Prospects for Grain Prices Ulrich Koester University of Kiel Germany

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 2 Outline Introduction: Hot topic: Most recent price changes on the wheat market in US$ Historical perspective Causes of price movements Specifics of recent price drop Causes of uncertainties Likely development: Short-, medium and long- term Summary

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 3 The recent bubble on the wheat and corn market 2007/2008 Source: CBOT, SRW prices

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 4 Index of real corn and wheat prices, Note: Prices through 2007 are marketing year averages. The wheat prices are weighted by production; the prices are weighted by sales. The 2008 wheat and corn prices are the November 2008 WASDE season average, mid-point of range. Due to lack of another consistent deflator, prices deflated by BLS calendar year CPI for all urban consumers. Sources: Carter, et al. editors (2006), USDA NASS Agricultural Prices, USDA WASDE and BLS CPI- All Urban Consumers. Quoted in Sumner (2008)

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 5 Typical sequences of a spike Initial production shortfall for some consecutive years Low stocks as percentage of annual consumption Significant change in expectations, partly due to misleading projections of the production potential Change in Government policies Speculation

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 6 Causes of the last price hike Short-fall in production due to bad weather for three consecutive years Low level of stocks, decline from nearly 25 % in Dec to below 18 % in May 2008 Birth of two new fundamental: The market for biofuel The importance of the oil Significant uncertainty Speculation Unknown level of privately held stocks Increase of public held stocks in some countries

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 7 Development of world production and world consumption for wheat 1000 MT

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 8 Source: OECD, 2008, Biofuel Support Policies an Economic Assessment. Paris Impact of biofuel support removal on world commodity prices

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 9 Additional specifics of the last spike Distribution of stocks across exporting and importing countries Behavior of some governments Inaccurate estimates and projections of short-term production, consumption and stocks Macroeconomic factors Financial expansion New financial instruments, also on the futures markets for grain Devaluation of the US Dollar

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 10 Specifics of the dramatic price drop since July Change in information about short- term production and demand Financial crisis Return to normal situation or over- shooting? Overshooting likely

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 11 Sources of main uncertainties for projections Adjustment of the agricultural sector Oil price Macroeconomic effects: Financial and economic crisis; growth rates and exchange rates Government policies Biofuel How to cope with a worldwide production shortfall Investment in the agricultural sector Technological change

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 12 Area harvested and production of wheat: Change in percent from 2007/08 to 2008/09 (estimates) 24%26 % 11.8%

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 13 Forecast of short and medium- term price movements Main determinants Production potential has been mobilized and is likely to be exploited even at lower prices Demand will increase less than under normal conditions due to worldwide recession Wheat prices may stay around US$ 140 to 180 per MT for the next three to four years Prices in most national currencies will likely be below the level of 2006 Future prices on the market in Chicago may serve as a good judgment given present information.

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 14 CBOT Wheat Futures 2008 to 2011

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 15 Long-term projections Fundamentals play a key role Price of oil Effect on the supply side Effect on the demand side Growth of production Investment in agriculture Expansion of crop area Growth of yields Growth of demand

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 16 Selected official long-term projection OECD/FAO produced in 2007 FAPRI January 2008 Very uncertain, but likely too optimistic due to misjudgment of capability to adjust and possibly overrating the effect of the oil price

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 17 Likely too high OECD-FAO Projections: Wheat OECD-FAO Agricultural Outlook,

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 18 OECD Projections: Coarse Grains (2007) OECD-FAO Agricultural Outlook,

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 19 FAPRI Projections of US Crop Prices from January 2008 Actual wheat prices were 2008 US$ 12.4 per Bushel in March and less than US$ 5 per Bushel in early Dec Projections are very uncertain mainly due to uncertainty related to oil prices

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 20 Projection AEO2007 (reference case) 59,2151,3753,6158,0760,91 AEO2008 (reference case) 74,0359,8559,7064,4970,45 GII68,2561,4054,8048,2045,70 IEA (reference) 59,0357,3058,8760,4362,00 DB56,6560,0066,0072,0080,00 SEER69,4158,8560,8362,8865,00 Projections of world oil prices, (in 2006 US$ per barrel) Source: :

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 21 Summary The last bubble on the grain market was larger (in relative terms) than other bubbles in the past. The sequence of the bubble was the same as in the past. It is likely that the available production potential is significantly higher than assumed in most projections. Uncertainty about future prices is extremely high

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 22 Summary It is likely that prices in the short and medium term will not be significantly higher than US$ 150 to 200 per MT in real terms and likely lower than in 2006 in national currencies Long-term price projection are very uncertain, however, it is unlikely that prices will be above US$ 200MT if prices of oil will develop as projected.

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 23 Additional information for discussion

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 24 World Wheat: Ending stocks as percentage of annual consumption

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 25 Ending stocks in percent of domestic consumption of wheat

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 26 Wheat prices and share of stocks as percent of annual consumption US Export FOB Price for Hard Red Winter. Source: USDA, PSD-Datenbank, IMF, 2008.

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 27 Domestic wheat consumption and ending stocks; annual changes in percent 2007 to 2008

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 28 Production of wheat 2007/2008

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 29 Source: Corn Futures Net Positions from CFCT (COT) reports; Quoted in Carter et al The impact of speculation on futures markets

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 30 Development of production, consumption, storage and imports of weat. China in 1000 MT Source:: USDA, PSD-Datenbank, 2008.

Introduction Historical perspective Causes of price movements Specifics of price drop Source of uncertainties Forecasts Summary 31 Accuracy of short-term projections of quantities Source:USDA, various years