THE OUTLOOK FOR CEREALS AND THE IMPACT OF ETHANOL

1
THE OUTLOOK FOR CEREALS AND THE IMPACT OF ETHANOL

• Loek Boonekamp
• Head of the Agri-food Trade and Markets Division
• OECD, Directorate for Trade and Agriculture

Seminario CIARA-CEC
Buenos Aires, 27 march 2007
2
Outline

• Assumptions underlying the projections for cereal
  markets
• The main future trends in world wheat and coarse
  grain markets
• The short and longer term market impacts of
  increased ethanol use
• Concluding remarks

3
The Main Assumptions

• Unchanged policies
• Normal weather
• Constant real exchange rates
• Sustained economic growth
• Slow-down in population growth

4
Where population and income is expected to grow
5
Most of the action in world cereal markets is
outside the OECD(cerealswheatcoarse
grainsrice)
change 2015 average 2003-05
6
Which regions contribute most to increased global
trade in crops?
change from 2003-05 to 2015 in countries that
represent at least 1 per cent of world trade
140
120
100
80
60
Per cent of world import growth
40
20
0
-20
-40
-60
Wheat imports
Coarse grain
Wheat exports
Coarse grain
imports
exports
7
Which countries show the strongest growth in
wheat trade? change from 2003-05 to 2015
Main exporters
Main importers
35
9
8
30
7
25
6
20
5
change
change
4
15
3
10
2
5
1
0
0
Australia
OIS
Nigeria
Brazil
Egypt
EU25
Ukraine
India
Korea
Argentina
8
Which countries show the strongest growth in
trade for coarse grains? change from 2003-05
to 2015
Main exporters
Main importers
40
25
20
30
15
change
20
change
10
10
5
0
0
China
Mexico
Iran
Argentina
Canada
Ukraine
Australia
Korea
Egypt
USA
9
World prices continue to fall in real terms
Wheat
Maize
250
200
200
160
150
120
USD/T
USD/T
100
80
50
40
0
0
1990
1995
2000
2005
2010
2015
1990
1995
2000
2005
2010
2015
Nominal
Real
Nominal
Real
10
Is the surge grain prices due to rising ethanol
demand?Some basic facts

• Declining global grain stocks provide a context
  for more volatile markets

11
Substantial drop in global grain stocks
12
Is the surge grain prices due to rising ethanol
demand?Some basic facts

• Declining global grain stocks provide a context
  for more volatile markets
• Extreme weather patterns have lowered global
  cereal production and exports.
• Increased ethanol production has raised wheat and
  coarse grains use.
• The drop in supplies has been much larger than
  the rise in demand

13
Supply-demand shocks in world cereal markets
Main quantity changes in 2006-07
20
10
Wheat
0
production
Coarse grain
Million tonnes
-10
production
Cereal use for
-20
ethanol
-30
-40
EU
USA
Total
Canada
Australia
14
The longer term market and trade impacts of
growing bio-energy demand

• A basic fact ethanol is not a viable option in
  most countries without government support!

15
Economics of biofuel productionThreshold prices
crude oil, 2004
100
80
60
US / barrel crude oil
40
20
0
Wheat
Maize
Sugar beet
Sugar cane
Rape oil
ethanol, EU
ethanol,
ethanol, EU
ethanol,
biodiesel,
USA
Brazil
EU
Threshold price crude oil
Oil price 2004
Oil price April 2006
16
The longer term market and trade impacts of
growing bio-energy demand

• A basic fact ethanol is not a viable option in
  most countries without government support!
• Rapid growth in cereal-based ethanol production

17
Rapid growth in cereal based ethanol production
70
60
50
China
40
Canada
Billion litres
EU
30
USA
20
10
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
18
The longer term market and trade impacts of
growing bio-energy demand

• A basic fact ethanol is not a viable option in
  most countries without government support!
• Rapid growth in cereal-based ethanol production.
• This requires substantial quantities of maize and
  wheat.

19
Cereal requirements for ethanol production
160
140
120
China - maize
Canada - wheat
100
Canada - maize
Million tonnes
80
EU - wheat
60
EU - maize
USA - maize
40
20
0
2005
2007
2009
2011
2013
2015
20
Large area requirements for higher biofuel shares
21
The longer term market and trade impacts of
growing bio-energy demand

• A basic fact ethanol is not a viable option in
  most countries without government support!
• Rapid growth in cereal-based ethanol production.
• This requires substantial quantities of maize and
  wheat.
• The consequences
• Lower wheat and maize exports
• Land drawn out of oilseed production
• Higher crop prices overall

22
Effect on crop prices if ethanol policy targets
would be met in 2014
20
15
10

change from base scenario
5
0
-5
-10
Maize
Wheat
Vegetable Oils
Oilmeal
Oilseeds
23
High oil price scenario 2014 world price impact
of higher crude oil prices relative to policy
target scenario
25
Biofuels Effect
Agr. Production Cost Effect
20
15
10
5
0
-5
Wheat
Coarse
Oilseeds
Vegetable
Oil meals
Sugar
grains
oils
24
The longer term market and trade impacts of
growing bio-energy demandConcluding remarks

• Much will depend on oil prices and in most
  countries on government policies
• Benefits regarding stated objectives
  (environment, energy security) are smaller than
  assumed
• Higher and more instable crop prices
• Higher incomes for some farmers, higher costs for
  others
• Energy policy can create a new source for
  distortion of agricultural markets