2009 FAPRI Outlook Shows Impacts of Economic Slowdown but Projects Higher Commodity Prices over the Next Decade

Jacinto Fabiosa; jfabiosa@iastate.edu
Dermot Hayes; dhayes@iastate.edu
Sandy Clarke; sclarke@iastate.edu

March 6, 2009

WASHINGTON – After dramatic increases in the prices of most commodities in the last three years, prices retreat in 2009/10, but growing demand for food, feed, and fuel is expected to return them to historically high levels over the rest of the decade, according to analysts with the Food and Agricultural Policy Research Institute (FAPRI), who briefed Congress this week on their 2009 agricultural economic baseline projections.

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.

The world sugar price declines slightly, by 0.7¢ per pound, in 2008/09. Because more sugarcane is used for ethanol in Brazil, and with strong sugar imports from the European Union, China, and India, prices increase by 15 percent over the projection period.

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.

Sanitation and food safety concerns in China continued to impact the world meat market, as did issues with traceability. Sustained growth in world population and income raises per capita meat consumption and fuels a 24.3 percent expansion in world trade. Trade is projected to end at 21.1 million metric tons in 2018. A recovery in demand, coupled with strong grain prices, pushes all meat prices to historically high levels. Brazil and the United States gain significant shares in the world meat market.

World dairy prices are retreating from the record-breaking levels posted in mid-2007. With uncertainty about economic conditions as well as increasing supplies, world dairy prices continue to decline in the next couple of years. In the long run, growth in population and incomes continues to put upward pressure on dairy prices. Australia, New Zealand, and the European Union remain the big exporters. But as excess supply from the EU dwindles, Argentina and Brazil expand their dairy exports.

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.

The multi-year FAPRI projections provide a starting point for evaluating and comparing scenarios involving macroeconomic, policy, weather, and technology variables in world agricultural trade. More information is available at the Iowa State (http://www.fapri.iastate.edu) and University of Missouri (http://www.fapri.missouri.edu) FAPRI Web sites.