturing regional differences and differences between food, feed and bioenergy demand shifts
Currently coverage of 10 regions including US, Canada, EU, Germany, France, Brazil, Australia, China, CIS, and RoW
Work in progress - model extensions on-going
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Modelling framework (2/2) Scenarios and shift factors
Base period: 2004 – 2008
Scenario 2016/18: Matrix of implemented shift factors (example EU, in percent):
Shifts Supply Demand
Commodity Area Productivity Energy cost
Population growth
Feed demand
Bioenergy
Wheat -3 9 -7 8 11 380
Corn -3 8 -8 24 10 250
Other grains -3 8 -5 24 11 300
Oilseeds -3 24 -6 16 11 220
Sugar -3 5 -9 -1 -1 1200 Source: Own calculations based on OECD and FAO (2008)
Alternative scenarios: 1. With higher energy cost shift factor2. Without energy cost shift factor3. Without bioenergy demand shift factor
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
World market price changes (1/4)
World market price projections for 2016/18 – new base scenario for 2016/18 all shift factors included
Prices increase between 35 – 80 percent
Source: Own calculations
Market Prices in base period
(US$/mt)
2016/18 (US$/mt)
base scenario
Change (in percent)
Peak prices in 2007/2008(US$/mt)
Wheat 225 304 35340
Corn 152 274 80218
Oilseeds 374 546 46583
Other grains
127 185 46190
Sugar 283 415 47301
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
World market price changes (2/4) World market price projections for 2016/18 – scenario with higher
energy price (as project in OECD outlook 2008)
Higher energy prices lead to significantly higher price increases, e.g. 91 instead of 35 percent for wheat
Source: Own calculations
Market Prices in base period (US$/mt)
2016/18 base scenario (in
percent)
2016/18 with high energy price
(in percent)
Wheat 225 35 91
Corn 152 80 163
Oilseeds 374 46 97
Other grain 127 46 85
Sugar 283 47 98
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
World market price changes (3/4) World market price projections for 2016/18 – scenario with constant energy price (no energy cost shift)
Source: Own calculations
World market price changes are significantly smaller
Large variability in price effect depending on energy price development, in particular on wheat and corn markets
Market Prices in base period
(US$/mt)
2016/18 base scenario (in percent)
2016/18 with high energy
price (in percent)
2016/18 withbase period energy price (in percent)
Wheat 225 35 91 16
Corn 152 80 163 52
Oilseeds 374 46 97 28
Other grain 127 46 85 31
Sugar 283 47 98 27
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
World market price changes (4/4) World market price projections for 2016/18 – scenario with constant biofuel production (no bioenergy demand shift)
Source: Own calculations
Market Prices in base period
(US$/mt)
2016/18 base scenario (in percent)
2016/18 with high energy
price (in percent)
2016/18 withbase period energy price (in percent)
2016/18 withbase period
biofuel production (in
percent)
Wheat 225 35 91 16 27
Corn 152 80 163 52 40
Oilseeds 374 46 97 28 32
Other grain 127 46 85 31 32
Sugar 283 47 98 27 28
Reduction of price effects, but to a smaller extent than under a constant energy price – except on the corn market
Energy price major determinant of future price development
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Impacts on crop production (1/3) EU – change in crop production (in percent)
Source: Own calculations
Despite the increase in energy cost in the 2016/18 base scenario, crop production increases (except sugar)
Higher energy cost lead to a decline in the supply of wheat and sugar The import role of the energy price is particular evident on the EU sugar market The importance of biofuels is reflected in changes in corn (and oilseeds)
production – reflecting the large drop in price compared to the 2016/18 base scenario
Market 2016/18 base scenario
2016/18 with high energy
price
2016/18 withbase period energy price
2016/18 withbase period
biofuel production
Wheat 4.19 -3,16 7.70 4.22
Corn 24.29 17,00 27.31 9.07
Oilseeds 43.41 40,82 43.23 35.35
Other grains 12.83 6,49 13.82 10.31
Sugar -2.39 -16,61 5.34 -4.06Source: Own calculations
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Impacts on crop production (2/3)
US – change in crop production (in percent)
Despite the increase energy cost in the 2016/18 base scenario, crop production increases (in particular sugar, corn and oilseeds)
