Part 1 What happened to world prices and why?

The State of Agricultural Markets 2009 8 World food price inflation in 2007–08

he upturn in international food prices that began in 2006 escalated into a Evolution of FAO food price indices T surge of food price inflation around the world, increasing food insecurity, leading Index (1998–2000 = 100) to violent protests and even raising fears 250 about international security. Africa was FAO extended real food perhaps hardest hit, but the problem was 200 global. Reports of the impact of high food prices on the poor across many developing 150 countries led to calls for international action to reverse the slide towards increased 100 and . Food agencies FAO extended food price index such as the World Food Programme (WFP) 50 encountered difficulties in meeting the higher costs of purchasing food for 0 distribution and appealed for additional funds. 1961 1965 1970 1975 1980 1985 1990 1995 2000 2005 2008 Source: FAO. The FAO food price index1 rose by 7 percent in 2006 and 27 percent in 2007, and that increase persisted and accelerated in the first half of 2008. Since FAO food price index adjusted for changes in exchange rates then, prices have fallen steadily but remain above their longer-term trend Index (1998–2000 = 100) levels. For 2008, the FAO food price index 250 still averaged 24 percent above 2007 and 57 percent above 2006. 200 Looking at prices in real terms (deflated by the ’s Manufactures Unit 150

Value Index [MUV]), the increases are still 100 significant. Real prices have shown a steady long-run downward trend 50 punctuated by typically short-lived price 0 spikes. There is some suggestion of a 1961 1965 1970 1975 1980 1985 1990 1995 2000 2005 2008 flattening out since the late 1980s with a FAO food price index gradual recovery beginning in 2000 FAO food price index adjusted for changes in US$–SDR exchange rates FAO food price index adjusted for changes in US$–CFA franc exchange rates before the sharp increase in 2006 – the Note: the Special Drawing Right (SDR) is a basket of major currencies (euro, sterling, yen and the US dollar) defined average annual growth rate of 1.3 percent by the International Monetary Fund (IMF); the CFA franc is the currency used in 14 African economies and whose for the period 2000–05 has jumped to value is tied to the euro. 15 percent since 2006. Sources: FAO and IMF.

What difference do exchange rates make? US dollar, in which international prices are affected by the changes. The extent to tend to be denominated. Expressed in which international price increases A proportion of these price increases can other currencies, the increases are less translated to domestic consumer and be attributed to the depreciation of the dramatic and within the range of historical producer price increases in different variation, but they are still substantial. countries depended on their US dollar 1 The FAO food price index is a trade weighted The relationship between the currency exchange rate as well as a variety of Laspeyres index of international quotations and commodity prices is a complicating other factors, such as import tariffs, expressed in US dollar prices for 55 food factor in assessing agricultural infrastructure and market structures, (see www.fao.org/worldfoodsituation/ commodity price increases. It also has that determine the degree of price FoodPricesIndex). implications for how different countries transmission. Because most commodity

The State of Agricultural Commodity Markets 2009 9 What happened to world food prices and why? 1990 currency totheUSdollar.currency than 30developingcountriespegtheir increases thecostofprocuringfood.More US dollar, depreciationintheUSdollar pegged toorareweakerthanthe are countries whoselocalcurrencies greater orlesserextent.However, for cushioning offoodpriceincreasestoa stronger thantheUSdollar, resultingina are for countrieswhosecurrencies US dollarreducesthecostofcommodities US dollars,depreciationinthevalueof prices arecommonlyexpressedin the rate of increase varied significantly the rateofincreasevariedsignificantly prices increasedatleastinnominal terms, While almostallagriculturalproduct increase inthesameway? all agriculturalcommodities Did thepricesof 200 400 600 800 100 150 200 250 300 Index (2002–04=100) Evolution ofmonthlyFAO priceindicesforbasicfoodcommoditygroups Price Evolution ofpricesfortropical exportcrops Note: 50 0 1990 andwheatpricesinUS$/tonne;cocoacoffee pricesinUScents/pound. 1992 1992 1994 1994 1996 1996 The State of Agricultural Commodity Markets 2009 1998 1998 ieCoffee Rice 2000 contrast to the secular downward trend contrast totheseculardownward trend The leapinfoodpriceswas sharp 2007–08 foodpriceincreases? What wasdifferent aboutthe of paymentsproblem. thisimposedaseriousbalance importers, many developingcountriesarenetfood As than thecostoftheirfoodimports. been increasingthiswasataslowerrate mighthave earnings while theirexport oftheselatterproductsfoundthat exports developing countriesdependenton such ascottonorrubber. Therefore, andcocoa,rawmaterials, as coffee than thepricesoftropicalproducts,such products, increasedfarmoredramatically , suchascereals,oilseedsanddairy particular, pricesofbasic international from onecommoditytoanother. In 2000 ha Cocoa 2002 2002 eel Oils 2004 2004

