Real commodity prices to remain below recent peaks but well above previous decade

Higher farm commodity prices are expected in this decade, having fallen from their record peaks of two years ago. They are unlikely to drop back to their average levels of the past decade, according to the annual joint report from the OECD and the UN Food and Agriculture Organization (FAO), published on Tuesday. The report says Brazil's agriculture growth is set to outpace the EU27 four-fold in next 10 years.

The OECD-FAO Agricultural Outlook 2010-19 says average wheat and coarse grain prices are projected to be nearly 15-40% higher in real terms relative to 1997-2006, while for vegetable oils real prices are expected to be more than 40% higher. For livestock products, average meat prices in real terms, other than for pigmeat, are expected to surpass the 1997-2006 average over the coming decade initially due to lower supplies, higher feed costs and rising demand. Average dairy prices in real terms are expected to be 16-45% higher in 2010-19 relative to 1997-2006, with butter prices showing most gains, supported by higher energy and vegetable oil prices.

Based on commodities in the Outlook, Brazil is the fastest growing agricultural sector by far, growing by over 40% to 2019, when compared to the 2007-09 base period. Russia and Ukraine are projected to grow 26% and 29%, provided plans and support measure by the respective governments proceed as indicated and bear fruit, marking a significant recovery in production levels.

China and India may also grow significantly by 26% and 21%, respectively. While Australia is projected to grow some 17%, this growth reflects an assumed return to more normal yields; over a longer period of comparison, Australia’s production by 2019 is only some 7% higher than in 2000. Production growth in the US and Canada is projected in the 10-15% range over the same period.

In contrast, over the same period, net agricultural output in the EU-27 will have grown less than 4%. The report says these diverse trends reflect important developments in these countries which may be generating or inhibiting growth.

The report says by region, production measures, on a per capita basis, provide an interesting viewpoint on longer term developments in global agriculture and their potential implications for food supplies. Per capita output has fallen in North Africa and the Middle East, largely due to limited water availability and policies in some countries such as Saudi Arabia to reduce highly subsidised wheat production. Production in the Sub-Sahara region of Africa is expected to be stagnant in per capita terms, as production barely keeps pace with population growth still averaging around 2.2% per year.

In Western Europe, production is also stagnant. Growth in consumption on a per capita basis in this region will need to be met by imports. Latin America is the fastest growing production region, but in per capita terms Eastern Europe, is the fastest growing, because projections assume that in this region’s population numbers will actually decline by over 3% over the Outlook period.

Net agricultural production for selected countries (index 2004-06=100)

Last Saturday a group of Saudi businessmen announced the launch of an agricultural company to grow rice under contract with growers in Asia.

The Far East Agricultural Investment Co, an SR100m ($26.6m) investment vehicle, has already agreed leases in Cambodia, Vietnam, Pakistan and the Philippines for aromatic and long grain basmati rice, both intended to export to Saudi Arabia at market prices, said Mohammed Abdulla al-Rajhi, chairman of the new company. The first harvest of rice, about 60,000 tons, is due to arrive to Saudi Arabia early next year, he said.

Saudi Arabia announced plans two years ago to phase out highly subsidised domestic wheat production by 2016 from the current 2.5m tons annual production, which is dependent on depleting Ice Age fossil aquifers, that are not replenishable.

The Outlook sees global agriculture output growing more slowly over the next decade than in the past 10 years but nevertheless remains on track with previous estimates to meet the 70% increase in world food production required to meet the market demand of estimated population levels in 2050.

The report adds that although the world produces enough to feed its population, recent price spikes and the economic crisis have contributed to a  rise in hunger and food insecurity. About one billion people are now estimated to be undernourished. The Outlook argues that agricultural production and productivity will need to be stepped up, while a well functioning, rules-based trading system will be crucial to fair competition and to ensure that food can move from surplus to deficit production areas.

Retail food prices initially remained high in many countries even after world commodity prices had fallen in the wake of  the price surge of 2007-08. As commodity prices fell, the contribution of food price increases to inflation fell sharply in 2009 in OECD countries but remained a key factor in some developing and emerging economies. Higher food costs, if sustained, will  undermine food security, especially for the poor who spend a significant share of their budgets on food.