Prices to ease but remain high

Posted by Isobel Drake on 30th May 2008

Agricultural commodity prices should ease from recent record peaks but over the next 10 years they are expected to average well above their mean levels of the past decade, according to the latest Agricultural Outlook from OECD and the UN Food and Agriculture Organization (FAO).

OECD Secretary-General, Angel Gurría, is pleading for the breaking down of trade barriers with restrictive trade practices likely to cause greater distress. “The way to address rising food prices is not through protectionism but to open up agricultural markets and to free up the productive capacity of farmers, who have proven repeatedly that they will respond to market incentives,” Mr Gurría said at the Outlook’s launch in Paris. “Governments can also do more to foster growth and development in poor countries, so as to improve the purchasing power of the most vulnerable food buyers.”

Food prices and their impact on the world economy will be one of the primary issues that will be addressed at the OECD Ministerial Council Meeting in Paris on 4-5 June 2008. At a separate summit at FAO headquarters in Rome, on 3-5 June, world leaders, including many Heads of State and Government from around the world, will discuss policies and strategies on how to improve and ensure world food security and re-launch agriculture in rural communities of developing countries.

“Coherent action is urgently needed by the international community to deal with the impact of higher prices on the hungry and poor,” Jacques Diouf, Director-General of the FAO said at a press conference launching the Outlook in Paris. “Today some 862 million people are suffering from hunger and malnourishment – this highlights the need to re-invest in agriculture. It should be clear now that agriculture needs to be put back onto the development agenda.”

The report outlined projections of real prices for a number of commodities, indicating considerable increases on past low prices.

Real price comparisons between last decade and the coming decade are expected to show an increase of up to 10 per cent for rice and sugar, under 20 per cent for wheat, around 30 per cent for butter, coarse grains and oilseeds and over 50 percent for vegetable oils.

Prices may also become more volatile because stock levels are anticipated to remain low and demand for agricultural commodities could become less responsive to price changes. The recent increase in investment funds on commodity futures markets and climate change might also become additional factors in price variability.

The report claims that drought in some of the world’s main grain-producing regions in the context of low stocks was a large – but transitory – factor in the sharp price rises of the past two years. More permanent factors, such as high oil prices, changing diets, urbanisation, economic growth and expanding populations, are also at play and are behind the expectation of higher average prices in the coming ten years relative to the past decade.

Growing demand for biofuel is another factor contributing to higher prices. World fuel ethanol production tripled between 2000 and 2007 and is expected to double again between now and 2017 to reach about 127 billion litres a year.

In OECD countries, at least, the growth of biofuel production has thus far been driven largely by policy measures, and the report recommends further review of existing biofuel policies as it is not clear that the energy security, environmental and economic objectives of biofuel policies will be achieved with current production technologies.