2006 2006 Source: Source: 2008 2008 FAO. FAO. 10 and the prolonged slump in commodity prices from 1995 to 2002, which even The world food crisis of the 1970s prompted calls for the revival of international commodity agreements. For some analysts, the increases signalled In the two decades prior to the crisis of the replenish stocks and diffuse the growing the end of the long-term decline in real 1970s, output in developing countries price crisis. However, , the former agricultural commodity prices, with rose by 80 percent. The “green revolution” Soviet Union, the of America The Economist (2007) announcing “the led to large gains in productivity and and much of Asia gathered poor in that end of cheap food”. Others saw the harvested land areas expanded. However, in year as a result of bad weather. At the end of beginnings of a potential world food crisis. 1972, bad weather hit crops across the globe that year, world cereal reserves had reached It is an interesting question whether these and world food production dropped for the a 22-year low, equal to sufficient supplies for sharp increases are fundamentally first time in 20 years, down 33 million tonnes about 26 days, compared with 95 days in different from earlier price spikes and at a time when the world needed an extra 1961. To make matters worse, the United whether the long-term decline in real 24 million tonnes to meet the needs of a States Government banned the exportation prices could have come to a halt, rapidly rising population. In the following of 10 million tonnes of grain (mostly to the signalling a fundamental change in year, a new supply shock played its part in former Soviet Union), fearing that such a agricultural behaviour. fuelling higher agricultural prices – oil prices massive sale would compound domestic High-price events, like low-price events, quadrupled. This posed a real threat to the food price inflation. After peaking in 1974, are not rare occurrences in agricultural green revolution, whose success was heavily prices of most foodstuffs remained markets, although high prices often tend dependent on , herbicides and consistently high up until the early 1980s. to be short-lived compared with low nitrogen-based fertilizer applications, all of Official estimates of the number of deaths as prices, which persist for longer periods. which are derived from petroleum. After a direct result of the world food crisis of the What has distinguished this episode was paying for their oil import bills, many 1970s have not been made but, using the concurrence of the hike in world prices developing countries had little left to buy the deviations from trend mortality rates during of not just a few but of nearly all major food chemicals and nutrients that their high-yield, the crisis period, unofficial estimates put the and feed commodities and the possibility required. In 1974, the world figure somewhere around 5 million people that the prices may remain high after the anxiously awaited much-needed abundant (The Oil Drum, 2009). effects of short-term shocks dissipate. harvests in richer nations in order to Sources: FAO; and Time, 1974. The price boom was also accompanied by much higher price volatility2 than in the past, especially in the cereals and oilseeds sectors, highlighting the greater and sellers. Greater uncertainty limits economy, they can also heighten the cost uncertainty in the markets. In the first four opportunities for producers to access of importing foodstuffs and agricultural months of 2008, volatility in wheat and credit markets and tends to result in the inputs. At the same time, large rice prices approached record highs adoption of low-risk production fluctuations in prices can have a (volatility in wheat prices was twice the technologies at the expense of innovation destabilizing effect on real exchange rates level of the previous year while rice price and entrepreneurship. In addition, the of countries, putting a severe strain on volatility was five times higher). The wider and more unpredictable the price their economy and hampering their efforts increase in volatility was not confined to changes in a commodity are, the greater is to reduce poverty. cereals – vegetable oils, livestock the possibility of realizing large gains by products and sugar all witnessed much speculating on future price movements of How does the 2007–08 high-price larger price swings than in the recent past. that commodity. Thus, volatility can episode compare with past crises? High volatility means uncertainty, which attract significant speculative activity, complicates decision-making for buyers which in turn can initiate a vicious cycle of A look at past price behaviour can destabilizing cash prices. At the national indicate how different the recent high food 2 Volatility measures how much the price of a level, many developing countries are still price episode was. As can be seen from commodity fluctuates over a given time frame using highly dependent on primary the graphs (see page 9), one price peak in the standard deviation of prices. Wide price commodities, either in their exports or particular stands out – the so-called world fluctuations over a short period constitute “high imports. While sharp price spikes can be a food crisis of the 1970s. There are some volatility”. temporary boon to an exporter’s similarities with that situation. Weather

