Falling Food Prices May Not Last, Report Says

Although food prices have fallen from their 2011 levels across the globe, they are not likely to remain on that trajectory, according to a new report by the OECD and the UN Food and Agriculture Organization. Production must increase by 60 percent over the next 40 years to meet demand. There are expected to be 680 million people inhabiting the planet over the next decade, with the population growing fastest in Africa and India.

The 286-page OECD-FAO Agricultural Outlook 2012-2021,released Wednesday, says increasing production “will be central to containing food prices in a context of rising resource constraints and will be a key factor in reducing global food insecurity." Among those constraints, the report notes, are critical water scarcity in many countries, extreme weather events and climactic patterns that are changing in many parts of the world.

“At the same time, there is a growing need to improve the sustainable use of available land, water, marine ecosystems, fish stocks, forests, and biodiversity,” the report continues. Some 25 percent of all agricultural land is highly degraded.

Global agriculture is increasingly linked to energy markets, with oil price projections on average about US$25 higher than those in the 2011 report, ranging from US$110 to US$140/bbl. These higher prices “are a fundamental factor behind the higher agricultural commodity price projections, affecting not only oil-related costs of production but also increasing the demand for biofuels and the agricultural feedstocks used in their production.” With the Middle East increasingly tense over the Iran situation, there are deep concerns that energy prices could explode, with food prices rising with them.

Food politics could come into play as well, with Russia, Ukraine and Kazakhstan expected to become much more important sources of wheat exports by 2021 although high production variability in the region could have implications for global trade and world price volatility Cereal stock-to-use ratios will remain below historical averages, posing the risk of future price volatility, the report notes.

Fish production is one of the fastest growing sources of animal protein. World fisheries and aquaculture production are expected to grow by 15 percent over the projection period putting more strain on the world’s oceans. However, with 33 percent growth in aquaculture production, it will surpass capture fisheries as the primary source of fish for human consumption by 2018.

So far, global production has managed to keep food stocks ahead of human population growth, enabling the world to rebuild stocks although millions still go to bed hungry every night. Demand has slowed as well because of weaker economic conditions. And, although output averaged 2.6 percent annual growth over the past decade, led by growth in Brazil, China, India and Russia, the FAO-OECD report anticipates that output growth will slow to 1.7 percent annually -- which still outpaces population growth and with growth in output per person estimated at 0.7 percent but once again raises the threat of instability.

A critical question is whether, how and where agricultural production will respond to current and projected high commodity prices. Over the past 50 years, annual trend growth in global agricultural production, as measured by the FAO’s net production index, has averaged 2.3 percent, the reports notes. Past price spike cycles have been met with high production response, and in the presence of inelastic demand, real prices had trended downward for decades.

However, real commodity prices, as measured by the FAO’s Food Price Index, reached a trough around 2000 and have persistently risen since then to double their values of a decade ago. With signs of slowing productivity in some regions, high and rising input costs for fertilizer and energy related inputs, and with growing constraints due to water and land degradation, the future supply response is open to question.

Output in developing countries is actually expected to outpoint that in developed ones, a trend that has continued in recent decades as developing countries have invested more in their agricultural sectors. The emerging economies including Brazil, China, Indonesia, Thailand, Russia and Ukraine are expected to capture an increasing share of the expanding world trade in agriculture. Hence, by 2021, developing countries will account for the majority of exports of rice, oilseeds, vegetable and palm oil, protein meals, sugar, beef, poultry meat, fish and fish products.

Given the fact that they can increase the land area devoted to agriculture and to improve productivity, developing countries will provide the main source of global production growth to 2021, and just tin time.

This rising productivity trend is projected to continue in the coming decade for developing country growth in the 20 major agricultural products including meats (beef, pigs and poultry), dairy products (butter, cheese and milk powders), vegetable oils and sugar continues to rise. Projected annual production growth exceeds that in the OECD countries by a wide margin, “often in excess of 50 percent. As a result, the OECD share of global production of all these commodities will decline over the course of the outlook period.”

OECD area production will continue to dominate in the case of dairy products including cheese, milk powders, biofuels, and fish oil. The OECD area has lost its lead in production of beef, poultry and coarse grains production in the current decade and for the other products in an earlier period.

Sustainability is a growing problem, given the constraints of degraded land and other problems. A flock of recent news stories have pointed to Chinese leadership concerns over the ruination of wide swaths of the country’s farmland because of overuse of pesticides and fertilizers and bad farming practices. However, the report notes, “Much can be done that contributes to increasing productivity and improving sustainability of agriculture in a complementary fashion” although the possible farm practices generally involve a long lead time before realizing the benefits.

The report notes that there are “many uncertainties concerning the future of biofuel policies” across the globe, as well there should be, since the production of biofuels is regarded by many environmentalists as a disastrous misdirection of resources, built on subsidies to farmers. US agricultural protectionism to shield corn has kept sugarcane based ethanol, which is held to be more efficient, out of the US market. That appears about to change with new laws coming into effect that would allow the US to import sugarcane-based ethanol mainly from Brazil to help meet domestic demand created by its mandate for advanced biofuels, while Brazil would import lower priced maize-based ethanol principally from the United States to satisfy the demand from its large fleet of flex-fuel vehicles.