The influence of macroeconomic factors on world agriculture has been profound over the last three years. The financial crisis, the severe economic recession and the emerging prospects for a sustained recovery and are likely to require long-term structural adjustments. Credit scarcity, contraction of demand and rising unemployment have impacted agricultural activities and regions, even though this sector is less affected than some others.

Economic downturn less severe for agriculture
The 2008 financial crisis broke out at a time when many nominal commodity prices had reached historical highs. As a result of a strong global supply response, prices of these products declined rapidly in 2008, a trend reinforced by the global economic downturn and the associated slowdown in demand and contraction in trade.

The OECD Economic Outlook Interim Report for March 2009 concluded that the world economy was in the midst of its deepest and most synchronised recession in the post-war period. To a large extent, the impact of the economic crisis on specific sectors varied according to their exposure to tighter credit conditions and to falling demand.

Agriculture in OECD countries is likely to have fared better than other sectors for a number of reasons. It has a relatively smaller financial exposure; demand is less sensitive to falls in income; the existing set of support policies cushioned the blow; and revenue had been accumulated during the recent period of high prices, despite important differences across sub-sectors and farms.

The recovery that began in a number of non-OECD economies in 2009 has now spread to the OECD area (OECD Economic Outlook November 2009) and should be sustained this year and next. However, the slow recovery in consumer spending means that growth in the OECD area is likely to fluctuate around 1.9% in 2010 and expected to rise to 2.5% in 2011.

Macroeconomic indicators  Click here to view full-size image

Demand for agricultural goods and trade is expected to mirror the performance of the global economy. The resulting changes in consumption are likely to be less for high-income consumers with a low income elasticity of demand for most agricultural products, than for low-income consumers. The impact can also differ significantly among the various agricultural commodities. Specific meat and dairy products which have a higher income elasticity may see more variation in demand.

Commodity price indices  Click here to view full-size image

Agriculture may have fared relatively well in the recession, but that doesn’t mean it is immune to economic contraction and slow recovery. The major impact will be in lower farm profitability as lower GDP dampens demand for agricultural products and prices.

Agricultural households will also suffer from declining income derived from off-farm jobs as rising unemployment ripples through to rural economies. Food processing, distribution, export-oriented sectors, and vertically integrated cooperatives are likely to be more sensitive to any continuing credit scarcity.

OECD Agricultural Outlook expects recession to impact livestock sectors the most…
The 2009-2018 Agricultural Outlook analyses the effect of lower incomes leading to a slower recovery of agricultural prices, production and consumption. The impact, in general, is likely to be moderate if economic recovery gets underway quickly as seems to be the case.

Livestock producers are expected to face greater impacts than crop producers from demand adjustments and these will also be greater in developing countries than in the OECD area. Demand and prices for livestock products, such as beef, butter and cheese, will be the most seriously affected.

Among cereals, the Outlook finds maize prices to be the most responsive to changes in GDP growth, reflecting its primary use as a feed ingredient.

Negative GDP growth in 2009, recovery has already begun  Click here to view full-size image

…and examines closer links to oil prices
Linkages between crop and energy prices are now stronger. The crude oil and energy markets have long influenced the supply side of crop production by their direct effect on the price of fertiliser, pesticides and other chemicals, transportation, and processing costs.

However, the demand side is now also linked to a certain extent. The emergence of biofuel sectors based on agricultural feedstocks, particularly in the important crop production and exporting markets of OECD countries, has generated a more dynamic link to crude oil markets, particularly for grains, oilseeds and sugar, but also indirectly to other crops competing for land.

The return to high oil prices of around USD 100 per barrel would raise crop prices by an additional 20% to 30% and livestock prices by around 10%. Livestock producers are negatively affected by higher energy prices through the increase in crop prices that in turn raises feed costs.

Expected prices in 2009-10 vary depending on the scenario  Click here to view full-size image

Tight credit availability impacting parts of agri-food sector
A broader examination of issues arising from the financial crisis based on a small survey of enterprises suggests that the agri-food sector has weathered the recession fairly well. However, downstream sectors have initially experienced difficulties in gaining access to credit. Trade finance constraints have a significant impact on firms dependent on lines of credit for their businesses and should tight credit markets persist, the viability of such firms could be in peril. Access to credit is viewed as the key issue, particularly by smaller agrifood firms in both OECD and non-OECD countries.

For policy makers, as the crisis abates and recovery spreads, it may be time to reflect on:

• What further structural reforms would make agriculture more resilient in the face of economic downturn and shocks.
• The need to resist protectionist measures and maintain open agricultural markets to facilitate recovery.
• How to ensure that financial resources remain available to viable agrifood enterprises and for trade facilitation.
• How to facilitate the adaption of agriculture to structural changes in the evolving credit and financial market environment.
• The implications for the sector of upcoming prolonged fiscal consolidation.

 

References

• OECD (2009), OECD Economic Outlook, Interim Report, March.
• OECD (2009), Agricultural Policies in OECD Countries: Monitoring and Evaluation, Chapter 1.
• OECD (2009), OECD-FAO Agricultural Outlook 2009-2018, www.agri-outlook.org
• OECD (2008), OECD Economic Outlook, Volume 2008/2, No. 84. December.