OECD projects price increases for agricultural products

While those buying the commodities will benefit from the lower prices and the increased ability to source products from a wider variety of countries, farmers in OECD countries will have to make additional efforts to improve their efficiency as profit margins fall, the organisations stated in a forecast report​ released this week.

Over the next decade developing countries are expected to import more agricultural products due to rising populations and increasing incomes, according to the forecast. They will be able to export part of their requirements from low-cost producing countries in the developing world.

"As a result, competition in global commodity markets will intensify in the medium term,"​ the organisations state. "Coupled with marked productivity gains at the world level, this will result in a further drop in real prices for most agricultural commodities."​

While the reports projects world prices for wheat and coarse grains should remain fairly close to the current high levels, prices for rice are set to increase between 2004 and 2014 in nominal terms.

In real terms, rice prices should remain relatively flat, while world wheat and maize prices are expected to continue their longer-term declining trend over the next decade, the report forecasts. Increasing wheat imports by China in particular could drive wheat prices up by about eight per cent during the first few years of the projection period, but prices are expected to fall again afterward, ending at about six per cent above their 2004 levels.

In nominal terms world rice prices are projected to increase by 26 per cent from a relatively low level in 2004. The rice price increase should be particularly strong in the first two years of the forecast period when Indonesia returns to its normal net imports of around three million tonnes annually, the report states.

Meanwhile sugar supplies continue to outpace demand. Overall, the world market is expected to be well supplied with sugar with no price increases above 2004 levels. Nominal world market prices for raw sugar are expected to remain within a band of seven to US$1.65 to US$1.95 per tonne to 2014, with the long run pattern of falling prices in real terms set to continue.

The OECD forecasts that livestock and dairy products prices will stay mostly below recent levels. Prices peaked at US$2.96 per 100kg carcass weight equivalent (cwe) in 2004. A gradual recovery in US beef output should push them lower over the next decade.

Pig meat prices in 2004 were supported by strong demand from the Pacific market that should lead to an increase in pork production over the next year the report states. The price increase should be followed by a cyclical decline in pork prices. Larger imports stemming from income-fuelled demand by Mexico, and to a lesser extent the Asian markets, are expected to support Pacific pork prices at a level of about US$20 per 100 kg cwe.

In the poultry sector the continued investment in integrated poultry systems, particularly in developing countries, will lead to lower prices, the report states.

Although world dairy prices are expected to remain firm in 2005, increased supplies due to higher prices in 2004 will eventually cause them to weaken again, the report forecasts. Dairy prices rose to near record levels in 2004, only two years after having collapsed to rock bottom lows comparable to those of the previous decade.

The effects of increased supply may start in the second half of 2005, and as the growth of world export supplies is projected to slightly outpace that in import demand over the medium term, prices are anticipated to continue to fall further until 2008, when nominal dairy product prices should resume an upward trend.

The two organisations project a fall of 15 per cent in cheese prices by 2014, while butter prices should be slightly below those in 2004. Milk powder prices could reduce slightly, with prices for whole milk powder projected to fall by about three percent. Skim milk powder prices are forecast to fall by about one per cent compared to 2004 levels.

World prices for cheese, butter and milk power are expected to remain at higher levels over the decade compared to the averages over the previous ten years the report states. The relative strength in international prices is expected to stem partly from anticipated reductions of skim milk power and butter exports from the EU and lower skim milk power exports from the US.

Prices for these products will also be supported by population growth, changes towards more protein based diets and rising consumer incomes in major importing developing countries.

"With the growing integration of China and India in global markets, small shocks to either demand or supply in these large countries could lead to substantial external effects on other countries,"​ the report states. "Similarly, conditions in the key emerging suppliers, particularly in South America, will be increasingly critical to the evolution of world markets. With rapidly increasing production and trade of livestock products, the incidence of animal disease outbreaks is also an important source of uncertainty surrounding the projections."​

The increasing concentration and globalisation in the food industry, the growing role of product standards and high trade barriers will have a dampening effect on the trend toward lower cereal prices.

"The ongoing structural changes in the food industry, characterised by increasing concentration and globalisation and changes in food chain governance, such as the growing role of product standards and vertical coordination, are likely to continue over the outlook period,"​ the report states. "In addition to domestic and trade policies and policy reform, these changes are becoming of growing importance for the longer term outlook for agricultural markets and trade."​

Within the OECD area, support to agricultural sectors represented about 30 per cent of gross farm receipts in 2004. Faced with the higher competition from developing countries and downward pressure on real prices, farmers in OECD countries will have to take additional measures to improve their efficiency and productivity. They would benefit from the reform of policies that stand in the way of such efforts, the report states.

Changes in demand are a key driver behind the growing importance of developing countries in shaping world agricultural markets. Population and income growth, coupled with urbanisation, and dietary diversification, are expected to generate additional demand and to lead to changes in the composition of food consumption, with growing preference for animal products.

In the mature markets of OECD-member countries, food demand is expected to grow only moderately. The role of government policies on safety, quality, environment and animal welfare is taking on prominence relative to price and income changes in such countries.

Further trade policy reform following a successful conclusion to the Doha round of multilateral trade negotiations, revisions to US agricultural policies in the context of the next Farm Bill, or changes in the EU sugar regime, would impact the forecast, the OECD said.

Total world cereal output is expected to increase by over one per cent annually over the next decade with most of the growth occurring in the non-OECD developing countries such as India and China. Global wheat production is projected to grow by 11 per cent to reach 688 million tonnes in 2014. World rice production is projected to grow to 466 million tonnes, up 14 per cent from 408 million tonnes in 2004.

Rice production is expected to grow at about 1.3 per cent per year. Global oilseed production is expected to grow at an average of 1.9 per cent annually over the projection period, slower than in the past. Oilseeds are used directly for feed and food, as well as biofuel use of vegetable oil.

World milk production is projected to increase by just under two per cent annually between 2004 and 2014, reaching 747 million tonnes in 2014. The EU, India, US, Russia, Pakistan, Brazil and China account for about two-thirds of total milk output.

World production of milk, cheese and butter is expected to grow by about 20 per cent, while world skim milk production is projected to fall by five per cent over the outlook period.

Meat production will continue to be driven by rising pig meat and poultry output in developing countries. Their share of global production is set to expand to 62 per cent in 2014, up from 59 per cent in 2004.

The OECD is made up of 30 countries including Austria, Belgium, the Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Luxembourg, the Netherlands, Norway, Poland, Portugal, the Slovak Republic, Spain, Sweden, Switzerland, Turkey, the UK and the US.

The forecast is contained in the OECD's current edition of Agricultural Outlook magazine and covers cereals, oilseeds, sugar, meats and dairy products over a forecast period from 2005 to 2014. The projections are based on an expected recovery to steady, broadbased, world economic growth over the medium term, slowing population growth and low inflation.