The State of Agricultural Commodity Markets 2009 11 What happened to world food prices and why? However, the purchasing power of the However, thepurchasingpowerof the worldwasfacingasimilar crisis. exceeded thosewitnessedinthe 1970s, conclude that,aspricesinearly 2008far respectively. Itwouldbetemptingto rose toUS$542andUS$180pertonne, quotationsofriceandwheat international effects. episode andmayhavelonger-lasting biofuel demand)werekeytothe2007–08 side shocks,demandfactors(notably the 1970scrisiswascausedbysupply- However, isthatwhile onebigdifference measures tocontaindomesticinflation. featured, inthesameveinasthistime, restrictions countries. Evenexport by rapidpopulationgrowthindeveloping wake ofrisingfooddemandbroughtabout contractions infoodproductionthe oilpriceshocksresultedin and crude 2007 and2008. significant priceeventyears:1973,1974, terms, onlyfouryearsappeartohavebeen applied tothepricesexpressed inreal However, whenthesamemethodologyis and twoyearsinthelast(20072008). in arow inthefirst(1972,1973and1974); in thefirstandlastperiods:three years consecutive yearsare thosethatoccurred current period.Theonlypriceeventsin increases: 1972–74,1988,1995andthe where pricesexhibitedsignificant four distinctperiodscanbeidentified twice thestandard deviationcalculatedas: each year’s percentage changeagainst during the1961–2008period.Checking (using theFAO foodpriceindex)occurred price eventsforbasicfoodcommodities possible toidentifytheyearsinwhichhigh- calculated from. Usingthisdefinition,itis year thatthepercentage changeis of thepriceinfiveyearspreceding the that ismore thantwostandard deviations identified asanannualpercentage change practical purposes,apricespikecanbe increase inpriceabovethetrend value.For A pricespikeisapronounced sharp Agricultural commoditypricespikes At the peak of the 1970s crisis, At thepeakof1970scrisis, The State of Agricultural Commodity Markets 2009 period of rising and protracted price period ofrisingandprotracted price prompting fearsofawide-scale crisis.Ina commodities wasanotherfactor replenish stocks. to withlittleopportunity exporters expansion inbiofuelproduction,leftmajor incomes andpopulationthen commodities, drivenbyrisingglobal growing demandforagricultural surge. Againstthisbackdrop,theworld’s totherecentprice the caseinrun-up and highervolatility. Thiswasprecisely tightness ismanifestinbothhigherprices stretched andtheensuingmarket consecutive years,globalsuppliesare in occur insuchcountries,particularly surprising thatwhenproductionshortages markets asneeded.Therefore,itisnot countriestosupplyinternational exporting resulted inasignificantroleformajor together, thesedevelopmentshave tomeetfoodneeds.Put on imports have ledtofarmoreplanneddependence inreducingstocklevels and instrumental market andpolicysettinghavebeen decades. Addedtothis,changesinthe spiralling downwardonatrendlastingfor agricultural paradigmsentrealprices world withfood.Thissupply-driven role ofafewcountriesinsupplyingthe elsewhere unprofitable,entrenchedthe efficient andcheaperproduction Development (OECD)thatrenderedmore Economic Co-operationand countries oftheOrganisationfor together withwidespreadsubsidiesin andthis, the costofproducingfoodstuffs Technological advancesgreatlyreduced 2–3 percentperyearinrealterms. fallingonaverageby many foodstuffs in theprevious30years,withpricesof basket hadfallenbyalmostone-half 2006, therealcostofglobalfood notion ofso-called“cheapfood”.Upuntil world hadbecomeaccustomedtothe becauseconsumersthroughoutthe partly Soaring foodpricescameasashock The endof“cheapfood”? four monthsof2008. over fourtimestheaveragefirst one tonneofricein1974stoodatwell exchange rates,forexample,thecostof picture isrevealed.At2000pricesand adrasticallydifferent prices inrealterms, from whatitwasinthe1970s.Lookingat US dollartodayisfundamentallydifferent Extreme price volatility for several Extreme pricevolatilityforseveral 12 Annual food prices, in nominal and real US$ terms, 1957–2008

Bulk commodities NOMINAL PRICES REAL PRICES

US$ US$ 600 1 500

400 1 000

200 500

0 0 57 70 80 90 00 08 57 70 80 90 00 08

Wheat Rice Soybeans

Vegetable oils

US$ US$ 1 500 2 500

2 000 1 000 1 500

1 000 500 500

0 0 57 70 80 90 00 08 57 70 80 90 00 08 Soybean oil Palm oil Rapeseed oil

Livestock commodities

US$ US$

200 300

150 200 100 100 50

0 0 57 70 80 90 00 08 57 70 80 90 00 08

Poultry Pig meat Beef Butter

Sugar and beverages US$ US$ 800 2 000

600 1 500

400 1 000

200 500

0 0 57 70 80 90 00 08 57 70 80 90 00 08

Cocoa Coffee Tea Sugar

Note: Real prices refer to nominal prices adjusted for changes in US Producer Price Index (2000 = 100). Sources: Cocoa (ICCO); coffee (ICO); cotton (COTLOOK A Index 1–3/32”); maize (US No. 2, yellow, US Gulf); rice (white rice, Thai 100% B second grade, f.o.b. Bangkok); soybeans (US No. 1, yellow, US Gulf); sugar (ISA); tea (total tea, Mombasa auction prices); Wheat (US No. 2, soft red winter wheat, US Gulf); beef (Argentina, frozen beef cuts, export unit value); butter (Oceania, indicative export prices, f.o.b.); pig meat (USA, , frozen product, export unit value); poultry meat (USA, broiler cuts, export unit value); rape oil (Dutch, f.o.b. ex-mill); Soya oil (f.o.b. ex-mill).

The State of Agricultural Commodity Markets 2009 13 What happened to world food prices and why? stock levels, oil prices, biofuel demand, stock levels,oilprices,biofuel demand, low responsible: productionshortfalls, factorshavebeencited as Many different explore thenatureofapparent causes. to itisnecessary behaviour patterns, slumps orrepresentsabreakwithpast peaksandprolonged sharp butshort-lived with pastcommoditypricebehaviourof the recenthigh-priceepisodeisconsistent order toanswerthequestionaswhether break.Therefore, in detect astructural econometric testshavesofarfailedto spike fromtheevidencetodate,and conclusions regardingtherecentprice simply resumedtheirprecedingtrend. After theworstofcrisispassed,prices breaks. manifest themselvesasstructural inthecrisisof1970sdidnot foodstuffs techniques, eventhepricepeaksformany commodity prices.Applyingthese breaksinagricultural structural techniques canbeusedtodetectthese break”.Econometric “structural economists describetheeventasa ofprices.Whentheydoso, the trajectory shiftin result inafundamental,permanent market turbulencedonotnecessarily rather largeone?Periodsofexcessive experiencing yetanotherspike,albeita prices orisitthecasethatworldwas reflect areversalinthetrendoffallingreal fears ofanimpendingcrisis. foodmarketsaddedto on international astojustwhatwashappening uncertainty fundamentally higherpricelevels.Again, between marketinstabilityand volatility, itisquitedifficulttodistinguish Index (2002–04=100) FAO foodpriceindices 110 140 170 200 230 It is difficult to draw any firm It isdifficulttodrawanyfirm Does therecenthigh-priceepisode J F M A M 2007 J 2006 J A 2008 S Source: O The State of Agricultural Commodity Markets 2009 N 2005 FAO. D could persistforsomeyears. but high pricesmaywellnotbeshort-lived from thepeakofearly2008,recent that, inspiteofthedownwardadjustments strong demandforbiofuels,thatsuggest historically lowstocklevelsforcerealsand situation,notablythe the current level ofprices.Therearesomefeatures ontheaverage have apersistenteffect quantitatively, someofthesefactorscould theirindividualcontributions determine speculation. Whileitisdifficultto depreciation oftheUSdollarand growing incomesinemergingeconomies, markets. still workingtheirwaythroughnational prices reachedinthefirsthalfof2008are some cases,thepeaksininternational remain substantiallyabove2007levels.In countries, butespeciallyinAfrica,prices levels. Atthenationallevelinmany standards andarestillabovetheir2007 However, pricesremainhighbyhistorical prices forotherbasicfoodshavefollowed. grain priceshavefallenby50percentand reached inthefirsthalfof2008.World have fallensignificantlyfromthepeaks Prices formostagriculturalcommodities food pricesnow After therise,fall– D 100 150 200 250 300 350 Index (2002–04=100) 2007–2008 Food commoditypriceindices, J Meat Dairy F Cereals M Sugar A M J J Oils andfats A S Source: O N FAO. 14 D Why did food prices increase so much?

