Ag Economics Rollercoaster – Down, Then Up

Not all economic news is completely grim. Analysts with the Food and Agricultural Policy Research Institute (FAPRI) briefed Congress this week on 2009 agricultural economic baseline projections. A key finding is that after dramatic increases in the prices of most commodities in the last three years, prices retreat in 2009 and 2010, but growing demand for food, feed, and fuel is expected to return them to historically high levels over the rest of the decade.

A widespread economic slowdown in 2009 weakens demand for agricultural commodities and, coupled with the high carryover supply from the last two years of high prices, depresses commodity prices in the short run. However, world population growth, recovery in income growth, and bioenergy mandates drive prices back to their historic highs over the rest of the decade.

The recent market turbulence in the advanced economies spreads and slows world economic expansion in 2009. However, recovery is projected in 2010, with long-term real growth in world gross domestic product of 3.5 percent reached by 2011. A bright spot in the outlook is that after the recovery, China, Vietnam, and India still post solid growth of 8.6, 7.7, and 7.5 percent, respectively. After substantial projected appreciation of the U.S. dollar in 2009, the U.S. dollar depreciates (inflation adjusted) over the rest of the decade against the currencies of most trade partners and competitors in international export markets, with the exception of the Brazilian real.

FAPRI expects the world ethanol price to fall in the short run because of weak crude oil prices and large supplies driven by previous oil price increases. However, bioenergy mandates translate into growing demand, which again strengthens the price of ethanol through 2018. Global net trade in ethanol is projected to increase by 3.68 billion gallons and reach 4.90 billion gallons by 2018. Biodiesel mandates in the Americas and Europe sustain the high price of biodiesel, with growth in consumption mostly met by domestic production, as the traditional South American exporters also face domestic mandates.

Other highlights from FAPRI’s 2009 world agricultural outlook:

  • Shortages in many exporting and producing countries and strong import demand drove grain prices up sharply in 2007/08. An adequate response to the demand softened prices in 2008/09. The world wheat price is projected to decrease further in 2009/10 because of high carryover stocks. The world corn price decreased in 2008/09 with the lower import demand in world markets. It is projected to decrease further in 2009/10. In the long run, grain prices are expected to remain strong because of growing demand for food, feed, and fuel purposes.
  • World prices of oilseeds and vegetable oil retreat from their historic highs of 2007/08 because of weaker demand. World trade of soybeans, soy meal, and soy oil grows by 33, 31, and 37 percent, respectively, over the next decade. Argentina, Brazil, Paraguay, and the U.S. account for 85 percent of the 296 million metric tons of world production in 2018/19. China continues to dominate world soybean imports and expands its net trade to 56 million metric tons by 2018/19. Palm oil remains the cheapest and most widely traded edible oil.

FAPRI is an economic research group with centers at Iowa State University and the University of Missouri-Columbia. The outlook projections incorporate recent macroeconomic forecasts and currently adopted agricultural policies. More information is available at www.fapri.iastate.edu and www.fapri.missouri.edu.

(Source: Iowa State University)

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