Some context for the semester ahead:The world food and financial crisis of 2007-09

AGEC 640Agricultural Development and Policy

Thurs., August 26, 2010

?Our goal for today:

much data, a few hypotheses

The 2007-09 crises, in one picture

DBA index = four major crops, in US dollars

USD index = six major currencies, per US dollar

Source: Computed from data at www.google.com/finance.Note: The DBA index is corn, wheat, soy and sugar (25% each). The USD DNX index is the currencies of Europe (57.6%), Japan (13.6%), Britain (11.9%), Canada (9.1%), Sweden (4.2) and Switzerland (3.6%), per US dollar. The S&P 500 is a value-weighted sum of large U.S. companies.

S&P500 index = all major companies, in US dollars

all rise commodities rise as stocks fall all fall, then

move together

Our goal for today: much data, a few hypotheses

Let’s start with the economy as a whole

Reprinted from IMF (2009), Country Report: United States (July). http://www.imf.org/external/pubs/ft/scr/2009/cr09229.pdf

We are here

GDP growth in the United States (pct./year, quarterly data)

The global economy is now relatively synchronized

Source: http://www.imf.org/external/pubs/ft/weo/2010/update/02/index.htm

Who is doing best?

Reprinted from IMF(2009), World Economic Outlook Update (July, www.imf.org).

Reprinted from SIFMA (2009), Economic Outlook (June). http://www.sifma.org/research/pdf/EconOutlook0609.pdf

In the U.S.,consumption and employmentDRIVE policy choices,especially interest rates…

A new aspect of the recent/current crisis was the collapse of mortgage-backed securities in the U.S.

Commercial

Residential

Reprinted from SIFMA (2009), Research Quarterly (August)http://www.sifma.org/research/pdf/RRVol4-8.pdf

…and the collapse of a large “shadow banking” sector on other assets

Reprinted from SIFMA (2009), Research Quarterly (August)http://www.sifma.org/research/pdf/RRVol4-8.pdf

…which made all financial transactions unusually risky

Source: Federal Reserve Bank of St. Louis, 2009. (http://research.stlouisfed.org/publications/es/09/ES0924.pdf)

Perceived bankruptcy risk for U.S. companies

Perceived bankruptcy risk for banks

…and remember we are all connected

Source: NY Times “Europe’s Web of Debt” (May 1, 2010)

Looking within the food price crisis

Reprinted from P.C. Abbott (2009), Development Dimensions of High Food Prices. Paris: OECD.

Note typical spike-and-valley pattern

Rice rose first and spiked highest

Other crops rose/fell in sync

A pre-history of the current crisis

Source: K. Anderson (2006), “Reducing Distortions to Agricultural Incentives: Progress, Pitfalls and Prospects.” <www.worldbank.org/agdistortions>. Data shown are an index of export prices in US dollars for all major traded agricultural products, deflated by the MUV index which is the unit value of manufactures exported from France, Germany, Japan, UK and US, with weights based on those countries’ exports to developing countries.

Index of real international food prices, 1900 to 2005 (1977-79 =100)

Not yet any sign of the 2007-08 price rise

A pre-history of the current crisis

Source: K. Anderson (2006), “Reducing Distortions to Agricultural Incentives: Progress, Pitfalls and Prospects.” <www.worldbank.org/agdistortions>. Data shown are an index of export prices in US dollars for all major traded agricultural products, deflated by the MUV index which is the unit value of manufactures exported from France, Germany, Japan, UK and US, with weights based on those countries’ exports to developing countries.

Index of real international food prices, 1900 to 2005 (1977-79 =100)

February 1917

August 1918

April 1973

The spike-and-valley pattern creates cycles of panic and then complacency

The 1973 crisis led to investments that brought prices down to unusually low and stable levels

Source: Reproduced from Ronald Trostle, “Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices ”, Outlook Report WRS-0801. Washington, DC: ERS/USDA, July 2008.

The spike-and-valley cyclesdiffer somewhat among crops

IMF indexes of nominal commodity prices, January 1992=100

Other commodities fluctuateeven more than food

Reprinted from P.C. Abbott (2009), Development Dimensions of High Food Prices. Paris: OECD.

Note how urea spiked

the most

So far in the 2009-10 recovery, food prices have not risen as much as oil & metals

Reprinted from IMF(2009), World Economic Outlook Update (July, www.imf.org).

Index values(Jan.2009=100)

Source: Reproduced from IMF, “Food and Fuel Prices—Recent Developments, Macro-economic Impact, and Policy Responses.” Washington, DC: IMF, June 30, 2008 (58 pages).