nalysts and commentators have sources and policy measures in the United demand for food, especially for livestock emphasized different States of America, and the European products, which generated increased A explanations for the leap in food Union (EU) encouraged the expansion of cereal and oilseed demand for feed. These prices. The most popular is increased biofuel production. High oil prices also explanations focus on “new” drivers in demand for certain agricultural products had a direct impact on the costs of international agricultural commodity as feedstocks for biofuel production, agricultural production and prices. A third markets and suggest the possibility of a particularly maize for ethanol. Record oil popular explanation is rapid economic fundamental change in the behaviour of prices and environmental concerns growth in certain emerging economies, agricultural commodity prices and strengthened interest in alternative energy notably China and India, increasing continuing high prices. “Traditional” explanations (see box on page 16) of high prices are also relevant – supply reductions as a result of drought in major Evolution of wheat ending stocks and stock-to-use ratios exporters and the lowest cereal stock levels for more than 30 years. Various other complicating factors have also been Million tonnes Percentage cited as at least partial explanations of the 400 45 high food prices. These include an inflow of speculative funds into agricultural 300 35 commodity futures markets as the global financial downturn weakened more usual bond and equity markets. Once world 200 25 prices began to rise significantly, the market and policy responses this provoked added to the inflationary 100 15 pressure, e.g. hoarding against expectations of further price rises, and export restrictions. 0 5 In practice, all these factors contributed 79/80 81/82 83/84 85/86 87/88 89/90 91/92 93/94 95/96 97/98 99/00 01/02 03/04 05/06 07/08 to pushing up food prices. It was the Ending stocks Stock-to-use ratio Source: FAO. combination of them that was crucial. These were the immediate triggers of increasing food prices but were set against Evolution of coarse grains ending stocks and stock-to-use ratios the background of the longer-term problems facing – slowing growth in yields, lack Million tonnes Percentage of investment, declining share of 400 36 agriculture in development aid, and declining funds for research and 300 27 development – which not only exacerbated the food insecurity problem but also made it even more difficult for 200 18 developing countries to deal with.

Production shortfalls 100 9 and low stocks

Traditional explanations for food price 0 0 variability emphasize the importance of 79/80 81/82 83/84 85/86 87/88 89/90 91/92 93/94 95/96 97/98 99/00 01/02 03/04 05/06 07/08 exogenous shocks to agricultural supply, Ending stocks Stock-to-use ratio Source: FAO. notably as a result of the weather.

