Food prices will fall but remain above average, OECD/FAO

By Jess Halliday

- Last updated on GMT

Related tags: Biofuel, Food security, Inflation

The OECD and FAO have today released their Agricultural Outlook for
2008 to 2017: Food prices will come down as temporary factors are
resolved, but longer-term factors will cause them to settle above
past averages.

The Agricultural Outlook has been published every year for the last four years, and the new edition covers cereals, oilseed, sugar, meats, milk and dairy produce. For the first time it also includes biofuels. It is particularly relevant this year, since uncertainties in the markets like food price inflation, weakening economic growth and food security concerns have been having a major impact on markets. Today's report will provide some comfort to the hardest-hit consumers and industry sectors who have struggled to cover the costs of more expensive commodities. But it also stresses the need for policy action to mitigate the effects of the various factors that have conspired to push prices up - particularly on developing countries. The outlook was developed under the assumption that current agricultural and trade policies would remain unchanged. This may not in fact be the case, especially if the beleaguered Doha round of trade talks ever reaches a conclusion. But in fact, the outlook says that the evolution of agricultural, commodity and food prices "hinges importantly on future policy developments".​ Immediate humanitarian policies to reduce the effect on the world's poorest people, who may face starvation as a result of rising prices, are not expected to have a major effect on markets. Price balances ​ The outlook says that the increase in prices since 2005/6 is partly the result of adverse weather conditions in major grain producing regions, with spill over effects on crops and livestock. "In the context of low global stocks, these developments alone would have triggered strong price reactions." ​ However such causes of food price inflation are not new and they are not permanent; they have happened in the past, and prices have come down once the situation returns to normality and supply response. Despite conceding that weather conditions and agricultural product supply may become more variable with climate change, the outlook authors say they see no reason to believe that resolution seen in the past will not recur in the next few years. On the other hand, the outlook expects that, once they have fallen from their current peaks, prices will remain at higher levels than in the past decade. By and large, productivity gains will eventually overweigh increased demand. The more permanent factors include increased demand as a result of changing diet, urbanisation, economic growth and expanding populations. Stacked on top of this, says the report, is the increasing demand for feedstocks by the biofuels industry. "While smaller than the increase in food and feed use, biofuel demand is the largest source of new demand in decades and a strong factor in underpinning the upward shift in agricultural commodity prices."​ In nominal terms, over the medium-term, the outlook expects commodity prices to average significantly above levels for the last ten years. When forecast averages for 2008 to 2017 are compared with 1998 - 2007 averages, beef and pork may come out 20 per cent higher, sugar 30 percent, wheat, maize and skimmed milk powder 30 per cent, butter and oilseeds over 60 per cent, and vegetable oils over 80 per cent. Policy support ​ Some countries have move to restrict trade in certain commodities in order to protect supply of food basics to their own populations. For example, India has implemented export restrictions for rice. While policies like export taxes and embargoes may help out domestically in the short term, they are attracting criticism from commentators, including the outlook authors, for their short-term view and the knock-on effect they have on trade-reliant neighbours. The outlook says they place a burden on domestic producers and limit their supply response, and contribute to uncertainty in the global commodity markets. Another key area in which policy will play a role (in addition to oil price evolution) is in biofuels. The development of second generation biofuels that do not make demands on feedstocks are expected to have a reducing effect on prices, but experts estimate that scale-up may be some years away. The OECD/FAO do not expect they will be being produced industrially before 2017. The outlook did not take into account potential outcomes from either the US Energy Independence and Security Act, or the EU bioenergy directive, but it said changes in either would also have a strong impact. Finally, the outlook said that public and private investment into agricultural innovation and productivity, especially in developing countries, would broaden the supply base and reduce the risk of spikes occurring in the future.

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