Agricultural Commodities: High Prices Here To Stay?

by: Research Recap

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.

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