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Food Prices to Stay High This Decade on Demand, Slowing Output

Food prices will remain higher in the next decade than in the past 10 years as agricultural production slows and demand increases, the OECD and the United Nations said in a joint report today.

Global farm output is forecast to grow an average 1.7 percent a year through 2020, compared with 2.6 percent in the previous decade, the Paris-based Organization for Economic Cooperation and Development and the UN’s Food and Agriculture Organization said in their annual Agricultural Outlook report.

“Slower growth is expected for most crops, especially oilseeds and coarse grains,” they said in the report. “The global slowdown in projected yield improvements of important crops will continue to exert pressure on international prices.”

Food costs rose to a record in February, according to an index of 55 agricultural commodities tracked by the Rome-based FAO. Corn futures have risen 73 percent in Chicago in the past 12 months, wheat gained 48 percent and rice climbed 27 percent.

“Harvests this year are critical, but restoring market balances may take some time,” the organizations said. “Until stocks can be rebuilt, risks of further upside price volatility remain high.”

Less Corn

World corn inventories are forecast to slide for a third year in 2011-12 to the lowest in five years, while demand will be at a record, U.S. Department of Agriculture data show. Global soybean stocks may drop a second year to the lowest in 18 years, according to the USDA.

The world population is forecast to climb to 9.2 billion in 2050 from an estimated 6.9 billion in 2010, requiring a 70 percent jump in world agricultural production, the FAO said. Corn prices in Chicago rose to a record this month as demand for the grain as food, feed and a raw material for ethanol has outstripped production growth, depleting stocks.

The OECD and FAO repeated last year’s outlook that agricultural commodity prices in real terms will generally be higher during the next decade compared to the past 10 years.

Higher commodity prices are a “positive signal” that will probably stimulate investment in productivity and output that’s needed to meet the rising demand for food, after decades of falling real prices, the OECD and FAO said.

In the short term, agricultural-commodity prices are expected to fall from “the highs of early 2011” as output rises in response to the price increase, they said. Prices for corn will still be an average 20 percent higher in the coming decade than in the previous one, while poultry prices may be 30 percent higher, OECD and FAO said.

Rising Costs

“There are signs that production costs are rising and productivity growth is slowing,” they said, citing rising energy costs and pressure on water and land use.

As higher commodity prices are passed on in the food chain, food inflation is on the increase in most countries, reducing purchasing power for poorer populations and raising concerns about economic stability and food insecurity in some developing countries, according to the OECD and FAO.

The “most frequent and significant” cause of price swings is unpredictable weather conditions, while an increasing link between agricultural and energy markets is also “transmitting volatility,” OECD and FAO said.

“Last year’s drought and fires in the Russian Federation and Ukraine, and excess moisture in the U.S. illustrated how quickly market balances can change,” they said. “Yield- induced production fluctuations in major crop exporting countries have been a prime source of international price volatility.”

Climate Change

Climate change is altering weather patterns, though the impact on extreme weather events is unclear, according to the report.

“The risk of higher prices is greater than lower prices,” the organizations said. “Weather-related crop-yield variations are expected to become an even more critical driver of price volatility in the future.”

Speculation in futures markets may amplify price movements in the short term, though there is “no conclusive evidence” of a longer-term effect on volatility, according to the report.

Per capita food consumption is expected to grow fastest this decade in Eastern Europe, Asia and Latin America as incomes rise, with the biggest gains for vegetable oils, sugar, meat and dairy products, the organizations said. Growing populations and income in China and India will sustain “strong” commodity demand, they said.

Population Growth

Food deficits in sub-Saharan countries are expected to increase as population growth outpaces domestic food production.

“If supply does not keep pace with demand, there will be upward pressure on commodity prices,” the OECD and FAO said. “With per capita incomes rising globally and in many poor countries expected to increase by as much as 50 percent, food demand will become more inelastic.”

Diets are changing with rising incomes, with an increase in per-capita consumption of meat and dairy and a decline for wheat over the next 10 years, according to the OECD and FAO.

“The use of agricultural output as feedstock for biofuels will continue its robust growth,” the OECD and FAO said. “Higher oil prices would induce yet further growth in use of biofuel. At sufficiently high oil prices, biofuel production in many countries becomes viable even in the absence of policy support.”

An estimated 13 percent of world production of coarse grains, which includes corn, will be used to make fuel by 2020, as well as 15 percent of vegetable oil and 30 percent of sugar- cane production, according to the report.

Overtaking Thailand

Rice trade is expected to increase in the next 10 years, driven by rising exports from Vietnam, which may overtake Thailand as the biggest shipper of the grain, according to the outlook. Sugar exports will remain dominated by Brazil, accounting for more than half of global trade, while China is expected to be the biggest importer of the sweetener by 2020.

Russia and other former Soviet Union republics may “play an increasingly significant role in export markets for wheat and coarse grains, regaining some of their historic importance as a bread basket for the world,” the OECD and FAO said.

Wheat exports by Russia, Ukraine and Kazakhstan combined are forecast to account for 30 percent of world trade by 2020, from 18 percent in period from 2001 to 2010. The U.S. share will slide to 18 percent from 25 percent, according to the report.

“Despite the end of spectacular growth in soybeans, Argentina and Brazil, as relatively low-cost producers, will continue to exhibit solid growth in oilseeds, cereals and livestock,” the OECD and FAO said.

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

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

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