“the economics of alternative energy sources and globalization: the road ahead”, november15 –...

“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


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


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?


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


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


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



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



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?


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


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


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


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


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


World market price changes (3/4) World market price projections for 2016/18 – scenario with constant energy price (no energy cost shift)


World market price changes are significantly smaller

Large variability in price effect depending on energy price development, in particular on wheat and corn markets


(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


World market price changes (4/4) World market price projections for 2016/18 – scenario with constant biofuel production (no bioenergy demand shift)



(US$/mt)

2016/18 base scenario (in percent)


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


Impacts on crop production (1/3) EU – change in crop production (in percent)


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


price

2016/18 withbase period energy price


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


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)






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


Impacts on crop production (3/3) Brazil – change in crop production (in percent)


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






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


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


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

)


Impacts on net trade (2/2) Net trade effects on the oilseeds market


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

)


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


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

“the economics of alternative energy sources and globalization: the road ahead”, november15 –...

Documents