The State of Agricultural Commodity Markets 2009 15 What happened to world food prices and why? because ofthedependence shocks are perhapsmostimportant produce wideswingsinprices.Supply supply anddemandshockscan respond muchtopricechanges,so products are inelasticanddonot supply anddemandforagricultural and demandshocks.Intheshortrun, Volatility inpricesstemsfrom supply resources, labourandclimatechange. term bytheavailabilityoflandandwater supply-side problems, andinthelonger and availabilityofkeyinputsother constrained intheshorttermbycost increases. Supplyexpansionmaybe supply expansion,soleadingtoprice and biofueldemand,mayrunaheadof income growth inemerging economies in thatdemandgrowth, asaresult of circumstances mayhavebeendifferent commodity prices.Recent run relative declineinagricultural expanded demand,leadingtoalong- population andincomegrowth supply expansionatafasterratethan progress reduced costsandinduced reduces costs.Inthepast,technological driven bytechnologicalprogress, which run expansioninsupplyisprimarily more generally. Long- materials suchasrubberisrelated to Demandforagriculturalraw patterns. changes andtheevolutionofdietary are alsoinfluencedbyrelative price population andincomegrowth, butthey demand are primarilytheresult of those trends. Long-runchangesinfood and thosethatcausevariabilityaround produce theunderlyingtrends inprices factors drivingdemandandsupplythat in trend. between normalvariabilityandachange except inhindsight,todistinguish variability, anditisnotstraightforward, about thenature ofpricetrends and there are stilldifferences ofopinion weather. Inspiteofintenseresearch, shocks related tofactorssuchasthe demand andsupplyexogenous so-called marketfundamentalsof determined byacombinationofthe Agricultural commoditypricesare How are agriculturalcommoditypricesdetermined? It isimportanttodelineatethose less persistentwhentheyare supply shocks. Theeffects ofshockstendtobe adjust immediatelytosupplyordemand for agriculturalcommoditiesdonot pressure onprices.Marketsandprices high orboth,there willbeupward because stocksare lowordemandis prices. Ifthe“stock-to-use”ratioislow is animportantfactorincommodity the levelofstocksinrelation todemand down oraddingtostocks.Therefore, cushioned bythepossibilityofrunning demand andsupplyonpricescanbe materials. Theimpactofshocksin important too,especiallyforcertainraw although demandshockscanbe agricultural production ontheweather, Sanitary andPhytosanitaryMeasures/non-tariff barriers. * SPS/NTBs:Agreement onthe Applicationof Factors affecting agriculturalcommodityprices Domestic demand ... etc. Domestic policies Oil prices Prices ofotherfeeds Demand formeat competitive products Prices of complementary products Prices of Taste Income Population Domestic production exporting country inexportingcountry Price formation Industrial use consumption Initial stocks Final stocks P Exports Human Feed + Q Prices ofotherfeeds Demand formeat The State of Agricultural Commodity Markets 2009 ... etc. Utilization inprevious year Prices Weather Domestic policies Input costs SPS/NTBs* Exchange rates Duties ... etc. import demand export supply complementary products price formation P competitive products World World World Exchange rates Q Technology Population oilseeds. demand andpricesforcereals and products willleadtoincreased feed increasing demandforlivestock supply andraisingtheirprices;or expense ofothercrops, reducing their producers togrow more maizeatthe higher pricesformaizewilllead commodity toanother. Forexample, effects ofpricechangesfrom one production. Theseleadto“cross” complementarity inconsumptionor linked through possiblesubstitutionor case ofdemandshocks. example –andmore persistentinthe shocks –owingtobadweatherfor Prices of Prices of Oil prices Policies Income ... etc. ... etc. Duties Prices ofdifferent commoditiesare Taste Domestic demand Domestic production importing country in importingcountry Price formation Industrial use consumption Initial stocks Final stocks P Imports Commodity prices Human Feed + previous year Q Utilization Technology Input costs Source: Weather Policies FAO. 16 A critical initial trigger for the recent price hikes was the decline in the production of Energy and food price indices cereals in major exporting countries beginning in 2005 and continuing in 2006. Index (2002–04 = 100) Reuters-CRB energy index FAO food price index Cereal production declined by 4 and 550 7 percent, respectively, in those two years. However, there was a significant increase 450 in cereal output in 2007, especially in maize in the United States of America, 350 responding to the higher prices. The quick supply response for cereals in 2007 came 250 at the expense of reducing productive resources allocated to oilseeds, especially 150 soybeans, resulting in a decline in oilseed production. 50 Stocks play a key role in equilibrating 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 Source: FAO and Reuters-CRB. markets and smoothing price variations. If stocks are low relative to use, markets are less able to cope with supply and demand shocks and supply shortfalls or Relationship between cereals stock ratios and prices demand increases will lead to bigger price increases. This ratio fell sharply Index (1989–1990 = 100) FAO cereal price index from 2006 onwards, reaching a historic 300 Global stock-to-use ratio low in 2008. Global stock-to-use ratio, excl. China Major exporters’ stock-to-disappearance ratio The level of stocks, mainly of cereals, has been falling since the mid-1990s. Indeed, since the previous high-price 200 event in 1995, global stock levels have on average declined by 3.4 percent per year. There have been a number of changes in the policy environment since the Uruguay 100 Round Agreements that have been instrumental in reducing stock levels in major exporting countries: the size of 0 89/90 91/92 93/94 95/96 97/98 99/00 01/02 03/04 05/06 07/08 reserves held by public institutions; the Notes: high cost of storing perishable products; Correlation coefficients: price with global stock-to-use ratio: r = –0.65; price with global stock-to-use ratio, the development of other less costly excluding China: r = –0.49; price with major exporters’ stock-to-disappearance ratio: r = –0.47. Data for China refer to mainland China. Source: FAO. instruments of risk management; increases in the number of countries able to export; and improvements in Ocean freight rates for grains information and transportation sharply in 2006. Continuing low stock from United States Gulf ports technologies. When production shortages levels is one reason why relatively high to selected countries occur in consecutive years in major prices could be expected to persist for exporting countries under such some time. By the close of the seasons US$/tonne circumstances, international markets tend ending in 2008, world cereal stocks had 100 Egypt to become tighter and price volatility and increased by only 1.5 percent from their European Union CIS* the magnitude of price changes become already reduced level at the start of the magnified when unexpected events occur. season and reached their lowest levels in 80 Indeed, there is a statistically significant 25 years. In 2007/08, the stock-to-use negative relationship between marketing ratio for world cereals stood at 60 season beginning stocks (expressed as a 19.6 percent, well below the five-year percentage of expected utilization in the average of 24 percent and even smaller ensuing season) and the cereal prices than the previous low of 20 percent in 40 formed during the same season. This 2006/07. The stock situation for oils/fats means that tight markets at the global and meals/cakes began to deteriorate in 20 level at the beginning of the marketing mid-2007 after the spillover effects from O N D J F M A M J J A S O season tend to put upward pressure on developments in the cereals markets, 2006 2007 prices. This was one of the main reasons especially of wheat and coarse grains, * CIS: Commonwealth of Independent States. Source: International Grains Council. why international cereal prices spiked so with the stock-to-use ratio falling from

