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THE OUTLOOK FOR CEREALS AND THE IMPACT OF ETHANOL: 

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 Buenos Aires, 27 march 2007 Seminario CIARA-CEC

Outline: 

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

The Main Assumptions: 

The Main Assumptions Unchanged policies ‘Normal’ weather Constant real exchange rates Sustained economic growth Slow-down in population growth

Where population and income is expected to grow: 

Where population and income is expected to grow

Most of the action in world cereal markets is outside the OECD(cereals=wheat+coarse grains+rice) : 

Most of the action in world cereal markets is outside the OECD (cereals=wheat+coarse grains+rice) % change: 2015 – average 2003-05

Which regions contribute most to increased global trade in crops?: 

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 -60 -40 -20 0 20 40 60 80 100 120 140 Wheat imports Coarse grain imports Wheat exports Coarse grain exports Per cent of world import growth

Which countries show the strongest growth in wheat trade? % change from 2003-05 to 2015 : 

Which countries show the strongest growth in wheat trade? % change from 2003-05 to 2015 0 1 2 3 4 5 6 7 8 9 % change Nigeria Brazil Egypt India Korea Main importers 0 5 10 15 20 25 30 35 % change Australia OIS EU25 Ukraine Argentina Main exporters

Which countries show the strongest growth in trade for coarse grains? % change from 2003-05 to 2015 : 

Which countries show the strongest growth in trade for coarse grains? % change from 2003-05 to 2015 0 5 10 15 20 25 % change China Mexico Iran Korea Egypt Main importers 0 10 20 30 40 % change Argentina Canada Ukraine Australia USA Main exporters

World prices continue to fall in real terms: 

World prices continue to fall in real terms 0 50 100 150 200 250 1990 1995 2000 2005 2010 2015 USD/T Nominal Real Wheat 0 40 80 120 160 200 1990 1995 2000 2005 2010 2015 USD/T Nominal Real Maize

Is the surge grain prices due to rising ethanol demand?Some basic facts: 

Is the surge grain prices due to rising ethanol demand? Some basic facts Declining global grain stocks provide a context for more volatile markets

Substantial drop in global grain stocks: 

Substantial drop in global grain stocks

Is the surge grain prices due to rising ethanol demand?Some basic facts: 

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

Supply-demand shocks in world cereal markets: Main quantity changes in 2006-07: 

Supply-demand shocks in world cereal markets: Main quantity changes in 2006-07 -40 -30 -20 -10 0 10 20 Australia USA Canada EU Total Million tonnes Wheat production Coarse grain production Cereal use for ethanol

The longer term market and trade impacts of growing bio-energy demand: 

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!

Economics of biofuel productionThreshold prices crude oil, 2004: 

Economics of biofuel production Threshold prices crude oil, 2004 0 20 40 60 80 100 Wheat ethanol, EU Maize ethanol, USA Sugar beet ethanol, EU Sugar cane ethanol, Brazil Rape oil biodiesel, EU US$ / barrel crude oil Threshold price crude oil Oil price 2004 Oil price April 2006

The longer term market and trade impacts of growing bio-energy demand: 

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…

Rapid growth in cereal based ethanol production: 

Rapid growth in cereal based ethanol production 0 10 20 30 40 50 60 70 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Billion litres China Canada EU USA

The longer term market and trade impacts of growing bio-energy demand: 

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.

Cereal requirements for ethanol production: 

Cereal requirements for ethanol production 0 20 40 60 80 100 120 140 160 2005 2007 2009 2011 2013 2015 Million tonnes China - maize Canada - wheat Canada - maize EU - wheat EU - maize USA - maize

Large area requirements for higher biofuel shares: 

Large area requirements for higher biofuel shares

The longer term market and trade impacts of growing bio-energy demand: 

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

Effect on crop prices if ethanol policy targets would be met in 2014: 

Effect on crop prices if ethanol policy targets would be met in 2014 -10 -5 0 5 10 15 20 % change from base scenario Maize Wheat Vegetable Oils Oilmeal Oilseeds

High oil price scenario 2014 world price impact of higher crude oil prices relative to policy target scenario: 

High oil price scenario 2014 world price impact of higher crude oil prices relative to policy target scenario -5% 0% 5% 10% 15% 20% 25% Wheat Coarse grains Oilseeds Vegetable oils Oil meals Sugar Biofuels Effect Agr. Production Cost Effect

The longer term market and trade impacts of growing bio-energy demandConcluding remarks: 

The longer term market and trade impacts of growing bio-energy demand Concluding 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