Agricultural Commodities: High Prices Here To Stay?

While several of the factors behind the recent runup in the prices of most agricultural commodities may be transitory, more permanent trends indicate prices are likely to remain high.

Agricultural commodity prices should ease from their recent record peaks, but over the next 10 years they are expected to average well above the mean of the past decade, according to the latest Agricultural Outlook from OECD and the UN Food and Agriculture Organization.

In comparing averages of the coming decade with those of the past, real prices, i.e. nominal prices corrected for inflation, are projected to increase in a range from less than 10 percent for rice and sugar, under 20 percent for wheat, around 30 percent for butter, coarse grains and oilseeds to over 50 percent for vegetable oils, according to the report.

Prices may also become more volatile because stock levels are expected to remain low and as some of the demand for agricultural commodities becomes less responsive to price changes.

The recent increase in investment funds on commodity futures markets might also become an additional factor in price variability. Climate change, too, may affect crop production and supply in unforeseen ways.

The report says that drought in some of the world’s main grain-producing regions in the context of low stocks was a large – but transitory – factor in the sharp price rises of the past two years. More permanent factors such as high oil prices, changing diets, urbanization, economic growth and expanding populations, are also at play and are behind the expectation of higher average prices in the coming ten years than over the past decade.

Growing demand for biofuel is another factor contributing to higher prices. World fuel ethanol production tripled between 2000 and 2007 and is expected to double again between now and 2017 to reach 127 billion liters a year. Biodiesel production is seen to expand from 11 billion liters a year in 2007 to around 24 billion liters by 2017. The growth in biofuel production adds to demand for grains, oilseeds and sugar, so contributing to higher crop prices.

In OECD countries, at least, this growth of biofuel production has thus far been driven largely by policy measures and the report says that it is not clear that the energy security, environmental and economic objectives of biofuel policies will be achieved with current production technologies. The report suggests further review of existing biofuel policies.

Grain markets are expected to remain tight as stocks are unlikely to return to the high levels of the past decade.

Consumption of vegetable oils, both from oil seed crops and from palm, will grow faster than for other crops over the next 10 years. The rise is being driven both by demand for food and for biofuels.

A summary of the OECD-FAO Agricultural Outlook 2008-2017 is available free of charge.

Comments

[Greg Pinelli:]

There are some important considerations not mentioned in the above article..and at least one that I would strongly disagree with...
First, crops are..believe it or not..critically dependent on the quality of the soil. Where quality (nutrients..microbes..... is low yields are either low or must be stimulated by enormous amounts of fertilizer (potash..nitrogen..etc... things are influenced dramatically by the prices of oil/nat gas.
Second..what makes anyone think drought is transitory?? Or that it has not done permanent damage to topsoils wherever it has occured?
Remember what drought did to Oklahoma in the 1930s??
Bottom line..food may flutuate here and there..but it's going to be a much larger part of everyone's budget in the future..and in some places having the ability to purchase foodstuffs won't matter...heard of Argentina?

2008 May 29 03:40 PM

[Investor612:]

Long term the liklihood of high ag commodity prices is good. As BMO's Don Coxe recently said, "The growth in the midsection of the US comes from growth in the midsections of consumers in China and India," or something close to that.

Short term if Amereican taxpayers and consumers ever wake up and decide to end the ethanol fiasco prices of ag commodities and stocks could drop. Then buy the dip.

2008 May 29 08:32 PM

[rbblum:]

More permanent factors such as high oil prices, changing diets, urbanization, economic growth and expanding populations, are also at play and are behind the expectation of higher average prices in the coming ten years . . . . .

Any consideration as to what daily life will be like in a global environment increasing trade barriers . . . that is, increasing a stance of protectionism? Even if one is generous and factors in more crops at the expense of the Rain Forest or using desalinated waters in the Sahara Desert, there will be a higher price to be paid by an increase of demand for food.

2008 May 30 05:35 PM