Food-Price Volatility to Persist on Supply-Demand Mismatch, UN’S FAO Says

Agricultural-commodity price swings will persist in coming years because of a mismatch between supply and demand, the United Nations’ Food and Agricultural Organization said.

“We expect prices actually to remain volatile for the next few years,” Hafez Ghanem, assistant director-general at the FAO, said in Brussels today. “Volatility has increased since 2005-06 and we expect prices to continue to be high and volatile.”

The Standard & Poor’s GSCI Agriculture Index rallied 6.4 percent since May 13 as European farmers contend with the driest growing conditions in more than three decades, drought threatens crops in China and flooding and heat ruin harvests in the U.S. The gauge of eight commodities is 73 percent higher than a year ago and the UN said May 5 that global food prices rose to near a record last month, adding to inflation that has spurred at least two dozen central banks and the European Central Bank to raise interest rates this year.

Costlier food also contributed to riots across northern Africa and the Middle East that toppled leaders in Egypt and Tunisia this year.

World food production will have to rise 70 percent by 2050 to feed a population forecast to grow to 9 billion people, the Rome-based FAO has said.

The rate of yield growth for cereals has slowed to about 1 percent a year from 3 percent a year in the 1960s, while annual demand is rising at a pace of 2 percent, according to Ghanem.

‘Tighter’ Markets

“Markets are tighter,” the FAO director said at a food- security conference in the Belgian capital organized by the European Economic and Social Committee. “Any shock, from weather events for example, has a bigger effect on prices.” The “long-run cause for price volatility in our view is the mismatch between demand and supply,” he added.

Wheat prices surged last year after drought wiped out crops in Russia, prompting the country to ban grain exports.

Price swings for agricultural commodities are also caused by a growing link with oil as crops are increasingly used to make fuel, according to Ghanem. The correlation between food prices and oil prices has risen to 80 percent from 50 percent five years ago, the FAO director said.

“There is really a need to review policies on biofuels,” Ghanem said. “It doesn’t make sense that today, when maize prices are 70 percent higher than a year ago, nearly 40 percent of maize produced in the U.S. goes to ethanol rather than food,” he said, referring to corn used to make fuel.

A decline in food stocks held by countries and companies has also contributed to price swings, as well as a lack of information on production and inventory levels, Ghanem said.

‘Inadequate’ Information

“There has been inadequate information about what is going on in the world, what are the production levels, what are the stock levels,” the FAO director said. “In mid-2006 there were already signs we were heading to a food crisis, the information was not credible enough for policy makers to act on.”

A plan by France, which presides over the Group of 20 nations this year, to create a global information-sharing system for agriculture is gaining support from G-20 countries, Jean- Marc Bournigal, director of the cabinet of French Farm Minister Bruno Le Maire, said at the conference.

The proposal for a shared international database of crop data and harvest forecasts “is starting to gather consensus,” Bournigal said.

France is seeking tighter commodity-market rules as it heads the G-20. Le Maire has been lobbying his G-20 counterparts in the past months, travelling to Russia, the U.S., China and India. Le Maire said last month Australia was “reticent” about any accord on agriculture within the framework of the G-20 because it questioned the legitimacy of the group as a forum to discuss the subject.

Framework Needed

“We need to improve the working of the futures market,” Dacian Ciolos, the European Union’s agriculture commissioner, said at the meeting. “There is maybe a need for more of a framework for the financial markets, for the futures markets.”

Volatility in the agricultural commodity markets holds back farm investment because it reduces farmers’ visibility on future earnings, according to Ciolos.

France has asked the UN’s World Food Programme to develop proposals for regional food stockpiles that can be used in case of humanitarian emergencies, in preparation of the G-20 farm ministers meeting on June 22-23.

The plan isn’t for “buffer stocks to try and control prices,” Sheila Sisulu, deputy executive director for hunger solutions at the WFP, said at the conference. “It will not be subsidized. It will be a last resort for food access.”

To contact the reporter on this story: Rudy Ruitenberg in Brussels at rruitenberg@bloomberg.net.

To contact the editor responsible for this story: Claudia Carpenter at ccarpenter2@bloomberg.net.

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