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Higher agriculture commodity prices here to stay, says major OECD-FAO report for 2011-2020

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Higher agriculture commodity prices here to stay – this is the overall message of the OECD-FAO Agriculture Outlook 2011-20. I will add material to this post from the main report. There is a database attached to the report which will also yield spreadsheets, to be posted here in the weeks ahead.

The OECD-FAO Agriculture Outlook 2011-20 has said that a good harvest in the coming months should push commodity prices down from the extreme levels seen earlier this year. However, the Outlook said that over the coming decade real prices for cereals could average as much as 20% higher and those for meats as much as 30% higher, compared to 2001-10. The press release has more of the big picture message from the Outlook.

Some key questions and concerns have been mentioned. One of these is: what is driving price volatility? The Outlook takes a look at the key forces driving price volatility, which create uncertainty and risk for producers, traders, consumers and governments. About a period of higher commodity prices, the Outlook said 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. In real terms, agricultural commodity prices are likely to remain on a higher plateau during the next decade compared to the previous decade.

All commodity prices in nominal terms will average higher to 2020 than in the previous decade. In real terms, prices are anticipated to average up to 20% higher for cereals and 50% higher for some meats, compared to the previous decade. On the forecasts of net agricultural production, global agricultural production is projected to grow at 1.7% annually on average compared to 2.6% in the previous decade. Slower growth is expected for most crops, especially oilseeds and coarse grains, while the livestock sector stays close to recent trends.

Where biofuels and agricultural outputs are mentioned, the Outlook has said the use of agricultural output as feedstock for biofuels will continue its robust growth, largely driven by biofuel mandates and support policies. By 2020, 12% of the global production of coarse grains will be used to produce ethanol compared to 11% on average over the 2008-10 period.

[The OECD-FAO Agriculture Outlook 2011-20 has a dedicated website here.]

[The OECD-FAO Agriculture Outlook 2011-20 Summary is available in English, Français, Español, Chinese, Português and Russian.]

A Nepalese vendor sells food from a roadside stall in Bhaktapur, some 12 kilometers southeast of Kathmandu. Photo: Foreign Policy/Prakash Mathema/AFP/Getty Images

Key points from the summary are:

(1) Commodity prices rose sharply again in August 2010 as crop production shortfalls in key producing regions and low stocks reduced available supplies, and resurging economic growth in developing and emerging economies underpinned demand. A period of high volatility in agricultural commodity markets has entered its fifth successive year. High and volatile commodity prices and their implications for food insecurity are clearly among the important issues facing governments today. This was well reflected in the discussions at the G20 Summit in Seoul in November, 2010, and in the proposals for action being developed for consideration at its June 2011 meeting of Agriculture Ministers in Paris.

(2) 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. Harvests this year are critical, but restoring market balances may take some time. Until stocks can be rebuilt, risks of further upside price volatility remain high. This Outlook maintains the view expressed in recent editions that agricultural commodity prices in real terms are likely to remain on a higher plateau during the next ten years 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.

Even in the midst of violence in Ivory Coast, locals shopped at markets in Abidjan’s Koumassi district. Photo: Foreign Policy/Sia Kambou/AFP/Getty Images

(3) Higher commodity prices are a positive signal to a sector that has been experiencing declining prices expressed in real terms for many decades and are likely to stimulate the investments in improved productivity and increased output needed to meet the rising demands for food. However, supply response is conditioned by the relative cost of inputs while the incentives provided by higher international prices are not always passed through to producers due to high transactions costs or domestic policy interventions. In some key producing regions, exchange rate appreciation has also affected competitiveness of their agricultural sectors, limiting production responses.

(4) There are signs that production costs are rising and productivity growth is slowing. Energy related costs have risen significantly, as have feed costs. Resource pressures, in particular those related to water and land, are also increasing. Land available for agriculture in many traditional supply areas is increasingly constrained and production must expand into less developed areas and into marginal lands with lower fertility and higher risk of adverse weather events. Substantial further investments in productivity enhancement are needed to ensure the sector can meet the rising demands of the future.

Three conclusions for agricultural commodities, says European Commission

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A Syrian family receives food aid at a WFP distribution point. Photo: WFP/John Wreford

A Syrian family receives food aid at a WFP distribution point. Photo: WFP/John Wreford

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

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?)

The return of the Food Aid Convention

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A man from the Balochistan province of southwestern Pakistan carts home food rations for his family with a pair of mules that were spared by the floodwaters. Picture: World Food Programme/Copyright: Amjad Jamal

A man from the Balochistan province of southwestern Pakistan carts home food rations for his family with a pair of mules that were spared by the floodwaters. Picture: World Food Programme/Copyright: Amjad Jamal

The TripleCrisis site has an entry on the little-known Food Aid Convention. Negotiators from member countries of the Food Aid Convention (FAC) are meeting to hammer out details of a new agreement. The FAC is an obscure international treaty that dates back to 1967 under which donors pledge a certain amount of food aid. It is the only international agreement where donors pledge to provide a minimum amount of aid.