The State of Agricultural Commodity Markets 2009 17 What happened to world food prices and why? 1 050 200 in China Cereal utilizationandnettrade Million tonnes world plus Indiaandtherest ofthe Cereals usedforfoodinChina Million tonnes utilization World cereal foodandfeed Note: Note: 300 400 500 600 700

Net Net 650 750 850 950 exports (left axis) Net trade imports ilo onsMilliontonnes Million tonnes 80 10 15 20 -5 Data forChinarefer tomainland China. Data forChinarefer tomainlandChina. 0 5 97/98 97/98 Food use 85 99/00 99/00 90 01/02 01/02 (right axis) Utilization 03/04 95 03/04 Feed use Rest oftheworld 05/06 China plusIndia 00 05/06 Source: Source: Source: 07/08 The State of Agricultural Commodity Markets 2009 07/08 05 FAO. FAO. FAO. 0 100 200 300 400 07 1 000 1 500 2 000 -20 -10 Million tonnes China andIndia Net importsofcereals by in India Cereal utilizationandnettrade Million tonnes India andtherest oftheworld Cereal utilizationinChinaplus Note: seed use,industrialuseandwaste. Utilization isthesumoffood,animalfeed, Notes: 10 20

Net Net 500 0

(left axis) Net trade imports exports 0 ilo onsMilliontonnes Million tonnes 12 15 80 -3 Data forChinarefer tomainlandChina. India China 0 3 6 9 Data forChinarefer tomainlandChina. 80 China plusIndia Rest oftheworld 97/98 85 85 99/00 90 01/02 90 (right axis) Utilization 03/04 95 95 05/06 00 00 Source: Source: Source: 07/08 05 05 FAO. FAO. FAO. 0 50 100 150 200 250 07 07 18 13 to 11 percent for oils/fats and from International Research a year earlier. China and India have not 17 to 11 percent for meals/cakes by the Institute (IFPRI, 2008). This argues that been the cause of the sudden price spike end of the 2007/08 season. rapid economic growth in certain in the oils complex, but this does not developing economies has pushed up downplay their role nor that of changing Putting food and feed in middle-class consumers’ purchasing consumption patterns in general on perspective – China and India power and this has increased demand for developments in food markets both in the livestock products such as meat and milk past and in the future. The increase in requires and, hence, demand for feedgrains. higher food production if consumption Emerging economies, particularly What about biofuels? requirements are to be met. Increasing China and India, are certainly playing an incomes generally also lead to changes in important role in global agricultural Demand for certain agricultural diets, often reflected in stronger demand commodity demand and supply. commodities as feedstocks for biofuels for higher-value foods (such as livestock However, the high commodity prices of can mean fewer productive resources products) as opposed to starchy staples 2007 and 2008 do not seem to have used in the production of food crops. (such as wheat). Because these changes originated in these emerging markets. Biofuel production may reduce the are gradual, it is not correct to consider Cereal use in China and India has in fact availability of food commodities on the them as an underlying cause for any been growing more slowly than in the rest market because “effective” demand for sudden price increase such as the one of the world. grains, sugar or oils and other basic food experienced recently. Therefore, the Cereal imports by China and India have staples as feedstock for fuel production widely accepted notion that rising demand been trending downwards since 1980, by could outbid that for food where the prices in countries such as China and India, the about 4 percent per year, from an annual of oil and feedstocks favour biofuel two most populous countries with rapid average of about 14 million tonnes in the production. This new source of demand population and income growth, is a reason early 1980s to roughly 6 million tonnes in has been playing an important role in for soaring food prices warrants the past three years. influencing prices. Among all major food re-examination. This means that the growth in cereal and feed commodities, additional demand The importance of growth in demand feed demand in these two countries, at for maize (a feedstock for the production from China and India as a shaper of world least until recently, has been met mainly of ethanol) and rapeseed (a feedstock for food markets and prices has been from domestic sources. Moreover, while the production of ) have had the highlighted in a recent study by the China has become a major importer of strongest impact on prices. For example, oilseeds, vegetable oils and livestock out of the increase of nearly 40 million products, the country’s overall agricultural tonnes in total world maize use in 2007, trade balance has remained largely almost 30 million tonnes were absorbed Maize utilization and exports in positive in most years since the mid- by ethanol plants alone. Most of this the United States of America 1990s. The long-term development in the expansion occurred in the United States of trade position of India also goes contrary America, the world’s largest producer and Million tonnes 400 to the belief that it is one of the drivers of exporter of maize. In the United States of increasing food prices in world markets. America, maize utilized to produce India has been a major exporter of food. In ethanol represented around 30 percent 300 most years between 1995 and 2007, it of its total domestic use. This contributed exported more wheat, rice and meat than to the steep rise in international maize 200 it imported. Even India’s relatively large prices observed since the beginning of imports of vegetable oils need to be 2007. The intensity of the price reaction considered in the context of equally large was also related to the fast pace (mostly 100 exports of oilcakes. In fact, in the case of within 2–3 years) at which this new both China and India, there is no evidence demand materialized and to its 0 of a sudden increase in imports of concentration in the United States of 03/04 04/05 05/06 06/07 07/08 oilseeds, meals and oils to indicate that America (more than 90 percent), a major Feed use Ethanol use they have contributed to their price hike, exporter of maize. Globally, some Other uses Exports which began in mid-2007 after the spike 12 percent of total world maize utilization Source: FAO. in the prices of grains (maize in particular) was used for ethanol in 2007, compared

