1. Commodity Market Outlook: Sources of Price Volatility ( Impacts of Price Volatility ) T. Randall Fortenbery Professor School of Economic Sciences Washington State University

4. Volatility Perceptions Biofuel production has driven up commodity prices, and increased commodity price volatility.

6. Background

9. Text Preliminary data compiled by D. Zaks at the Center for Sustainability and the Global Environment (SAGE), University of Wisconsin, May, 2008. Funded by NASA Earth Science Program. Do not distribute without explicit permission. For more information, please contact: jfoley@wisc.edu.jfoley@wisc.edu Million metric tonnes of grains and pulses Global Distribution of Grains and Pulses to Food, Feed and Ethanol

10. Preliminary data compiled by D. Zaks at the Center for Sustainability and the Global Environment (SAGE), University of Wisconsin, May, 2008. Funded by NASA Earth Science Program. Do not distribute without explicit permission. For more information, please contact: jfoley@wisc.edu.jfoley@wisc.edu Million metric tonnes of oilseeds Global Distribution of Oilseeds to Food, Feed and Biodiesel

11. Actual Corn Price Compared to Price Expected from Supply/Demand System

15. Is it Really Food vs. Fuel?

16. Volatility Perceptions Speculative activity in the derivative (especially futures) markets has resulted in increased price volatility and inefficient price discovery.

21. Empirical Evidence Work by the CFTC looking at 2008 oil prices suggested that speculators were not the cause of either price levels or price volatility Similar results were found by Irwin et. al looking at soybean markets.

22. Volatility Perceptions International economic events have become more important than basic market fundamentals in determining price levels and volatility.

24. Malaysia's Land Development Authority FELDA has announced plans to immediately establish 100,000 hectares (250,000) of oil palm plantations in the Brazilian Amazon. The agency will partner with Braspalma, a local company, to form Felda Global Ventures Brazil Sdn Bhd. FELDA will have a 70 percent stake in the venture. "As a start, 20,000ha in Tefe will be opened for oil palm planting. After that, between 3,000ha and 5,000ha will be opened yearly," said Deputy Prime Minister Datuk Seri Najib Razak. "Felda wants to emulate Petronas as a global player," he added, referring to Malaysia's national oil company. Amazon palm oil: Palm oil industry moves into the Amazon rainforest Rhett Butler, mongabay.com July 9, 2008

25. Oil palm plantations and heavily logged forest near Lahad Datu, Malaysia. Photo by Rhett A. Butler

26. Malaysia, Indonesia to curtail palm oil production due to low prices Malaysia, Indonesia to curtail palm oil production due to low prices (11/8/2008) Malaysia and Indonesia ̵ countries that account for more than 85 percent of global palm oil production will cut production in an effort to shore up collapsing palm oil prices, reports The Jakarta Post. The decline in palm oil prices is expected to slow expansion of oil palm plantations in Indonesia and Malaysia, a development that will please environmentalists who blame the palm oil industry for large-scale destruction of rainforests across Southeast Asia. November 11, 2008 Monogabay.com

28. Fundamentals Still Matter Land Use Asian Demand Alternatives Uses

29. Contract Expirations Sept. 30 20092.8 million acres o Tx 561K, Colo 409K, Ks 331K, NDak 192, o SDak 184K, MT 138K Sept. 30, 20104.5 million acres Sept. 30 20114.4 million acres Sept. 30 20126.5 million acres

30. CRP OBJECTIVES Upland Bird Habitat250,000 acres Bottomland hardwood trees500,000 acres Non-flood plain wetlands250,000 acres Flood plain wetlands500,000 acres Longleaf pine plantings250,000 acres Prairie pot hole duck habitat100,000 acres State acres for wildlife 500,000 acres

35. OUTLOOK We have likely entered a sustained period of higher average prices, coupled with increased volatility. Sources of volatility vary, and policy strategies to control volatility are at risk of causing, not solving, concerns related to market risk. Tensions between various use categories will result in considerable political pressure to manage who can and cannot engage in trade, especially in derivative and forward markets.

39. Conclusions We have likely entered a new pricing regime relative to basic commodity prices. Both price levels and price volatility will continue to exceed levels experienced through 20006/07. We will likely see several proposed solutions to commodity price activity initiated through political institutions. This will be a global phenomenon, and many of the proposals will be short- sighted and off target. Much of the political motivation for managing markets makes overly simplistic assumptions relative to causality. Creative risk management becomes important

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