OECD-FAO Joint Report: Food Commodity Prices to Remain High for Coming Decade

The report suggests that in addition to population growth higher per capita incomes, urban migration and changing diets in developing countries, as well as rising requirements for biofuel feedstocks, are underpinning demand pressures.

12 Jul 2012 --- While international agricultural commodity markets appear to have entered calmer conditions after record highs last year, food commodity prices are anticipated to remain on a higher plateau over the next decade, underpinned by firm demand but a slowing growth in global production, according to the latest OECD-FAO Agricultural Outlook.

The report suggests that in addition to population growth higher per capita incomes, urban migration and changing diets in developing countries, as well as rising requirements for biofuel feedstocks, are underpinning demand pressures. At the same time, agricultural output by traditional exporting developed countries has been slow to respond to higher prices in the last decade.

Higher demand will be met increasingly by supplies that come to market at higher cost. With farmland area expected to expand only slightly in the coming decade, additional production will need to come from increased productivity, including by reducing productivity gaps in developing countries, the report said.

The Outlook anticipates that agricultural output growth will slow to an average of 1.7 percent annually over the next 10 years, down from a trend rate of over 2 percent per year in recent decades. Higher input costs, increasing resource constraints, growing environmental pressures and the impacts of climate change will all serve to dampen supply response.

Much of the projected growth will come from developing countries, which will increasingly dominate in the production of most agricultural commodities, and also take on a more important role in commodity trade.

"Increased productivity, green-growth and more open markets will be essential if the food and nutrition requirements of future generations are to be met," said OECD Secretary-General Angel Gurría. "Governments should renounce trade-distorting practices and create an enabling environment for a thriving and sustainable agriculture underpinned by improved productivity. We have highlighted many of these issues in our work on food security for the G20 and this Outlook provides further important analysis and recommendations to governments."

"For consumers, especially for the millions of people living in extreme poverty, high food prices have caused considerable hardship. We need to redouble our efforts to bring down the number of hungry people. We must focus on increasing sustainable productivity growth, especially in developing countries, and especially for small producers," said FAO Director-General José Graziano da Silva. "High real prices for agricultural commodities provide higher incentives for farmers and rural development, especially where markets are open and price mechanisms function well, and where farmers also have the capacity to respond."

The Outlook notes that 25 percent of all agricultural land is highly degraded. Critical water scarcity in agriculture is a fact for many countries. Several fish stocks are over-exploited or at risk. There is a growing consensus that extreme weather events are becoming more frequent and climatic patterns are changing in many parts of the world.

Beyond its call for complementary policies to address productivity and sustainability, the report recognizes that the private sector will play the lead role in agriculture going forward.

Governments should encourage better agronomic practices, create the right commercial, technical and regulatory environment and strengthen agricultural innovation systems (e.g. research, education, extension, infrastructure), with attention to the specific needs of smallholders.

Creating the right enabling environment also means ensuring that the business climate is conducive to domestic and foreign investments, so governments should limit trade restrictions as well as those domestic support schemes that distort incentives for production and investment in agriculture.

There is a need to develop national investment schemes and increased development assistance to agriculture for research and development, innovation adoption and infrastructure development, the report said.

Developing countries should promote agricultural infrastructure investment in rural areas to improve storage, transportation and irrigation systems, as well as electrification, information and communication systems. Investment in human capital is equally important and depends on more public spending on health care, education and training.

These policies should also address the reduction of food loss and food waste, pegged by a recent FAO study at roughly one-third of food produced for human consumption, in order to limit the need to increase production and conserve resources.