Biofuel Mandates Will Keep Crop Prices High in 2008

Outlook for 2008 shows new bioenergy legislation and high-priced oil will sustain strong corn, soybean prices.

Continuing high crude-oil prices and new bioenergy mandates - such as the U.S. Energy Independence and Security Act of 2007 - are expected to sustain prices at historic highs across all ag commodities in 2008 and over the next decade. This is according to an analysis released last week by economists with the Food and Agricultural Policy Research Institute, or FAPRI. They briefed Congress on the new 10-year projections for U.S. and international commodity markets.

FAPRI is an economic research group with centers at Iowa State University and the University of Missouri. The new bioenergy legislation was passed by Congress and signed into law by President Bush in December.

Global net trade in ethanol is projected to increase by 2.53 billion gallons, reaching 3.61 billion gallons by 2017. New biodiesel mandates in the Americas and Europe will almost double the price of biodiesel, pushing it to $6 per gallon with the doubling of net trade over the next decade.

In the projection for ethanol, FAPRI expects the world ethanol price to fall over the first half of the decade because of strong supplies encouraged by previous price increases. Thereafter, growing demand strengthens the price again through 2017, and it ends at a projected $1.52 per gallon.

Asian economies have brightest outlook

Although recent market turbulence and high crude-oil prices have clouded prospects, the 10-year outlook for the global economy continues to be strong, with a 3.3% average annual rate of real growth in gross domestic product. Downside risk in the outlook is seen in the U.S. economy where rising energy and food prices coupled with recent difficulties in the financial and real estate markets restrict growth in 2008 to only 1.90%. These problems affect economies in the rest of the world, especially in Western Europe and Latin America.

The brightest spot in the outlook is the exceptionally solid growth expected in Asian economies. The highest growth rates (7.4 to 8.2%) are projected for China, Vietnam and India for the decade. The outlook shows the U.S. dollar depreciating (inflation adjusted) against the currencies of most countries that consume or compete in international export markets, with the exception of the Brazilian real.

The world corn price increased dramatically in 2007-08, to $198.17 per metric ton, because of demand from ethanol and livestock sectors and sustained exports. FAPRI expects that demand will sustain this high price level over rest of the decade. Similarly, all vegetable oil prices soared in 2007-08 with new biodiesel mandates, and they will continue to increase by 1.28 to 3.60% annually for the rest of the period.

Highlights from FAPRI's global outlook

Following are the other highlights from FAPRI's 2008 world agricultural outlook.

All world grain markets were characterized by higher prices in 2007-08 because of supply shortages and an increase in demand from the emerging biofuels sector. In particular, the world wheat price increased to $313.55 per metric ton because of production losses due to adverse weather. Adjustments in supply and demand settle the wheat price at $264.05 per metric ton in 2017-18.

The price of sugar is seen increasing by 10.7% over the next decade because exportable surplus is cut significantly in the European Union as a result of its sugar reforms and in Brazil as a result of increased production of ethanol there from sugarcane.

Strong demand coupled with the doubling of biodiesel trade is expected to drive up world trade within the soybean complex by 17 to 32%. World soybean production is projected to reach 297 million metric tons by 2017-18. Argentina, Brazil, and the United States will remain the dominant soybean trio, accounting for 81% of world production. China, the world's largest importer of soybeans, expands its import share to 57% of total world imports by 2017-18. Palm oil will remain the most widely used edible oil, and world consumption will likely increase by 46% over the next 10 years.

Higher per capita meat consumption

Sanitary and phytosanitary issues continued to affect the world meat market in 2007. FAPRI expects that recovery from these problems and sustained income and population growth will lead to higher per capita meat consumption globally.

Consequently, projections show meat production reaching 248.5 million metric tons, and meat trade expanding to 20.9 million metric tons by the end of the decade. Recovery in demand, along with strong grain prices, pushes all meat prices to high levels. The outlook shows the United States and Brazil gaining significant market shares compared to their average levels in 2003 to 2007.

Because of strong global demand and limited growth in supplies from major exporters, the world prices of butter, cheese, nonfat dry milk and whole milk powder increased to record-breaking levels in 2007. Strong prices will encourage production growth in many countries. World dairy prices will taper in the mid-term, but strong economic growth and rising population favor higher dairy demand, which puts upward pressure on dairy prices in the long term.

Projections assume current ag policies

Australia, New Zealand and the European Union remain the big players in export markets, and Argentina and Brazil expand their dairy exports to substitute for exports that are declining in the European Union due to policy reforms.

FAPRI is an economic research group with centers at Iowa State University and University of Missouri. The outlook projections incorporate recent forecasts and currently adopted agricultural policies. The multi-year FAPRI projections provide a starting point for evaluating and comparing scenarios involving economic, policy, weather and technology variables in world agricultural trade. More information is available at the Iowa State, and University of Missouri, FAPRI Web sites.

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