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Higher food commodity prices here to stay

By Nathan Gray , 20-Jun-2011

High food prices and volatility in commodity markets are here to stay, according to a new report by the Organization for Economic Cooperation and Development (OECD) and the Food and Agriculture Organisation (FAO).

The joint report said commodity prices should fall from the highs of early 2011, but in real terms are projected to average up to 20 per cent higher for cereals and up to 30 per cent for meats, over the 2011-20 period compared to the last decade.

In its ‘Agricultural Outlook 2011-2020’ the OECD-FAO reports that the agricultural commodity market has entered its fifth successive year of high volatility, but added that a good harvest in the coming months should push commodity prices down from the extreme levels seen earlier this year.

“In the current market context, price volatility could remain a feature of agricultural markets, and coherent policies are required to both reduce volatility and limit its negative impacts,” said Jacques Diouf, director-general of the FAO.

The Outlook, which covers fisheries for the first time, forecasts global agricultural production growing more slowly over the next decade than in the past 10 years.

Farm output is expected to rise by 1.7 per cent annually, compared to the 2.6 percent growth rate of the past decade, whilst meat, dairy products, vegetable oils and sugar should experience the highest demand increases, says the report.

Price rises

The report predicts that, in real terms, agricultural commodity prices are likely to remain on a higher plateau during the next ten years compared to the previous decade, adding that prolonged periods of high prices could make the achievement of global food security goals more difficult and put poor consumers at a high risk of malnutrition.

Per-capita food consumption is forecast to grow rapidly in the next decade, particularly in Eastern Europe, Asia and Latin America, where incomes are rising and population growth is slowing.

“While higher prices are generally good news for farmers, the impact on the poor in developing countries who spend a high proportion of their income on food can be devastating,” said Angel Gurría secretary-general of the OECD.

“That is why we are calling on governments to improve information and transparency of both physical and financial markets, encourage investments that increase productivity in developing countries, remove production and trade distorting policies and assist the vulnerable to better manage risk and uncertainty.”

Rising costs

The OECD-FAO report adds that whilst higher prices may help some food producers, there are also signs that production costs are rising and productivity growth is slowing – highlighting that the costs of animal feed and energy have risen significantly, whilst pressures on land and water resources are also increasing.

“Land available for agriculture in many traditional supply areas is increasingly constrained and production must expand into less developed areas and into marginal lands with lower fertility and higher risk of adverse weather events,” the report stated.

“Substantial further investments in productivity enhancement are needed to ensure the sector can meet the rising demands of the future.”

Diouf noted that a key solution to the problem “will be boosting investment in agriculture and reinforcing rural development in developing countries, where 98 per cent of the hungry people live today and where population is expected to increase by 47 per cent over the next decades.”

An full overview of the Outlook report can be found: here