Tag Archives: higher

June 11th, 2013 This post concerns a 120-page PDF report combining efforts from the OECD and the FAO, from which I’ve excerpted some key projections on food commodity prices and how they are expected to be impacted by rising input costs, especially crude oil and fertilizer costs. Note that I’ve zeroed in on these subjects by choice, as there are many other subjects covered in the report. I’ve highlighted a few sentences in red, but there are many additional nuggets in the paragraphs below, beginning with the report description and overview. OECD-FAO Agricultural Outlook 2013-2022: The nineteenth edition of the Agricultural Outlook, and the ninth prepared jointly with the Food and Agriculture Organization of the United Nations (FAO), provides projections to 2022 for major agricultural commodities, biofuels and fish. Notable in the 2013 report is the inclusion of cotton for the first time and a special feature on China. Higher costs and strong demand are expected to keep commodity prices well above historical averages with a high risk of price volatility given tight stocks, a changeable policy environment and increasing weather-related production risks. China is projected to maintain its self-sufficiency in certain key food commodities while increasing its trade and integration in world agricultural markets. Overview: Market tightening in recent years has been accompanied not only by an increase in the level of agricultural prices but also by a resurgence of commodity and food price volatility, reminiscent of the situation of the 1970s. In these circumstances, prolonged periods of low agricultural product prices driven by ever increasing productivity improvements in a context of low oil and energy prices seem now a feature of a bygone era. Instead, with energy prices high and rising and production growth declining across the board, strong demand for food, feed, fibre and industrial uses of agricultural products is leading to structurally higher prices and with significant upside price risks. The frequency of short term price surges and bouts of high volatility, accentuated in some cases by policy choices, have catapulted agriculture and its future prospects into renewed prominence. The factors external to agriculture that will shape global demand and supply for agricultural commodities include slowing population growth and changing population demographics, macroeconomic shocks and the speed of recovery to sustained global economic growth, the increasing co-movement of agriculture with energy and financial markets, and enhanced climatic uncertainties. Overall, the increasing scarcity of arable land, water constraints and rising input and energy costs in agriculture all serve to highlight the critical importance of achieving higher agricultural productivity in a more sustainable manner both at the farm level and upstream and downstream sectors of the food supply chain. As a result of rising energy, higher operational expenses, and rising input constraints of land and water necessary for expansion, global livestock inventories and livestock product supplies of meats and dairy products expand less rapidly over the projection period than in the past decade. Oil and energy prices are assumed to increase over the coming decade and to remain historically high reflecting steady global economic growth. By the end of the projection period in 2022, the price of crude oil is assumed to be around USD 145 per barrel, with an average growth over the period of 2.6% p.a. and slightly above that for consumer price inflation. High energy and oil prices will have effects on both demand and supply of agricultural products, through higher agricultural supply costs and increased demand for agricultural feedstocks used for biofuels production. With prices of fertilisers and other farm chemicals and machinery costs closely related to oil prices, any rise in oil prices is expected to quickly translate into increasing production costs. In addition, some inputs such as water are becoming increasing constrained in availability to agriculture and more costly to procure needed supplies. Higher energy and oil prices and rising costs of other inputs are factored into the commodity price projections through higher agricultural supply costs. Higher production and supply costs will reduce the profitability of capital and input intensive agriculture and this development can be expected to further slow the growth in production. At the same time it will likely encourage production growth in countries with less intensive farming practices due to higher net returns, such as pasture-based dairy and meat operations. An exception will be countries such as the United States and Brazil, in which exchange rate depreciation will help to offset some of these cost disadvantages to preserve the competitiveness of their agricultural production on world markets. Overall, the increasing scarcity of arable land, water constraints and rising input and energy costs in agriculture all serve to highlight the critical importance of achieving higher agricultural productivity in a more sustainable manner both at the farm level and upstream and downstream sectors of the food supply chain. This will be required to ensure the increasing food supplies needed by an expanding global population and to reduce upside price pressures over the longer term. Slower output growth is expected to be a feature of agricultural production in both the developed and developing countries’ agriculture sectors in the coming decade. Developed and the large emerging economies in particular are projected to enter a period of lower yield and production growth for most crops. This will also apply to livestock sectors of meats and dairy, but with the downward adjustments perhaps less pronounced in some cases than for crops. For livestock production, these developments reflect a combination of moderately rising feed costs, higher energy costs and a growing scarcity of inputs such as water and suitable land. However, the projected growth in global agricultural production will still be sufficient to outpace the increase in global population with output per person estimated at 0.5% p.a. Short term supply response to changing prices has been faster in the past in the developed countries with their highly capital and input intensive farming practices and capacity to adjust variable input usage rapidly. Nonetheless, agricultural production over the longer term is projected to continue to grow more rapidly in the developing countries and this will further increase their share of global agricultural output to 2022. China: Budgetary transfers for producers have been growing constantly since the end of the 1990s and are provided mostly through direct payments for grain producers, payments compensating increase in prices of agricultural inputs, in particular fertilisers and fuels, payments enhancing use of improved seeds and through subsidies for purchases of agricultural machinery. A positive feature of these transfers is that to an increasing extent they are provided through direct payments at a flat rate per unit of land which is effective in supporting farmers’ income and have limited influence on production and trade. Ethanol production is expected to increase 67% over the next ten years with biodiesel increasing even faster but from a smaller base. By 2022, biofuel production is projected to consume a significant amount of the total world production of sugar cane (28%), vegetable oils (15%) and coarse grains (12%). There is much more of interest in the report. Continue reading →