Posts Tagged ‘agricultural commodities’
Three conclusions for agricultural commodities, says European Commission
Here’s the latest punditry from the European Commission.
“Despite remaining uncertainties, based on the outlook for agricultural commodities established by several organisations, including the latest Commission medium term projections, three conclusions are clear for agricultural commodities:
- Agricultural commodity prices are expected to stay higher than their historical averages, reversing their long-term downward trend, at least for the foreseeable future.
- Price volatility is also expected to remain high, although uncertainties with respect to its causes and duration persist.
- The level of input prices used in agriculture is also likely to remain higher than its historical trends.”
These three conclusions are contained in the document, ‘Tackling the Challenges in Commodity Markets and on Raw Materials’, issued as a Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions. (These Eurocrats need urgent lessons in how to be brief and clear.)
The ‘Communication’ has also said:
“While higher global prices could stimulate agricultural production, price transmission mechanisms are often imperfect. In many developing countries, commodity markets are often disconnected from world markets or, at best, world price signals are transmitted to domestic markets with considerable lags so that a domestic supply response is often delayed. Several analyses by the Food and Agricultural Organisation, OECD, Commission and others have focused on supply and demand developments, exacerbated by short-term economic and policy factors (including restrictions on exports) that explain part of the observed extreme price volatility, including factors specific to financial markets that may have amplified price changes.”

A food crisis in northern Burundi’s Kirundo province – the result of failed rains – has prompted many women to make a long daily commute to neighbouring Rwanda, where a day’s work in a field earns them just enough money to feed their family for a day. Photo: IRIN/Judith Basutama
There are several errors in this statement. One, in many developing countries, commodity markets are extremely closely tied to world markets quite simply because they are buying staple foodgrain from world markets. Two, domestic supply responses are not delayed – the structural adjustment in agriculture is preventing them from taking place. Three, the “restrictions on exports” mantra is being repeated as often as possible by all multilateral development banks (World Bank, IMF, ADB, IADB, AfDB) and by financial markets and commodities analysts who collaborate to spread this misinformation. Four, why are the “factors specific to financial markets” not spelt out?
“The combination of the above factors implies that higher prices for agricultural commodities will not necessarily result in higher incomes for farmers, especially if their margins are squeezed by increased costs. In addition, potential problems for net food importing countries and more generally for the most vulnerable consumers are evident, stemming from price impacts on food inflation. While a certain degree of variability is an intrinsic part of agricultural markets, excessive volatility does not benefit producers neither users.”
The contradictions between what the EU thinks it ought to say to the finance + markets constituency and what it thinks it ought to say to critics of neo-lineral economics at home is clear from this paragraph. The EU is admitting there is a profiterring taking place between the higher prices for agri commodities and the “not necessarily” higher incomes for farmers. Higher costs are mentioned too. Food importing countries have “potential problems’! (Seriously, are the people who wrote this completely unaware of the events in North Africa and the reasons behind them?)
Only 16 points under the 2008 peak, FAO’s food price index
International prices of most agricultural commodities have increased in recent months, some sharply. The FAO Food Price index has gained 34 points since the previous Food Outlook report in June, averaging 197 points in October, only 16 points short from its peak in June 2008. The upward movements of prices were connected with several factors, the most important of which were a worsening of the outlook for crops in key producing countries, which is likely to require large draw downs of stocks and result in tighter global supply and demand balances in 2010-11.
Another leading factor has been the weakening of the United States Dollar (US Dollar) from mid-September, which continues to sustain the prices of nearly all agricultural and non-agricultural traded commodities. The increase in international prices of food commodities, all of which accruing in the second half of 2010, is boosting the overall food import bill in 2010 closer to the peak reached in 2008.

Seedlings waiting to be transplanted in village of Gbarnga-ta, 15km from Gbarnga in Bong county, where CRS and Caritas NGOs support farmers to diversify their crops as part of their nutrition push. Photo: Anna Jefferys/IRIN
The pressure on prices to rise was first felt in the cereal market, most notably for wheat and barley, in August. This prompted FAO to call for an extraordinary meeting on 24 September 2010 to discuss the underlying causes and possible remedies. The meeting clearly identified the importance of reliable and upto-date information on crop supply and demand to cope with unexpected developments in world markets. More transparency and a better understanding of the role of commodity futures markets and government responses were also viewed as necessary to address price volatility.
Amid fears of a repeat of the price surge experienced in 2008, FAO expects supplies of major food crops in 2010-11 to be more adequate than two years ago, mainly because of much larger reserves. The fact that supplies of rice, wheat and white maize, the most important staple food crops in many vulnerable countries, are also more ample lessens the risk of a repeat of the 2007-08 crisis in the current season. Nonetheless, following a series of unexpected downward revisions to crop forecasts in several major producing countries, world prices have risen alarmingly and at a much faster pace than in 2007-08.
Attention is now turning to plantings for the next (2011-12) marketing season. Given the expectation of falling global inventories, the size of next year’s crops will be critical in setting the tone for stability in international markets. For major cereals, production must expand substantially to meet utilization and to reconstitute world reserves and farmers are likely to respond to the prevailing strong prices by expanding plantings. Cereals, however, may not be the only crops farmers will be trying to produce more of, as rising prices have also made other commodities attractive to grow, from soybeans to sugar and cotton.
This could limit individual crop production responses to levels that would be insufficient to alleviate market tightness. Against this backdrop, consumers may have little choice but to pay higher prices for their food. With the pressure on world prices of most commodities not abating, the international community must remain vigilant against further supply shocks in 2011 and be prepared.