Global Food Price Volatility a Fact of Life

Sudden surges and declines in food prices are likely to remain a fact of life and could well increase, according to an exhaustive new report released jointly by the UN Food and Agriculture Organization and the Organization for Economic Cooperation and Development.

The 194-page document, released Friday, examines the outlook for food production for the decade through 2020. It contains a special chapter on price volatility that concludes a complex series of factors are involved including the growing effect of climate change, declining stock levels, rising energy prices, currency exchange rates, demand growth as economically rising nations switch from grains to meat, trade restrictions, the entry of financial speculators into heretofore stolid futures markets, competition for water between farmers and urban dwellers, and agricultural land lost to urbanization and others.

“Many observers have come to believe that extreme price spikes may become more rather than less frequent,” the report notes. “Certainly, the potential for short run price spikes in the cereals market is relatively high with lower world production and stocks in 2010/11.” Although these key drivers of volatility in agricultural markets are well known, “of concern is the extent to which the drivers are, themselves, likely to exhibit greater variability and uncertainty in the future, or to condition market responses in ways that will exacerbate price volatility in the coming decade,” the report notes.

Price volatility is certainly not new to agriculture, the report says. “However, recent periods of high prices and increased price volatility are having significant impacts on food-insecure populations. These events signal the need for responses by all stakeholders which address their concerns.”

In effect, however, the authors skirt gingerly around the issue that drives price volatility and everything else about food production, and that is a population that is rising faster than the earth can adjust. The report notes that by the end of 2011 global population will rise to 7.7 billion. It is rising population that strains resources, is driving global warming, diverting water from rural to urban populations and increasing pollution of the world’s rivers and oceans.

While it is true that in major industrialized nations and even in China, the most populous country – for now – on the planet, birth rates are falling below replacement, in other areas population is continuing to increase. According to the latest United Nations report on global population, the number of people will reach 9.0 billion by 2050, assuming even that fertility falls from 2.5 per woman to 2.0.

As the OECD-FAO agriculture forecast notes, almost all growth will take place in less-developed regions while the developed world will remain largely stable. India, Pakistan, Nigeria, the Congo, Bangladesh, Uganda and Ethiopia are expected to drive population growth – and the United States, the only industrialized country whose population is still growing steadily.

One of the major problems, despite the refusal of virtually the entire Republican opposition in the US Congress to believe it, is that climate change is transforming these countries, and not for the better. Adverse weather conditions, drought and permanently changing climate conditions mean that agricultural productivity will fall inexorably in most of these countries. The International Rice Research Institute has already reported that rice productivity, the major staple for half the world, is falling Gains are expected as production rises in temperate countries such as Canada and the former Soviet countries that make up the major wheat-growing regions.

But the gains are not expected to offset the losses by far. Like it or not, the report notes, “Climate change is altering traditional weather patterns. The latest findings of the Intergovernmental Panel on Climate Change suggest that long-term changes in climate have already been observed, including changes in Arctic temperature and ice, widespread changes in precipitation, ocean salinity, wind patterns and aspects of extreme weather including droughts, heavy precipitation, heat waves and intensity of tropical cyclones. Agricultural impacts are expected to be more adverse in tropical areas than in temperate areas.”

With agriculture consuming some 70 percent of the world’s available freshwater withdrawals, “water use projections to 2050 suggest that the water supply to some 47 percent of the world’s population, mostly in developing countries, will be under severe stress, largely because of developments outside of agriculture.”

The refusal of the United States, the biggest energy user and the biggest emitter of greenhouse gases after China, to seek any solutions is a major stumbling block to any solution. Climate change appears certain to get worse and probably accelerate, with a deleterious effect on global agricultural production at a time when the world’s growing population cannot afford it.

Although the report doesn’t say it, the inevitable conclusion is that people from overpopulated regions, especially as their agricultural production is curtailed by weather problems, will opt with their feet, heading for the rich nations where agricultural productivity and imports keep everybody relatively well fed.

Three basic reasons govern price instability, the agriculture forecast notes – natural factors such as weather, disease and pests, price “inelasticities” or the responsiveness of supply and demand to price changes, which become more critical when stocks are low. And because production response may take considerable time, supply “cannot respond much to price changes in the short term, though it may do so much more once the production cycle is completed.”

Currently, the report notes, the world is coming off a period of serious supply side volatility that has driven prices upward rapidly, with the weather having played a major role in the 2006-2008 price increases and again in the latter half of 2010. However, the report notes, “This Outlook is cautiously optimistic that commodity prices will fall from their 2010-11 levels as markets respond to these higher prices and the opportunities for increased profitability that they afford.”

Thus rising prices for agricultural commodities have drawn new players into the food production cycle and can be expected to stimulate investment in improved productivity and increased output, the report says.

Nonetheless,”until stocks can be rebuilt, risks of further upside price volatility remain high. This Outlook maintains its view in recent editions that agricultural commodity prices in real terms are likely to remain on a higher plateau during the next decade compared to the previous decade. Prolonged periods of high prices could make the achievement of global food security goals more difficult, putting poor consumers at a higher risk of malnutrition.” Global agricultural production is projected to fall to a growth rate of 1.7 percent annually on average, compared to 2.6 percent in the previous decade

The land and resources diverted from feeding people to biofuels “can also have indirect effects on the prices of crops which are not widely used as biofuels feedstock, resulting in higher feed prices and have the potential to reduce the supply of feed to the livestock industries at a time when the appetite for meat is growing, particularly China and the rising middle class in India “although the full effect is somewhat mitigated with the incorporation of biofuels co-products into feed rations (distillers’ grains, oilseed meal).”

Against this grim scenario, both India and China, the two most populous countries on earth, have largely managed their resources to feed themselves. “The use of cereals in China and India has been relatively stable during the subsequent global financial crisis and continues to grow, the report notes. An account of China’s and India’s wheat trade during the 2006-08 price spikes “does not support the view that these two countries contributed in any significant way to the run-up in prices.

Next year’s crop is critical, especially for wheat and maize. A strong supply response to positive price signals may result, but unfavorable weather conditions could play a significant role. This continuing uncertain environment calls for coherent international approaches that will help restore confidence in the ability of agriculture and the food economy to meet the rising demands of the future.

“Recognizing that volatility will remain a feature of agricultural markets, given weather variation and potential adverse consequences of climate change, coherent policies are required to reduce volatility on the one hand, but also to mitigate the impact of volatility on those who are most adversely affected,” the authors write.