Agricultural price index

Categories : Category Insights | Commodity Trends Published on : Jul 27 2017

Because the agricultural price index represents the prices of all agricultural products, it closely mirrors the performance of the US economy as a whole. Any idiosyncratic movement of the price of one product is often canceled out by the movement of the others. Corn, wheat and soybeans operate as substitutes on the animal feed market (which is the endpoint for a majority of each crop). While the size of corn production in the United States gives it greater influence over the price index, whoever its influence is mitigated by the variety agricultural products. Moreover, when crop prices increase this increases feed prices, which drives up meat prices (holding demand constant). As a result, the index only moves when prices of all goods move due to external factors.

The main outside driver of agricultural prices is the price of oil. Both corn and soybeans have increasingly been used more in fuel substitutes in the past decade; corn in ethanol, soybeans in biodiesel. The energy independence and security act of 2007 drastically increased quotas for biofuel production in the United States. High oil prices boost the demand for alternative fuel, which increases the price of corn and soybeans. Furthermore, transportation is a major cost for all agricultural products. As a result, when oil prices rise, the prices of agricultural products are increased to recoup the higher transportation costs. The other key driver of agricultural prices is the strength of the American dollar. The United States is a major exporter of most agricultural products, and foreign demand expands when the dollar is weak versus other currencies.

The appreciation of oil prices from 2006 to 2008 greatly expanded the production of corn-based ethanol and soybean-based biodiesel. Indeed, according to the USDA, food, seed and industrial uses account for one-third of domestic corn utilization. As demand and prices increased for corn and soybeans, demand for wheat as an animal feed substitute increased, raising its price as well. The supply of meat grew significantly due to accelerated slaughtering rates, but higher transportation costs tempered the resulting price drop for cattle and hogs. This all contributed to the sharp rise in the index from 70.5 in 2006 to 91.6 in 2008.

The global financial crisis in 2008 caused oil prices, the value of foreign currencies versus the dollar and overall demand to drop significantly. These factors led to an agriculture price dip of 11.8% in 2009, before a rebound of 7.0% in 2010 once oil prices and demand started improving. High oil prices over 2011, plus adverse weather conditions in farming areas around the world, drove up the price of all major agricultural products significantly, leading to a 15.7% increase over the year. In 2012, continued strength in oil prices, rising consumption of agricultural products and a drought in the Midwest and Plains Regions of the United States caused the agricultural price index to rise 5.1%. Since then, agricultural production has normalized as adverse weather conditions subsided. Additionally, in late 2013 the Environmental Protection Agency did not set an increased Renewable Fuel Standard for 2014, breaking the precedent that ethanol and other biofuel production would increase each year. The flat demand from biofuel producers has alleviated upward pressure on corn and soybean prices. Increasing meat prices during 2014 due to low cattle herd numbers and a drought in the West pushing up vegetable prices led the agricultural production index to rise further in 2014. Falling oil prices, steady overall inflation and a strengthening US dollar have all contributed to the decline in the agricultural price index in recent years, from its high of 110.6 in 2014 to an estimated 88.7 in 2016. Additionally, in 2015, as the production of both crops and livestock products increased, supply constraints eased, leading prices to fall 10.0%. As these trends continue, the agricultural price index is expected to decline further in 2016. However, the index is expected to increase slightly in 2017 as oil prices exhibit firmer levels and biofuel values improve.



Forecast

After severe drops in recent years, the agricultural price index is forecast to increase over the next five years. Upward pressure on crop prices will be driven by continued growth in demand, appreciation in oil prices and a return to growth in biofuel use. Meat prices are forecast to fall by the USDA as livestock production increases and cattle farmers replenish their herds. However, recent issues with supply out of South America and growing demand for meat in emerging markets are expected to pressure meat prices. Furthermore, continued advances in production, which improves yield rates, will limit price appreciation. The agricultural price index is forecast to only increase at an annualized rate of 1.4% to 96.7 over the five years to 2022.

Price volatility could result from fluctuating oil prices. Oil prices contribute to the price of agricultural goods because they form a part of transportation costs and because biofuels compete with petroleum products as an energy source, which further ties the price of biofuels and biofuel crops to oil prices.


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