This version of the OECD-FAO Agricultural Outlook is set against a background where world reference prices for most agricultural commodities covered in this report are at or above previous record levels, at least in nominal terms. While some of the reasons for these high prices are transitory, there is strong reason to believe that there are now also permanent factors underpinning prices that will work to keep them at higher average levels than in the past (Figure 1.1).
Are High Prices here to Stay?
World prices of maize, wheat and oilseed crops all nearly doubled in nominal terms between the 2005 and 2007 marketing years (Figure 2.1). Those prices continued rising into early 2008, competing with oil-price hikes in capturing media and policy attention. These developments have led to a fuller awareness and a justifiably heightened concern about food security and hunger, especially for developing countries where food availability at affordable prices is precarious. The analysis in this chapter does not attempt a comprehensive explanation of all of the factors responsible for the recent run up in prices. Rather the focus of the discussion is predominantly on the contribution – qualitative or quantitative – of various factors in determining price developments over the medium term.
Macroeconomic and Policy Assumptions
Economic activity is now slowing with the distinct possibly of the US, the world’s leading economy, sinking into recession in 2008. The slowdown in the US and some other OECD economies is occurring despite continuing robust economic conditions in many other parts of the world. One cause of this moderation is the global credit crunch that has buffeted financial markets and shares worldwide recently. However, this shock has occurred in a period of robust economic performance and this has to some extent softened its impact. Another underlying cause is the cooling of housing markets, which will act to reduce consumers’ wealth and slow down growth in the future. Adding to the downside risks, is the fact that the financial turmoil that began over the 2007 summer has not yet come to an end, with the eventual fallout on the real economy still hard to gauge. At the same time, increases in the prices of oil, food and other commodities have led to a pick-up in headline inflation rates in many countries, reducing purchasing power and consumer demand, the stalwart of growth in many OECD economies.
High energy prices and growing concerns on global warming have, among other factors, increased public interest in renewable energies in general. Within these, biofuels – liquid transport fuels produced from biomass – receive particular attention; production technologies based on starchy, sugary or oily agricultural commodities (such as cereals, sugar cane and oilseeds, respectively) are relatively simple, and the resulting fuels – ethanol and biodiesel – can be used in conventional combustion engines with no or comparatively little modifications. While the OECD/FAO Agricultural Outlook 2007-2016 for the first time explicitly considered feedstock use for biofuel production as an important factor in agricultural markets, this Outlook report includes full projections for supply, demand, trade and prices of ethanol and biodiesel.
In spite of the increase in world cereal production in 2007, a tight global cereal supply and demand situation prevailed throughout the whole marketing season. The bulk of the increase in world cereal production came from a record maize harvest in the United States, which boosted world coarse grains output in 2007. Wheat production also increased compared to the previous year but not as much as expected because of unfavourable weather conditions in some parts of the world; especially droughts in eastern parts of Europe and Australia. World rice production increased marginally in 2007, mostly driven by larger harvests in Asia.
Oilseeds and Oilseed Products
In 2007, the rise in oilseed, oil and meal prices that started in 2005 and intensified in 2006 continued with unabated vigour. During 2006, prices in the oilseed complex started to come under the influence of external factors: prices rose even though supplies were ample relative to demand and in spite of high levels of global stocks, both in absolute terms and compared to total consumption. The rise in prices was driven by the tightness in the related world feedgrain market: the unprecedented rise in maize prices provided incentives to shift land out of oilseeds, driving up oilseed and oilmeal prices. The price development was reinforced by the fact that both oilseeds and vegetable oils were also in demand for biodiesel production, particularly in the EU and some south-east Asian countries.
World sugar market fundamentals are bearish at the start of the long-term outlook. A near record sugar surplus has overhung the world sugar economy in 2006-07, and a similar situation is expected for 2007-08, as record sugar production continues to outstrip the more steady growth in global consumption. The surplus resulted in sharply lower world sugar prices in 2006-07 with a build-up of global ending stocks, an increasing stocks-to-use ratio that approached 53% and a trade surplus. In spite of the sugar glut, world sugar prices initially rallied in late 2007, but have subsequently weakened, reflecting a change in market sentiment and sugar price dynamics.
In 2007, agricultural markets where characterised by unusually high prices: grain prices reached record highs, and prices for many dairy products were far above historic levels. Unlike these markets, most meat and livestock markets have not experienced comparable price hikes. This combination of high feed prices and relatively low meat prices has had an overall negative impact on profit margins of meat producers.
In recent editions of this report, the key driving forces identified as conditioning the medium-term evolution of the global dairy industry have been strong demand growth, largely in developing countries, within the context of restrained supply from traditional OECD exporters. The main drivers on the demand side in developing countries are a sustained growth in population, a rapid pace of urbanisation, and higher per capita income growth than has been experienced in decades. Consumption of milk and dairy products varies vastly by country/culture, but is rising nearly everywhere, exhibiting the highest growth rates among agricultural food commodities. Supplies from traditional OECD exporters have slowed, either due to supply constraints and/or policy reforms that have reduced production and export incentives. These fundamental factors remain the same in the projections provided in this Outlook.
This section provides information on the methodological aspects of the generation of the present Agricultural Outlook. It discusses the main aspects in the following order: First, a general description of the agricultural baseline projections and the Outlook report is given. Second, the compilation of a consistent set of the assumptions on macroeconomic projections is discussed in more detail. A third part presents an important model element that has been improved for this Outlook, i.e., the representation of production costs in the model’s supply equations.
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