Relative to other things, food is still cheap

Index values(2007=100)

Relative to other things, food is still cheap

Source: Reproduced from IMF, “Food and Fuel Prices—Recent Developments, Macro-economic Impact, and Policy Responses.” Washington, DC: IMF, June 30, 2008 (58 pages).

and yet still barely affordable for the poorest

Major food riots, Jan. 2007-Apr. 2008

March 13, 2002World: Many Hungry Mouths Around 815 million people -- 13 percent of the world's population -- suffer from hunger and malnutrition, mostly in developing countries, said Jacques Diouf, head of the United Nations Food and Agriculture Organization.

At the all-time

low prices of

2002…And when

prices rise…

Index values(2007=100)

Local crises driven by underlying world market conditions and local “stochastic” events

Looking globally, note that prices in other currencies have risen much less than in dollars

Corn price movements in nominal U.S. dollars, real euros and other currencies

Source: Reproduced from Philip C. Abbott, Christopher Hurt and Wallace E. Tyner, “What’s Driving Food Prices?” Oak Brook, IL: Farm Foundation, July 2008 (82 pages).

WHY?

Source: Reprinted from IFPRI (2008), “An Assessment of the Likely Impact on Ugandan Households of Rising Global Food Prices.” Kampala, Uganda: IFPRI, June 9th 2008 (39 pages).

Local prices don’t always link directly to “world market” prices

Why did food prices spike?The USDA’s summary of conventional wisdom

Source: Reproduced from Ronald Trostle, “Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices”, Outlook Report WRS-0801. Washington, DC: ERS/USDA, July 2008.

The stage was set by low world stocks

Total world grain & oilseeds stocks

Source: Reproduced from Trostle (2008), from IMF data on prices and USDA estimates on stocks.

IMF price indexes

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450 Sub-Saharan Africa East Asia

South Asia Southeast Asia

Rest of World

USDA estimates of cereal grain stocks per capita, by region, 1961-2008 kg/person

Source: Author's calculations. Grain stock estimates are for the end of the marketing season in the year shown, from USDA PS&D database (www.fas.usda.gov/psdonline), matched with mid-year population estimates from US Census Bureau, International Database (www.census.gov/ipc/www/idb).

Stock changes have been mostly in Asia

On the demand side, food consumptionis driven by population and income…

Reprinted from The Economist, 8 December 2007.

Biodiesel (mostly EU)Ethanol (mostly US)

Source: Reproduced from Trostle (2008), from USDA data and projections.

…and recently by biofuels policy as well

Biofuels feedstocks vary, but all use land

Source: Reproduced from Trostle (2008), from various estimates.

The U.S. use of corn for ethanol has been especially fast-growing

Source: Reproduced from Trostle (2008), from USDA data and projections.

U.S. increased corn use for ethanol accounts for 30% of world increase in all uses of all grains

Source: Reproduced from Trostle (2008), from USDA data and projections.

…about the same share as increased feed use; food use accounts for 44% of growth

Global trade is mainly into East Asia

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100Rest of WorldSub-Saharan AfricaSouth AsiaSoutheast AsiaEast Asia

USDA estimates of cereal grain net trade by region, 1961-2008

Source: Author's calculations. Data are for standard trade years over a 12-month season ending in the year shown, from USDA PS&D database (www.fas.usda.gov/psdonline), matched with mid-year population estimates from US Census Bureau, International Database (www.census.gov/ipc/www/idb).

mmt

Impo

rts

Expo

rts

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100Sub-Saharan Africa East AsiaSouth Asia Southeast AsiaRest of World

USDA estimates of cereal grain net trade per capita, by region, 1961-2008 kg/person

Source: Author's calculations. Data are for standard trade years over a 12-month season ending in the year shown, from USDA PS&D database (www.fas.usda.gov/psdonline), matched with mid-year population estimates from US Census Bureau, International Database (www.census.gov/ipc/www/idb).

kg/person

Impo

rts

Expo

rts

…but on a per-capita basis,Africa imports even more than Asia

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1,000

1,200 Sub-Saharan Africa East Asia

South Asia Southeast Asia

Rest of World

USDA estimates of cereal grain production per capita, by region, 1961-2008 kg/person

Source: Author's calculations. Grain production estimates are for the country's harvest in the year shown, from USDA PS&D database (www.fas.usda.gov/psdonline), matched with mid-year population estimates from US Census Bureau, International Database (www.census.gov/ipc/www/idb).

kg/person

The price rise was due partly to slowdown in per-capita production growth…

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5Sub-Saharan Africa East AsiaSouth Asia Southeast AsiaRest of World

USDA estimates of cereal grain average yield, by region, 1961-2008 mt/ha

Source: Author's calculations, from grain production and area estimates for harvests in the year shown, from USDA PS&Ddatabase (www.fas.usda.gov/psdonline), matched with mid-year population estimates from US Census Bureau, International Database (www.census.gov/ipc/www/idb).