Last renegotiated in 1999, the FAC is now more than 10 years out of date. It was supposed to have been updated in 2001, but instead has limped from extension to extension on the hopes that the Doha Round of trade talks, which include new rules on food aid, would be completed first. Finally, following a major food crisis in 2007-08 and continued food price volatility, donors have realized that the FAC must be updated to take the new situation into account, even in the absence of a Doha agreement. Read the rest here.

Written by makanaka

February 26, 2011 at 11:05

WTO, trade, markets, agribiz research-the meeting of agriculture ministers in Berlin

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Thou Market, southern Sudan. Across the Sahel, women generate income from balanites seeds, which are about half oil and a third protein. After processing at home, they can be turned into many tasty items, including roasted snacks and a spread not unlike peanut butter. They also supply a vegetable oil that is a prized ingredient in foods as well as in local cosmetics. (From 'Lost Crops of Africa: Volume III: Fruits', The National Academies Press. Photo: Caroline Gullick)

Thou Market, southern Sudan. Across the Sahel, women generate income from balanites seeds, which are about half oil and a third protein. After processing at home, they can be turned into many tasty items, including roasted snacks and a spread not unlike peanut butter. They also supply a vegetable oil that is a prized ingredient in foods as well as in local cosmetics. (From 'Lost Crops of Africa: Volume III: Fruits', The National Academies Press. Photo: Caroline Gullick)

Forty-eight ministers of agriculture from countries large and small, poor and rich, met in Berlin to talk about food and about how people in their countries put two meals on the table. They ought to have got to grips with the prices question, they ought to have called for justice and equity, they ought to have represented what the poorest and most vulnerable in their countries want.

They didn’t. Instead, they have released one of the sorriest, weakest, most unfocused and pointless statements I have seen in recent years on the subject.

This piece of diplomatic puffery is called ‘Final Communiqué of the 3rd Berlin Agriculture Ministers’ Summit 2011 in Berlin on January 22nd 2011’.

It explains: “At the ‘3rd Berlin Agriculture Ministers’ Summit’, agriculture ministers from 48 countries came together to exchange experiences and ideas on how trade at local, regional and global level could contribute towards food security. They are convinced that sustainable and regional production and an integrated, rules-based trading system, are prerequisites for making food security and the right to food a practical reality’.

And there you have it. Trade is the most important ingredient, as far as these ministers can see, for food security. The integration of trade is what is needed, and a trading system (conveniently, such as the one they refer to several times in the following text) is the ultimate answer. The paragraphs of their mercantile output have been added to the agriculture page. When you read it:

Note the heavy-handed propaganda techniques employed in this communiqué. “Economic growth” appears early, in the second para, and is found to be “inextricably linked” with the provision of sufficient and nutritious food.
Note that private investment appears in the third para and the ministers emphasise that it must increase. Of course R&D is all done privately now, and national agricultural research systems must be arm-twisted to turn over their best and brightest to the agribiz giants.
Note that “climate change”, some muddy notion of “responsibility” and an equally muddy notion of “sustainable” comes early in the communiqué. This is done so that the environmentalists cannot fault the ministers for ignoring ground realities, but is not explained by any operational directives arising out of this meeting.
Note that the term “integrated” is used early. I’ll explain the significance below.
Note that “markets” makes its first appearance in the text in para eight, and here “integration” is immediately linked to this term in the following para. This is sought to be justified by invoking ideas of food security and “global economic development”.
Note that “value creation” comes next as a keyword, and is attached to the idea of “producers” (who I am sure are not meant to be smallholder farmers) and the familiar tautology of “fair competition”.
Note that “smallholder” does in fact turn up in the following para (ten) but only as a recipient of “due regard” and only provided they “integrate” themselves with markets.
Note that “trade” is the glue which, in this view of the agricultural world, binds everything together.
Note that “markets” and a “trading system” are important enough to be in a puff para together.
Note that developing countries must be “supported” in the primary quest to remove “technical” and “institutional” “obstacles” to – what else? – trade.
Note that the Doha Development Round (which collapsed unceremoniously) is resurrected in para 14 as the new champion of this global agricultural vision.
Note that in para 15 the Doha Development Round is further held up as being a signal contributor to “global food security” and that this is vital to “the poorest countries”, a precondition of which the World Trade Organization chief negotiators are strongly urged to recognise.
Note that “markets”, “price” and “free and transparent” all appear in the same para (16).
Note that “price volatility” follows immediately thereafter, as being evident throughout the world (now just how did all that happen?) and therefore “risk-protection” measures are required (such as markets, of course).
Note that the statement ends with a hurried hodge-podge of a conclusion and a fireworks of “market” and “price”.

If you have the stomach for such vacuous declaiming, the original statement is here.