Global agriculture has experienced a series of severe shocks in recent years with record-high oil prices, commodity price spikes, food insecurity, trade protectionism and the most severe global economic recession since the Great Depression. In 2010, calm seems to have returned to the markets. With production closer to historical levels and demand recovering, many governments remain concerned about the potential for a repetition of shocks to the system from energy prices and exchange rates, and about the consequences that such shocks would have on market volatility.
While the volatility in the grains and oilseeds markets has subsided, prices are not likely to return to the previous low levels. In fact, an annual joint report from by the Organization for Economic Co-operation and Development (OECD) and the United Nations Food and Agriculture Organization (FAO) predicts that prices globally over the next decade will be higher.
The OECD-FAO Agricultural Outlook 2010-19, released in June, sees average wheat and coarse grain prices over the next 10 years between 15% and 40% higher in real terms (adjusted for inflation) than average levels during the 1997-2006 period. Real prices for vegetable oils are expected to be more than 40% higher.
The Outlook said that while short-term price volatility is now high, the evidence is inconclusive as to whether it has changed over the long run for major food crops. The report also noted that the extent to which world price fluctuations are transmitted to domestic markets varies markedly across countries. Price transmission depends on a country’s integration in world markets, its infrastructure and, often most importantly, its trade and agriculture policies.
While presenting the Outlook in Rome, Italy with FAO Director-General Jacques Diouf, the OECD’s Secretary-General, Angel Gurría, said: "The agriculture sector has shown resilience to recent price shocks and the economic downturn. On the whole, this year’s outlook is cautiously more positive than in recent years. But going forward, governments should implement measures to ensure that farmers have at their disposal better tools to manage future risks, such as production contracts, insurance schemes and futures markets."
Sustained economic growth in emerging markets is an important factor underpinning growing demand and higher prices. Continued expansion of biofuel output — often to meet government targets — will also create additional demand for wheat, coarse grains, vegetable oils and sugar. Increasingly, higher production costs will add upward pressure on prices, particularly where energy is used intensively.
The Outlook sees global agriculture output growing more slowly over the next decade than in the past 10 years, but nevertheless it sees production meeting the 70% increase in world food production required to meet the market demand of estimated population levels in 2050 (See feature "Feed the world in 2050" in the December 2009 issue of World Grain).
"While OECD countries dominate production and trade in many key agricultural commodities, most of the growth in production, consumption and trade will come from developing countries. This is welcome news for the economies of developing countries which are highly dependent on agriculture," Gurría said. However, the projections for the Least Developed Countries imply increased reliance on international markets and growing exposure to commodity price changes and fluctuations in import bills.
Brazil is by far the fastest growing agricultural producer, with output expected to rise by more than 40% between now and 2019. Production growth is also expected to be well above 20% in China, India, the Russian Federation and Ukraine.
Nevertheless, OECD countries will continue to dominate exports in 2019 of wheat (52%) and coarse grains (59%), while developing countries will hold dominant shares in 2019 for rice (88% share), oilseeds (56%), protein meals (80%) and vegetable oils (91%).
SUPPLIES DEPRESS CEREAL PRICES
The world wheat and coarse grain markets in 2010 are marked by a return to normalcy after two exceptionally turbulent seasons. An increase in supply, bumper crops replenishing stocks, a slowdown in demand driven by the high prices, reduced policy supports for biofuels in some countries, and troubled financial markets and recession have forced international prices to lower levels at a fast pace.
The Outlook indicated that stocks of wheat and coarse grains are expected to increase between 2010 and 2019, although much of these will be located outside the traditional exporters, and the stocks-to-use ratio should remain relatively low when compared to the previous decade.
This development is expected to underpin wheat prices to some extent but may also make them more unstable. The price of the benchmark U.S. wheat (No. 2 Hard Red Winter, f.o.b. Gulf) is projected to increase to $225 per tonne by 2019, up 3% from the average in 2007-09. However, the Outlook predicts that in real terms wheat prices are likely to continue their long-term decline, albeit falling less rapidly and from higher levels.
In the case of coarse grains, the Outlook’s current projections for stocks and utilization point to a somewhat tighter supply-and-demand balance during the early years of the projection period, resulting in prices rising the fastest until 2016. The situation is likely to improve thereafter because of slower growth of use for ethanol production. By 2019, the price of the benchmark U.S. maize (No. 2 Yellow, Gulf) is projected to reach $187 per tonne, almost unchanged from the average in 2009. A noteworthy feature is the drop in wheat-to-maize price ratio to a low ratio of 1.1-1.2, compared to 1.3-1.6 in the past, indicating a stronger upside potential for maize prices than for wheat.
The Outlook said that world producers of cereals may take comfort in the fact that prices are likely to remain relatively strong compared to the previous decade, and consumers will find that prices are unlikely to reach the highs that provoked so much of the recent turmoil in food markets. However, an emerging feature, which will not be of any benefit to producers or consumers, is a continuation of price volatility in the coming years.
The next decade will witness relatively strong growth in world production of major grains. Compared to the base period of 2007-09, world production of wheat and coarse grains are projected to increase by 14% and 19%, respectively, to reach 746 million tonnes and 1.311 billion tonnes, over the next decade. These projected production levels are likely to match or outstrip world consumption of these grains for food, feed and industrial use.
RICE MARKETS IN CLOSER BALANCE
The Outlook projects rice markets to remain substantially in balance over the coming decade at prices lower than the relatively high levels that dominated the global rice market in 2007-08. World rice prices continued to be high in 2010, averaging $570 per tonne in the first three months of the year, which compares with $335 per tonne in 2007, prior to the price surge.