The State of Agricultural Commodity Markets 2009 19 What happened to world food prices and why? farmers expanded soybean plantings expandedsoybeanplantings farmers well abovetwointhe2007/08 season, maize plantings.However, withtheratio drasticallyincreased 2006/07, farmers maize tosoybeans.Asthisratiofellin resulting inashiftofplantingareafrom soybeans arefavouredovermaize, ofthumb approaches two,asarule perspective, whenevertheratio futures market.Fromahistorical by thesoybean–maizepriceratioin marketing season.Thistrendisconfirmed States ofAmericaforthe2008/09 in soybeanplantedareatheUnited prices gaverisetoasubstantialincrease higher relativeprices.Strongsoybean in favourofsoybeansbecausetheir America cutbackontheirmaizeplantings order. intheUnitedStatesof Farmers itself in2008,butthistimereverse they did. would nothaveincreasedbyasmuch is conceivabletoassumethatgrainprices hampered bytheunfavourableweather, it outputs intheEUandUkrainenotbeen fromanotheryearofdroughtand suffered However, hadproductioninAustralianot one reasonfortheirsharppriceincreases. and, therefore,theirproduction.Thiswas reduced wheatandsoybeanplantings development– disguised anotherimportant However, thisapparentsuccessinmaize ethanol sector, aswelltoexport. demand, includingthatfromitsgrowing States ofAmericatomeetbothdomestic in2007,enablingtheUnited harvest weather resultedinabumpermaize plantings combinedwithfavourable wheat areas.Theexpansioninmaize possible bythereductioninsoybeanand 18 percent.Thisincreasewasonlymade 2007. Maizeplantingsincreasedbynearly States ofAmericatoplantmoremaizein intheUnited 2006 encouragedfarmers Already, highmaizepricessincemid- feedstock fortheproductionofbiofuels. producing othercropstothoseusedas from planting areacouldbediverted than forfoodandfeed,buthowmuchof each cropmaybeusedforbiofuelsrather in thecommoditythatyear. production and70percentofglobaltrade amounting toabout25percentofglobal states’ rapeseedoiloutputin2007, absorbed about60percentofmember the biodieselsectorisestimatedtohave with 60percentforanimalfeed.IntheEU, This chain reaction somewhat repeated This chainreactionsomewhatrepeated The issueisnotlimitedtohowmuchof The State of Agricultural Commodity Markets 2009 viable biofuel production becomes and viable biofuelproductionbecomes and that oilpricesare,themoreeconomically other agriculturalmarkets. onpricesin prices, withspillovereffects involved willcontinuetoshoreuptheir demand fortheagriculturalproducts biofuels remainsinplace,theadditional biofuels. However, for whilesupport typesof originally assumedforcertain greenhouse gasemissionsarelessthan evidence emergesthatreductionsin fossil fuels–isnowbeingquestionedas environmental benefitsofbiofuelsover –theclaimed for suchsupport products asfeedstocks.Onemotivation agricultural increased demandforcertain toliquidbiofuelsand,hence, the rush encouraged These policyinterventions in 2006whiletheEUspentUS$4.7billion. spent US$5.8billiononbiofuelsubsidies Initiative, theUnitedStatesofAmerica costs. AccordingtotheGlobalSubsidies reflecting higherfeedstockandprocessing double thoseforBrazilianethanol, biodiesel productioncostsaremorethan market priceoffossilfuels.European costs, butinbothcasescostsexceedthe maize havethenextlowestnetproduction soybeans andUnitedStatesethanolfrom equivalent. Brazilianbiodieselfrom consistently pricedbelowitsfossil-fuel ethanol, whichistheonlybiofuelthat far thelowestforBraziliansugar-cane production costsperlitreofbiofuelareby The ofpolicysupport. other forms economically viablewithoutsubsidiesor not production ofbiofuelsiscurrently production fromsugarcaneinBrazil, crops. spillover toothermajorfoodandfeed withastrongpossibilityof could firm, periods ofmarkettightness,maizeprices indications ofthiseventuality. Inthese market willbecloselywatchedfor stocks duringthe2009/10season.The significant drawdownonitsownmaize withouta feed, fuelandexports) America couldmeetalldemand(food, difficult topicturehowtheUnitedStatesof were todeclinein2009,itwouldbe continue torise.Ifproductionofmaize maize bytheethanolsectorisexpectedto United StatesEnergyBill,thedemandfor precariously balanced.Inviewofthenew soybean marketbutleftthemaize were apositivedevelopmentforthe instead. Increasesinsoybeanplantings Much depends on oil prices. The higher Much dependsonoilprices.The higher With theexceptionofethanol 20 the more agricultural products are 30 percent over the previous year. Share of commercial and demanded as feedstocks. When oil prices Notably, the share of non-commercial non-commercial traders reach a level where biofuels become traders taking long positions in the in futures markets competitive, demand by the energy commodity markets has been rising, market for agricultural products as indicating increased interest on their part Percentage feedstocks increases and this new in buying futures contracts. Between 2005 100 demand pushes up agricultural prices. and 2008, non-commercial traders Thus, agricultural and energy markets almost doubled their share of open 80 become linked in a new way. As energy interests in the maize, wheat and soybean 60 markets are huge relative to agricultural futures markets although their share in the markets, demand from the biofuel sector sugar futures market remained largely 40 could in principle absorb any additional unchanged. Investments by institutional 20 production of crops usable as feedstocks investors can be large. However, the so the energy market would effectively set volume of these investments in 0 a floor price for the agricultural products. It agricultural commodities has not been as 05 08 05 08 05 08 05 08 Maize Wheat Soybean Sugar would also set a ceiling on agricultural significant as in other commodities such product prices at the point where they as metals. Commercial traders Non-commercial traders Source: OECD. have risen so much that biofuel production is no longer competitive. It would be energy demands rather than food demands that would set agricultural Speculation on agricultural commodity markets product prices and agricultural product prices would be tied to energy prices. Clearly, this would be a major departure Typically, commodity exchange markets commodity prices. This may occur when an from how agricultural product prices have provide risk management tools such as increasing share of open interests (number of been determined in the past. futures and options to enable market outstanding futures contracts) is held by participants like farmers, processors, investors interested in gaining from future What is the role of speculation? producers or traders – “commercial price movements with little regard to the traders” – to hedge against the risk of price fundamentals of commodity demand and Recent discussions of high food prices fluctuations in the future. These markets also supply. Thus, the impact of excessive have included a growing interest in the assist in the discovery of prices and thus speculation is counterproductive to futures possible effects of speculators and provide a measure of predictability in markets because the risk of price volatility is institutional investors – “non-commercial ascertaining future prices. Another market a fundamental condition that these markets traders” – buying into agricultural activity is speculation, undertaken mainly by attempt to address. In addition, excessive commodities on futures markets as speculators or investors – “non-commercial speculation in agricultural commodity returns on other assets have become less traders”. This involves making profits by markets may transmit inappropriate market attractive. There has been some concern speculating on future movements in the price signals to agricultural producers, leading to that speculation has contributed to of an asset or a commodity. inefficient allocation of resources. increasing food prices. The downturn in Speculation is important for the efficient The level of speculative activity could be the global properties and securities functioning of markets because it brings controlled by regulating commodity markets. markets resulted in an inflow of funds into liquidity into the market and helps farmers One way is through limiting the number of agricultural commodity futures markets and other participants to offset their futures contracts that one participant, other looking for profits, both from traditional exposure to future price fluctuations in the than a participant eligible for hedge institutions such as hedge funds and physical commodity markets. However, exemption, can hold, thereby limiting the pension funds and from newer speculation can sometimes play a perverse ability of a single participant to influence the commodity-linked and exchange-traded role in markets. For example, excessive market. However, this is risky as excessive funds. Global trading activity in futures levels of speculation can lead to sudden or regulation may drive speculators out of the and options combined has more than unreasonable fluctuations or unwarranted market, depriving it of liquidity. doubled in the last five years. In the first changes (in one particular direction) in nine months of 2007, this activity grew by