Yield trends drive production

Proportion of households who produce, sell or are net sellers of food, 1998-2001

Ethiopia (2000) Madagascar (2001) Zambia (1998)Total Rural Total Rural Total Rural

Rural population (% of total) 50.7 75.8 47.8All foods

producers (% of all hhlds) 78.1 97.0 71.2 83.1 66.5 89.4sellers (% of all hhlds) 68.4 87.9 58.1 68.5 36.7 53.9net sellers (% of all hhlds) 40.6 53.2 41.4 49.1 7.9 12.6net sellers (% of poor hhlds) 44.3 51.5 54.5 56.2 10.6 12.5

Main staple foodsproducers (% of all hhlds) 55.4 71.5 64.4 75.7 47.5 69.5sellers (% of all hhlds) 28.5 36.9 35.1 41.7 28.8 42.5net sellers (% of all hhlds) 23.1 27.3 31.7 37.6 19.1 29.6net sellers (% of poor hhlds) 21.8 24.3 41.0 42.7 23.9 28.1

Note: Poor households are defined as the lowest 40% of income per capita; staple crops are wheat and maize (Ethiopia), rice, maize, groundnut and beans (Zambia) and rice and maize (Madagascar).

Source: Reproduced from W.A. Masters (2008), “Beyond the Food Crisis in Africa.” African Technology Development Forum, 5(1-2): 3-13. Data shown are compiled from M.A. Aksoy and A.Isik-Dikmelik (2008), "Are Low Food Prices Pro-Poor? Net Food Buyers and Sellers in Low-Income Countries" Policy Research Working Paper 4642. Washington, DC: The World Bank, June 2008 (30 pages).

Table 1.

But not all farmers are net sellers!

Note: All data are from the Kagera Health and Development Survey (www.worldbank.org/lsms); results shown are a local polynomial regression with its 95% confidence interval, for surveyed households with agricultural production (579 in 1991-92, and 557 in 1992-93). Staple food crops are maize, cassava, cooking bananas, millet, sorghum, and yams or potatoes. The household’s expenditure per capita is measured in 2006 U.S. dollars converted at PPP prices. Source: Reprinted from A. Rios, W.A. Masters and G.E. Shively (2008), “Agricultural Prices and Income Distribution among Farmers .” Working Paper available online at www.agecon.purdue.edu/staff/shively/RMS.pdf.

Farm household net crop sales in Tanzania, by income level

All Crops, 1991-92

Staple Food Crops, 1991-92

All Crops, 1992-93

Staple Food Crops, 1992-93

Net buyers

Net buyers

Net buyers

The poor sell little, or are net buyers

Aid has risen, but not for food & ag.

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1975 1980 1985 1990 1995 2000 2005

Health Agriculture

Food Aid Debt Relief

Total ODA (right axis)

ODA commitments to all LDCs in selected sectors and total, 1973-2006(real US dollars per capita)

Source: Author's calculations, from OECD Development Assistance Committee (2008), Bilateral ODA commitments by Purpose (www.oecd.org/dac), deflated by OECD deflator (2005=100) and divided by midyear population estimates for all LDCs from the U.S. Census Bureau, International Database.

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1975 1980 1985 1990 1995 2000 2005

Health AgricultureFood Aid Debt ReliefTotal ODA (right axis)

ODA commitments to Africa in selected sectors and total, 1973-2006(real US dollars per capita)

Source: Author's calculations, from OECD Development Assistance Committee (2008), Bilateral ODA commitments by Purpose (www.oecd.org/dac), deflated by OECD deflator (2005=100) and divided by midyear population estimates for Sub-Saharan Africa from the U.S. Census Bureau, International Database.

Aid to ag. in Africa has fallen the most

Whew! Conclusions?

• There’s a lot of data out there– not everything is measured, but much is known– relationships between variables remain questionable

• Hw #1 will give you experience using those data– write-ups should describe what you see in the data;

inferring causality is risky (avoid “because”)

• Next week, we begin systematic search for links between economic growth, agricultural development and government policies…