Biofuel demands keeps ag prices high, OECD-FAO report

By Lorraine Heller

- Last updated on GMT

Related tags: Biofuel, European union

World prices for many agricultural commodities may remain at
historical highs over the next decade, as the increase in demand
for biofuels continues to shape agricultural markets, says a new
OECD/FAO report.

Published last week, the OECD-FAO Agricultural Outlook 2007-2016​ says that the recent price increases can in part be explained by temporary factors, such as drought and low stocks. But long-term shifts, including increased feedstock demand for biofuel production and the reduction of surpluses due to past policy reforms, could keep commodity prices above historic equilibrium levels during the next ten years, says the report. "Over the outlook period, substantial amounts of maize in the US, wheat and rapeseed in the EU and sugar in Brazil will be used for ethanol and bio-diesel production. This is underpinning crop prices and, indirectly through higher feed costs, the prices for livestock products as well,"​ writes the report. In the United States, annual maize-based ethanol output is expected to double between 2006 and 2016. In the European Union the amount of oilseeds (mainly rapeseed) used for biofuels is set to grow from just over 10 million tons to 21 million tons over the same period. In Brazil, annual ethanol production is projected to reach some 44 billion liters by 2016 from around 21 billion today. Chinese ethanol output is expected to rise to an annual 3.8 billion liters, a 2 billion liters increase from current levels. Stronger than expected demand for cereals​ for biofuel production put extra pressure on global prices, which were already strained due to reduced stocks resulting from weather related shortfalls. World cereal prices are expected to decline towards the end of the outlook horizon, but should stay substantially higher than prices observed over the past decade because of expanding food demand in developing countries as well as budding demand for maize in ethanol production. Oilseed​ prices were strained as supplies again tightened due to a reduction in planted acreage of oilseeds in favor of maize. This price strength was enhanced by rising demand for meals as a cereal feed substitute and increasing demand for vegetable oils for bio-diesel production. Oilseeds and oilseed meals prices will continue to rise through 2007 partly as a result of the run-up in cereal prices that have made oilseed protein meals to become a more a cost-competitive animal feed. In subsequent years, however, prices will gradually fall back as supply and demand adjust. After surging in 2005-early 2006, sugar​ prices remained below earlier expectations for 2006-07, reflecting abundant supplies, higher stocks and an emerging global surplus. Sugar reform in the EU and the retraction of large white sugar supplies from the international market contributed to a widening white sugar premium in 2006. Sugar prices will remain under pressure throughout the outlook period, with the white sugar margin remaining substantial, particularly in the first years, as high quality EU white sugar is pulled from world markets under reforms to the EU sugar regime. For dairy​, solid demand and reduced overall supplies accounted for most of the price increases. Policy reforms in the EU are behind the reduction in EU dairy surpluses and the drop in subsidized exports. This may constitute a more permanent element of price strength in world dairy markets, said the report. World prices of dairy products, which had escalated strongly in 2006 and 2007, will remain at these elevated levels throughout the outlook, partly reflecting the structural changes that reforms have brought about on world markets. According to the report, "much of the observed variation between actual and projected prices in 2006 can be explained largely by short-term production shocks and resulting supply/demand imbalances. But longer-term influences may also be at work, even though they may have been masked by the more traditional market fundamentals". ​Essentially, the growing biofuel-food tug-of-war is expected to underpin prices and to lead to price levels for field crops that are, on average, higher than in past projections. Nevertheless, cereal, oilseed and sugar prices are expected to fall below current or recent peak levels. Higher average crop prices and associated feed costs, in turn, lead to higher livestock product prices over the outlook period as well, forecasts the report.

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