FAO predicts lower prices over the next decade in real terms
With the FAO Global Outlook being published this month, it is timely to review the economic environment for agriculture for the years ahead.
The global economy is growing, but at a slower rate than previously forecast. The main influences are the slowdown in China and the contraction of global trade, which is limiting growth. The main drivers are recovery in developed economies and rising domestic demand in these areas, driven by low inflation and low fuel prices. There are some downside risks to growth, including a sharper than expected slowdown in emerging and developing economies and a sudden increase in the cost of borrowing.
What does this mean for global agriculture?
Prices for crops and livestock products showed diverse trends in 2014. For crops, two years of strong harvests put further pressure on prices of cereals and oilseeds. Tighter supplies due to factors including herd rebuilding and disease outbreaks supported record high meat prices, while the prices of dairy products dropped steeply from historic highs. Further adjustments to short-term factors are expected in 2015, before the medium-term drivers of supply and demand take hold.
FAO predicts that in real terms, prices for all agricultural products are expected to decrease over the next ten years, as on-trend productivity growth, helped by lower input prices, outpaces slowing demand increases. While this is consistent with the tendency for long-term secular decline, prices are projected to remain at a higher level than in the years preceding the 2007-08 price spike. Demand will be subdued by per capita consumption of staple commodities approaching saturation in many emerging economies and by a generally sluggish recovery of the global economy.
The major changes in demand are in developing countries, where continued but slowing population growth, rising per capita incomes and urbanisation all increase the demand for food. Rising incomes prompt consumers to diversify their diets by increasing their consumption of animal protein relative to starches. For this reason, the prices of meat and dairy products are expected to be high relative to the prices of crops; while among crops the prices of coarse grains and oilseeds used for feed should rise relative to the prices of food staples. These structural tendencies are in some cases offset by specific factors, such as a flat demand for maize-based ethanol.
Lower oil prices are a source of downward pressure on prices, principally through their impact on energy and fertiliser costs. Moreover, under the projected lower oil prices, the production of first generation biofuels is generally not profitable without mandates or other incentives. Policies are not expected to lead to significantly higher biofuel production in either the United States or the European Union. On the other hand, a rise in the production of sugar-based ethanol in Brazil is expected to flow from the increase in the mandatory blending ratio in gasoline and the provision of tax incentives, while biodiesel production is being actively promoted in Indonesia.
In Asia, Europe and North America, additional agricultural production will be driven almost exclusively by yield improvements, whereas in South America yield improvements are projected to be complemented by additional agricultural area. Modest production growth is expected in Africa, although further investments could raise yields and production significantly.
Exports of agricultural commodities are projected to become concentrated in fewer countries, while imports become more dispersed over a large number of countries. The importance of relatively few countries in supplying global markets for some key commodities increases market risks, including those associated with natural disasters or the adoption of disruptive trade measures. Overall, trade is expected to increase more slowly than in the previous decade, but maintaining a stable share relative to global production and consumption.
The current baseline reflects fundamental supply and demand conditions on world agricultural markets. However, the Outlook is subject to a variety of uncertainties, some of which are explored by stochastic analysis. If historical variations in yields, oil prices and economic growth are projected into the future, then there is a high probability of at least one severe shock to international markets within the next ten years.
What could this mean for UK farming?
With consumer confidence and private consumption growth forecast in the UK, there are opportunities for ‘trading up’ as consumers increasingly seek quality as an equally important factor as price. With sterling weaker against both the Euro and the Dollar from 12 months ago, exporting produce should in theory be easier, with our prices becoming more competitive. However, the global slowdown in growth, coupled with the contraction in world trade means increasing exports in some areas may not be straightforward.
In addition there are many trade negotiations on-going, for example between the EU and the Mercosur region and the US. With the UK at a disadvantage in some commodity areas, due to higher costs of production, this could result in UK agriculture being in a vulnerable position in an increasingly open global market.
Sarah Baker, Senior Analyst
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