Agricultural commodity prices rose by an annual average of 29.6% in 2008, but much of this apparent surge was a result of strong gains early in the year. For much of 2008 prices were actually falling, and the Economist Intelligence Unit expects its food, feedstuffs and beverages (FFB) index to continue this trend in 2009, as weaker demand, ample supply, lower global trade levels and difficulties raising finance all serve to keep prices at relatively low levels.
Agricultural commodity prices soared in 2007 and early 2008 largely because of strong growth in demand, particularly from developing countries (where disposable incomes were rising) and from the biofuel industry. Investors increasingly sought exposure to the sector, especially through the futures markets. As signs of the global financial crisis emerged, however, money flowed out of agricultural markets. Trade was constrained by increasing difficulty in obtaining letters of credit, while the prospect of widespread recession started to feed through to weaker global demand. Falling oil prices compounded the sector's problems by making the use of agriculture-based biofuels less price competitive. These negative developments coincided with record harvests, particularly of grains and some oilseeds, which boosted supply and exacerbated the downward trend in prices.
Grainsprices are expected to recover from recent lows over the course of this year as it becomes increasingly clear that official policies are going to remain supportive of biofuel development, notwithstanding lower hydrocarbon prices. By 2010 smaller harvests (2008 was a bumper year) and lower yields owing to less investment by cash-strapped farmers, coupled with already low stocks, will combine to see prices move higher. The oilseed sector will also suffer from lower investment in 2009 but higher production in 2010/11 will more than meet demand resulting in little upward pressure on prices.
The beverages price index is expected to fall throughout the forecast period as the coffee, tea and cocoa markets will be in healthy surpluses and demand growth will be subdued. The price of sugar rose by 27% in 2008, but has not subsequently collapsed and the EIU expects sugar prices to continue to rise over the forecast period. The market is currently in deficit and demand from the ethanol sector is expected to support the price.
|Price forecast summary
|(US$ index; 1990=100; % change year on year)
|Source: Economist Intelligence Unit.
For specific commodities, the Economist Intelligence Unit’s current forecasts are as follows:
Overview: Generally good supply prospects and weaker demand underpin the EIU forecast of relatively little recovery in the prices of agricultural commodities in 2009. Furthermore, the EIU expects prices broadly to stabilise at these lower levels in 2010 as weak global economic conditions persist. However, global stocks are at historically low levels and any unforeseen disruptions to supply of individual commodities could therefore send prices higher.
Cocoa: The cocoa market will return to surplus in 2009/10. This, together with weaker demand for chocolate confectionery, particularly in the developing world, suggests that prices will fall.
Coffee:Coffee prices are expected to fall in both 2009 and 2010 as the market remains in surplus. In 2008/09 the impact of a poor Brazilian harvest will be more than offset by weaker demand.
Grains: An expected surplus in the market, together with stagnating demand, will mean that there will be little upward pressure on wheat prices in 2009. The maize market is expected to be in deficit in 2009/10, which will support prices but will also encourage planting and a return to a market surplus in 2010/11. Rice prices will stabilise at around currently traded levels during 2009, before resuming an upward trend as a result of tightening world stocks. Sorghum will benefit from demand from the biofuels sector in the US in particular and prices will rise over the forecast period.
Oilseeds: By the end of 2008 prices of all vegetable oils had plummeted. There has been some recovery in early 2009, owing to concerns about the likely size of South American crops, particularly of soybean and sunflowerseed. Palm oil is likely to suffer from a persistent build-up of stocks during 2008/09 and 2009/10. Stocks of rapeseed and rapeseed oil are also on the increase.
Sugar: Sugar prices are expected to rise moderately over the forecast period, largely owing to sustained demand from the biofuels sector and from self-sufficient and surplus-producing countries. These countries account for a large share of growth in sugar consumption.
Tea: The upward pressure on prices in 2008 as a result of tighter global supply is set to reverse in 2009-10, as production increases in all the major producers. Growth in consumption is expected to remain relatively robust as tea remains a cheaper alternative to its main competitor, coffee.