Monday, June 20, 2011

FAO says high prices do not mean a bigger supply

A new study raises some doubts that the record high food prices could bring an increase in food production. From IRIN, this story takes a look at the Agricultural Outlook report published by the UN Food and Agriculture Organization.

Contrary to popular perception, the current high food prices will not see more money flowing into agriculture in the long term, warned a new forecast released ahead of a critical meeting of agriculture ministers in Paris on 22 and 23 June.

“Input costs, including that of fuel and fertilizer, have risen significantly - we anticipate global agriculture production to slow down in the next decade,” said Meritt Cluff, a senior economist at the UN Food and Agriculture Organization (FAO) and one of the authors of the Agricultural Outlook 2011-2020.

The Outlook - produced jointly by FAO and the Organization for Economic Cooperation and Development (OECD), which includes all the major developed countries - has forecast in its last three editions that food prices will remain high for the next few decades.

Global agricultural production is projected to grow at 1.7 percent annually until 2020, compared to 2.6 percent during the previous decade. Slower growth is expected for most crops, especially oilseeds and coarse grains, which face higher production costs and slowing productivity.

FAO estimates that to meet projected demand over the next 40 years, farmers in developing countries need to double production.

The cost of nitrogen fertilizers and other farm chemicals is closely related to the crude oil price, which has jumped from about US$35 per barrel in 2000 to hovering around $100 per barrel today.

Besides the cost of agricultural inputs, pressure on resources such as water and land, and the higher risk of adverse weather are also contributing to the slow-down in food production.

“We need greater political will to make substantial investments into improving production of food grains to meet the rising demands in the future,” said Cluff.

An increase in the supply of major food grains such as wheat and rice could help bring food prices down somewhat. “We are not into a crisis of the proportions we faced in 2007/08. Yes, food prices are high, but the global supply of wheat and rice - the two major food grains - is not critical at the moment,” Cluff noted.

There is some concern over maize crops in US, which have been affected by floods. The US Department of Agriculture is expected to release final figures later in June. All food grain prices are now above those of 2010.

2010 ended with food prices at their highest since 2008, when the world was in the grip of a crisis sparked by very expensive staple grains. Cereal prices, especially of wheat, started climbing in the second half of 2010 as severe drought and fires slashed crop sizes in Russia and Ukraine, two of the world's largest producers. The price of wheat shot up by more than 70 percent. Economists said speculation and national policy responses were partly to blame for the for the price hikes.

Countries that do not produce enough to satisfy national demand and are net consumers have been hit not only by high food prices but by price volatility or fluctuations, said a new inter-agency report to the G20, Price Volatility in Food and Agriculture Markets: Policy Responses, coordinated by FAO and OECD on behalf of 10 international organizations.

The report proposes a list of policy responses to bring down food prices and tackle price shocks. It calls for the reduction or elimination of trade-distorting policies and the establishment of a new mechanism to improve information and transparency in agricultural production, consumption, stocks and trade.

Basic commodities like grains, sugar and oil experienced boom times between 2002 and 2008, attracting growing numbers of financial investors to the commodities futures exchange, a move dubbed the "financialization of commodity markets" by the UN Conference on Trade and Development (UNCTAD), an intergovernmental body dealing with trade, investment and development issues.

The Intergovernmental Groups on Grain and Rice at FAO list the impact of financialization on the futures markets - along with poor market transparency, insufficient information about investors, unexpected changes triggered by national food security situations, panic buying and hoarding - among the root causes of harmful, rapid food price hikes. Russia announced a ban on exports in 2010, which also helped push up prices, economists said.

The absence of accurate reliable public information on food stocks, and the entry of unscrupulous commodities speculators have been cited among the major reasons for price swings. The US has already put in motion plans to curb speculation and “Other countries are also following suit,” said Cluff.

Price levels and volatility

Christopher Barrett, a food security expert who teaches development economics at Cornell University, New York, said there was a need to distinguish between high food prices and price volatility, because the way the food-price problem is cast affects policy response.

“Policies aimed at curbing food price volatility, such as export bans, price controls and price stabilization schemes, not only have a poor track record, they are misguided if policy-makers’ goal is to increase the welfare of the poor,” he said.

“Instead, policy-makers should consider policies that prevent sharp increases in food prices, such as removing barriers to international agricultural trade, and increased investment in scientific research on crop productivity improvement, on soil and water conservation, on reducing post-harvest losses that run to nearly 50 percent in many low-income countries, and on renewable energy sources that do not compete with food for land and harvests.’”

Barrett said the public discourse on food price volatility has been disappointing because political leaders, the media and popular commentators are commonly conflating rising food price levels with greater food price "volatility", which is best defined as variance around that level.

“The error is understandable because the two phenomena are indisputably correlated, but they are different things, and by conflating high food price levels and high price volatility, global leaders make some important errors,” he commented.

“First, while it is clear that food price levels are at historic highs, food price variability, although high these past few years, is not out of line with historical experience and is generally lower than in the 1970s. Although it is clear that the world faces historic food price highs, it is unclear that there is a similarly unprecedented food price volatility problem,” Barrett said.

“Second, the effects on the well-being of the poor of price levels, and of price volatility, differ. Rising food price levels hurt food consumers by reducing their purchasing power while benefiting food producers by increasing farm profits,” he pointed out.

“By contrast, food price volatility hurts food producers, who make irreversible investments in crop inputs at the start of the growing season, and routinely reduce such investments as food price risk increases” Barrett explained.

“But because food commodities are often substitutes for one another, and because changes in the prices of foodstuffs are not perfectly correlated, food consumers can adjust their food purchases so as to take advantage of relative price discounts. As a result, they commonly benefit from increased volatility around a price level,” he noted.

“Throughout the world, but especially in low-income countries, the poor are overwhelmingly net food buyers, so poverty increases as food price levels rise - but losses due to food price volatility fall mainly on relatively better-off large farmers, Barrett said.

“Perhaps not coincidentally, these same large farmers enjoy tremendous taxpayer-funded support programmes from G20 governments presently expressing concern about food price volatility.”

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