Despite weaker import demand, the market remains strong due to policies in the major exporting countries, tending to reduce export supplies, for instance, through export restrictions and the retention of large public stocks. Global rice inventories are projected to increase by 18% by 2019 and this should increase the stocks-to-use ratio.
The Outlook sees world rice prices weakening in the coming years, ending in 2019 at $422 per tonne. At that level, rice would still be almost 1.9 times the price of wheat.
The Outlook indicated that a continuation of policies in support of production together with renewed interest by private investors in large-scale production in water-rich countries are expected to be important drivers of the rice sector in the coming decade. For instance, the large production gains anticipated in Myanmar, Cambodia and Laos are likely to allow these countries to emerge as important players in the export market, which would widen the choice of origins for rice trade and reduce the dependence on traditional suppliers such as Thailand and Vietnam.
Some Asian countries are expected to engage in the commercial production of genetically modified rice by 2015, which will lead to questions about product segregation and labeling that may also acquire increased prominence in the commercialization of rice both in domestic and export markets.
Compared to the base period 2007-09, world production of rice is projected to increase by nearly 15%, or 67 million tonnes, to reach 522 million tonnes by 2019. The Outlook projects world consumption to grow by 1.1% per annum to reach 521 million tonnes by 2019. Particularly fast growth in consumption is foreseen in Africa amid relatively strong expansion of population and growing preference for rice in diets. In China, the largest consuming country, consumption should continue to decline as consumers become more affluent and shift to higher protein-based diets.
With sustained food vegetable oil demand in developing countries, robust mandates for biodiesel consumption and strong use of protein meal by the expanding livestock sector, the Outlook indicated that oilseeds and oilseed products markets will continue to undergo further expansion between 2010-19.
The Outlook sees oilseeds and protein meal prices remaining firm over the projection period compared to the levels prior to the food crisis. Global stock-to-use ratios are expected to stay at low levels. With sustained crush demand and increasing production, oilseed prices are expected to increase in nominal terms to $419 per tonne in 2019 but to decrease in real terms (when adjusted for inflation) over the entire projection period.
In line with other feed commodities, the Outlook expects protein meal prices to decrease in the early years of the outlook period before marginally increasing over the rest of the projection period to reach $288 per tonne in 2019, about on par with prices at the start of the monitored period.
While still high relative to other crops, the rate of growth in oilseed production over the next 10 years will not match that observed during the previous decade. The Outlook foresees that much of the expansion will be concentrated in Brazil, the E.U. and Argentina, supported by land reallocation from other uses and new land entering production. The U.S. should remain the major oilseed producer over the projection period. When compared to the 2007-09 average, world oilseed oil production should increase by 30% over the projection period.
BIOFUEL PRICES SET TO RISE
Biofuel markets depend heavily on government incentives and mandates, but prospects remain uncertain, due to unpredictable factors such as the future trend in crude oil prices, changes in policy interventions and developments in second-generation technologies. The Outlook notes that continued expansion of biofuel production to meet mandated use will create additional demand for wheat, coarse grains, vegetable oils and sugar used as feedstocks.
Weaker energy prices, lower profit margins and reduced investment following the economic crisis slowed the expansion of the biofuel sector in 2009. As a result, when compared to their peak 2008 levels, ethanol and biodiesel prices decreased, respectively, by 6% and 26% in 2009. The Outlook projects that between 2010-19 biofuel markets will be highly influenced by mandates and other incentives in countries all over the world, with the U.S., Brazil and the E.U. playing major roles, respectively, on ethanol and biodiesel markets.
Based on sustained political support for biofuels, the Outlook projects increasing world biofuel prices, and these will also be underpinned by rising crude oil and energy prices. The world ethanol price should follow an increasing trend to reach $54.4 per hectoliter (100 liters) in 2019 supported by demand conditions in the U.S. market where the Conventional Renewable Fuels mandate is assumed to be binding over the entire projection period.
Demand should also be strong in Brazil due to the continuation of the government’s blending regulation. The Outlook estimates that the world biodiesel price will increase up to 2015 and then remain at a plateau of almost $144 per hectoliter as secondgeneration biofuel will increasingly become available in the E.U. in the latter years of the outlook period and thus will diminish the pressure on supply globally.
With mandates calling for growing ethanol use, and with higher crude oil prices expected, the Outlook projects global biofuel production to reach 200 billion liters in 2019, comprising 159 billion liters of ethanol and almost 41 billion liters of biodiesel. These quantities are far above the average 2007-09 base levels. In the context of the new Renewable Fuels Standard (RFS2) in the U.S., ethanol use for fuel is projected to increase continuously over the projection period to reach 77 billion liters by 2019 but to remain below the 2019 mandate of 102 billion liters.
In the case of the E.U., ethanol production is mainly from wheat, coarse grains and sugar beets. It should increase to 18 billion liters by 2019. Under the Renewable Energy Directive (RED), fuel ethanol use is projected to increase to 21.2 billion liters in 2019, representing an average share of almost 8.5% in gasoline types for transport fuels by 2019.
With rising demand for domestic use by a growing fleet of flexi-fuel vehicles and for exports, ethanol production in Brazil is projected to grow by almost 7.5% per annum, on average, to reach 55 billion liters in 2019, while ethanol exports expand to reach 13.3 billion liters by the close of the projection period.
On the trade side, the Outlook expects Brazil will be the major international ethanol supplier. Trade of biodiesel should remain marginal, with Argentina expected to be the main supplier on international markets.
While many developing countries, especially in Sub-Saharan Africa and Southeast Asia, have initiated ambitious renewable energy programs, many have been put on hold during the economic crisis due to credit constraints and the more uncertain market prospects. The OECD-FAO Agricultural Outlook, therefore, presented a conservative view on biofuel prospects in many of the developing countries over the projection period.