Food Prices Set to Fall Further, According to OECD/FAO Outlook Report

06 Jul 2015 --- Strong crop yields, higher productivity and slower growth in global demand should contribute to a gradual decline in real prices for agricultural products over the coming decade, but nonetheless, prices will likely remain at levels above those in the early-2000s, according to the latest Agricultural Outlook report produced by the OECD and FAO.

The growing role of a relatively small group of countries in supplying global markets with key commodities could increase market risks, including those associated with natural disasters or the use of disruptive trade measures. 

Major changes in demand are expected in developing countries, where population growth, rising per capita incomes and urbanization will increase demand for food, according to the report. Rising incomes will prompt consumers to continue diversifying their diets, notably by increasing their consumption of animal protein relative to starches. As a result, the prices of meat and dairy products are expected to be high relative to crop prices. Among crops, the prices of coarse grains and oilseeds, used for animal feed, should rise relative to the prices of food staples.

Presenting the joint report in Paris, OECD Secretary-General Angel Gurría said: "The outlook for global agriculture is calmer than it has been in recent years, but there is no room for complacency, as we cannot rule out the risk of new price spikes in the coming years.”

"Governments should take advantage of the current conditions to concentrate on developing policies that raise productivity, boost innovation, better manage risk and ensure that robust agriculture systems benefit consumers and farmers alike," Mr Gurría said. 

Calling the Outlook's projection that developing countries are likely to continue to improve the caloric intake of their populations "good news," FAO Director-General José Graziano Silva also noted that least-developed countries "remain significantly behind advanced economies; this is cause for concern, as it means hunger in these countries could persist."

"And malnutrition is an issue: developing countries now have to face problems of overweight, obesity and other diet-related non-communicable diseases," he added.

The build-up of high cereal stocks over the past two years, combined with low oil prices, should lead to a further weakening of cereal prices in the short term. Slowly rising production costs and sustained demand should strengthen prices again over the medium term.

Strong demand for protein meal will drive further expansion of oilseed production, according to the report. This should result in meal being very important in the overall profitability of oilseeds, and would favour further expansion of soybean production, especially in Brazil.

Higher sugar demand in developing countries should help prices recover from low levels, leading to further investment in the sector. The market outcome will depend on the profitability of sugar versus ethanol in Brazil, the globe's leading producer, and could remain volatile as a result of the sugar production cycle in some key Asian sugar-producing countries.

Meat output is expected to respond to an improvement in margins, with lower feed grain prices set to restore profitability to a sector that has been operating in an environment of particularly high and volatile feed costs for most of the past decade.

Worldwide fisheries production is projected to expand by almost 20 percent by 2024. Aquaculture is expected to surpass total capture fisheries in 2023.

Exports of dairy products are projected to further concentrate among four prime sources: New Zealand, the European Union, the United States and Australia, where opportunities for domestic demand growth are limited.

Cotton prices should be suppressed in the short term by the drawdown of large stocks in China, but they are projected to recover and stay relatively stable for the remainder of the outlook period. By 2024, both real and nominal prices are expected to remain below the levels reached in 2012-14.

Ethanol and biodiesel use is expected to grow at a slower pace over the next decade. The level of production is projected to be dependent on policies in major producing countries. At lower oil prices, trade in biofuels should remain small as a share of global production.

This year's Outlook contains a special focus on Brazil, which is poised to capture most of the trade expansion to be generated by import demand growth, particularly from Asia.

Brazilian agricultural growth is projected to be driven by continued improvements in productivity, with higher crop yields, some conversion of pasture to cropland and more intensive livestock production. Structural reforms and a reorientation of support towards productivity enhancing investments, for example in infrastructure, could foster these opportunities, as could trade agreements that improve access to foreign markets.

Brazil has made outstanding progress in eliminating hunger and reducing poverty. Prospects for further reductions in poverty through agricultural development are growing, for producers of some food crops as well as producers of higher-value products such as coffee, horticulture and tropical fruits.

The Outlook says that Brazil's projected agricultural growth can be achieved sustainably. While additional supply will continue to come more from productivity gains than area increases, pressure on natural resources can be alleviated by environmental and conservation initiatives, including support for sustainable cultivation practices, the conversion of natural and degraded cropland to pasture and the integration of crop and livestock systems.