Higher energy prices lead to smaller increases and a decline in wheat supply Corn, wheat and sugar production particular affected by variations in the energy
price The importance of biofuels is reflected in changes in corn and sugar production Shift of production towards wheat and other grains (from energy to food)
Source: Own calculations
Market 2016/18 base scenario
2016/18 with high energy price
2016/18 withbase period energy price
2016/18 withbase period
biofuel production
Wheat 0.65 -7,71 4.57 4.25
Corn 29.96 22,51 33.95 17.14
Oilseeds 25.47 23,70 26.53 22.53
Other grains 18.02 14,44 20.07 20.31
Sugar 30.35 21,98 33.50 22.23
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Impacts on crop production (3/3) Brazil – change in crop production (in percent)
Source: Own calculations
Highest relative increase in corn and sugar production of all covered regions The impact of changes in the energy price is particular high for wheat and other
grains (markets without substantial bioenergy demand) The importance of biofuels is reflected in changes in corn and sugar production Overall, projected world production increases of 10 – 30 percent within the
range of OECD projections
Source: Own calculations
Market 2016/18 base scenario
2016/18 with high energy price
2016/18 withbase period energy price
2016/18 withbase period
biofuel production
Wheat 7.17 -0,66 11.24 7.27
Corn 38.62 35,08 40.83 23.93
Oilseeds 28.63 24,36 30.55 24.62
Other grains 6.92 -5,27 13.12 9.68
Sugar 32.40 29,04 33.32 23.74
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Impacts on net trade (1/2) Net trade effects on the corn market
High market price with higher energy prices improve net trade of EU corn
The US corn market becomes an importing market under all three scenarios assuming an increase in biofuel production; small changes depending on energy price
Higher energy cost have a small positive effect on net trade of Brazilian corn
Source: Own calculations
EU USA Brazil
-80000
-60000
-40000
-20000
0
20000
40000
Base period 2016/18 baseline 2016/18 with high energy price
2016/18 with base period energy price 2016/18 with base period biofuel production
Region
Ne
t tr
ad
e (
in k
to
ns
)
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Impacts on net trade (2/2) Net trade effects on the oilseeds market
Source: Own calculations
Biofuels main factor affecting net trade in Germany, less important at EU level
Net trade in the US benefits from higher market prices and higher food and feed demand on the Chinese oilseeds market
EU Germany USA
-20000
-10000
0
10000
20000
30000
40000
50000
60000
70000
Base period 2016/18 baseline 2016/18 with high energy price
2016/18 with base period energy price 2016/18 with base period biofuel production
Region
Ne
t tr
ad
e (
in k
to
ns
)
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Conclusions (1/2) In summary:
Results suggest that price of major agricultural crops will increase between 35 and 80 percent until 2016/18
Price of energy will be the single most important determinant of the price of food in the decades to come
Total production increases vary between 10 percent for wheat and 30 percent for oilseeds
Variations in energy cost have the biggest impact on sugar production in the EU and China, corn production in the North America and CIS, other grains production in Australia and Brazil,
Increasing bioenergy demand has generally the biggest impact on corn production followed by sugar and oilseeds
Trade impacts are mixed for the EU and US: Positive trade impacts for oilseeds, other grains and sugar markets in both regions and EU corn
Biofuel production is the main determinant for changes in net trade on the US corn, German oilseeds and Brazilian sugar market
“The Economics of Alternative Energy Sources and Globalization: The Road Ahead”, November15 – 17, 2009, Orlando, Florida
Conclusions (2/2)
Results highlight need for productivity growth:
Large projected production increases only possible through higher productivity growth, as land reserves are limited
Large increases in oilseeds and corn production in the EU depend on the availability of additional land. Increasing competition with non-agricultural land uses such as nature conservation and housing likely to reduce available land.
Even higher pressure on food production in developing countries
But...
Assumptions on energy costs and oil price fluctuations
Assumptions of future biofuel production and dependency on policy developments
Impact of elasticities