The sharp rise in most commodity prices in 2007-08, combined with high levels of poverty and growing populations have highlighted concerns about food security. Commodity prices have come down from their 2007-08 record highs, but prices are expected to strengthen with economic recovery. According to the OECD-FAO Agricultural Outlook to 2018, for the next ten years prices in real terms are still projected at, or above, the levels of the decade prior to the 2007-08 peaks. The issue of food security will remain high on the international political agenda. A successful remedy will require greater investment in agriculture and measures aimed at poverty reduction.

Main market developments
The dramatic increase in international agricultural commodity prices was followed by a rapid decline driven by increased production responding to earlier price rises, and by weaker demand intensified by the start of the global economic crisis. Continued weakness in the general economy will restrain commodity prices over the next 1 to 2 years, which should then strengthen with economic recovery.

The situation varies by commodity, but average prices in real terms (adjusted for inflation) for the next ten years are still projected at or above the levels of the decade prior to the 2007-08 peaks. Average crop prices are expected to be 10-20% higher in real terms, while for vegetable oils, real prices are expected to be more than 30% higher.

Meat prices in real terms are not expected to surpass the 1997-2006 average, while reduced consumer incomes at the beginning of the projection period will tend to encourage substitution to cheaper meats, favouring poultry over beef. Average dairy prices in real terms are likely to be slightly higher to 2018, notably for butter, due to rising energy and vegetable oil prices.

Prices in real terms to fall from peaks but to remain above 1997-2006 average: Per cent change relative to 1997-2006 average  Click here to view full-size graphic

Worldwide production of vegetable oils is expected to be more than 40% greater in 2018 than the 2006-08 average, while that of oilseeds, oilmeals, poultry, butter and whole milk powder is expected to be more than 30% higher.

Other than wheat and coarse grains, the OECD-FAO Outlook foresees agricultural commodity production increasingly shifting away from developed countries towards developing regions, especially emerging and middle income countries. This shift is particularly pronounced for meat and dairy products.

Growth in consumption and trade
Growth of consumption of agricultural products is also expected to be centered in the developing world, driven by growing populations and rising incomes, and also urbanisation and trends towards western diets high in animal protein. Oilmeal use (for animal feed) in developing countries will be almost 60% greater in 2018 than the 2006-08 average, while consumption of butter and poultry will be some 50% greater and that of vegetable oils about 40% more.

Changing global production and consumption will underpin the anticipated growth in trade, which will also bridge the gap between the rising appetite for increased product variety and the ability of local producers to deliver these in terms of quantity, quality and price.

For almost all commodities, projected growth in imports and exports of developing countries exceeds that of the OECD area. Continued expansion of South-South trade is a key feature of the Outlook. Nevertheless, OECD countries will still dominate exports of wheat, coarse grains and all dairy products.

Highest growth in exports expected in developing countries: Export growth from 2006-08 average to 2018 (%)  Click here to view full-size graphic

Increased price fluctuations
Over the medium term, expected low levels of stocks imply that any supply or demand shock would have greater impact than in the past. In thin markets (low volumes, few actors), policy decisions (such as export restrictions) can severely reduce global supplies and drive up prices. Agricultural commodity prices are also being increasingly integrated into global financial markets and could be potentially subject to speculation activities.

Moreover, there have always been important links between energy and agricultural prices. The emergence of the biofuel sectors has now forged a more dynamic link to crude oil markets, particularly for crops.

Expansion of biofuels
Biofuel markets depend to a large extent on government mandated use and other support measures. A projected rapid expansion of biofuel production to meet mandated use would continue to put upward pressure on prices for feedstocks such as wheat, maize, oilseeds and sugar. However, uncertainty remains due to possible changes in policy interventions and other unpredictable factors like crude oil prices and developments in second-generation technology.

Brazil will continue to be the market leader. Growth in domestic fuel ethanol use is driven mainly by the expanding fleet of flex-fuel vehicles (expected to account for almost two-thirds of the spark-ignition fleet in Brazil by 2018). Increased exports will maintain Brazil’s position as the world’s largest supplier, with net exports reaching almost 12 billion litres by 2018, or 90% of global ethanol exports.

Brazil ethanol market projections  Click here to view full-size graphic

Food price contribution to inflation
While commodity prices have fallen dramatically food prices have remained high in many countries. The weight of the food component in the Consumer Price Index (CPI varies significantly across countries. In high income countries, this share ranges from 10% to 20% but in low and middle income countries it is substantially higher, often in the 40-60% range. As seen in the figure below, the food price contribution to overall inflation even in times of rising food prices remains relatively limited in OECD countries, but is quite significant in lower income countries such as Kenya, India and Brazil.

Food contribution to % change in CPI  Click here to view full-size graphic

Food security
In terms of the capacity to increase production, there is substantial additional land available for use in agriculture, but bringing more marginal land into production can involve considerable investment and lower yields, while possibly incurring increased social and environmental costs. The potential for future improvements in agricultural productivity, particularly in developing countries, is high, but it requires continued investment in research, extension and infrastructure.

In summary, the recent episode of high food prices refocused attention on agricultural production and markets. Challenges and critical factors for policy makers include:

• Keep markets open and improve price transmission to local producers (from international markets but also along the food supply chain).
• Address the need for continued investment in agricultural research, extension and infrastructure.
• Improve agricultural support, energy and water use policies to ensure that policy actions are best suited to policy goals and contribute to an efficient use of resources.
• Support good risk management policies enabling farmers to deal with future increased price volatility.

 

References

• OECD (2009), OECD-FAO Agricultural Outlook 2009-2018
• OECD (2008), Biofuel support policies: an economic assessment