The State of Agricultural Commodity Markets 2009 21 What happened to world food prices and why? (and expected) upward demand (and expected)upwarddemand fundamental variablesmanifest agradual income growth.Inmostcases, thesetwo in foodmarketsarepopulation and biofuel factor, themaindriversofdemand is because,asidefromtheemerging general neitherrapidnorunexpected.This supply, changesonthedemandsidearein in worldfoodpricesarefew. Unlikewith side, factorscontributingtotherecentrise policies bymajortraders.Onthedemand policy measuressuchasrestrictiveexport andto are relatedtoproductionshortfalls and the supplysidetendtobeshort-lived principal driversofincreasingpriceson for thefoodpricehikecanbefound.The demand sidethatplausibleexplanations cereals andoilseeds.Itisprimarilyonthe major commoditymarkets,notably and demandimbalancesinmanyofthe reason forthisdevelopmentwassupply significant spikesincethe1970s.The 2008, canbecharacterizedasthemost food, whichpeakedinthefirsthalfof The sharpjumpintheUSdollarpricesof soaring foodprices No singleexplanationfor regulation. have evenconsideredadditional totheextentthatsomecountries concern influencing foodpricesisamatterof role, ifany, offinancialinvestorsin research isneeded.Inthemeantime, increased volatility. Again,further high foodpricesandtheirapparently explanation atleastforthepersistenceof inflows offundscouldprovideafurther research.Large causality requiresfurther agricultural commodities.Thisquestionof investment fundsintofuturesmarketsfor prices thatwereencouraginginflowsof concluded thatingeneralitwasthehigh Fund(IMF) Monetary International increasing anyway. Arecentstudybythe was attractedbypricesthatwere commodities wasdrivingpriceshigheror whether speculationonagricultural speculation. However, itisnotclear increases infoodpriceswithincreased has ledsomeanalyststoconnectthe commodity marketsinthelastfewyears speculative activityinagricultural the physicalmarkets.Thishighlevelof increase inpricesofthesecommodities soybean marketscoincidedwiththe commercial tradersinmaize,wheatand The increaseinthesharesofnon- The State of Agricultural Commodity Markets 2009 markets andprices. future valuesofkeyvariablesaffecting the basis ofassumptionsconcerning onthe projections overthemediumterm model isusedtogeneratemarket model ofworldagriculturalmarkets.This with theOECD–FAO Aglink-Cosimo factors canbegleanedfromsimulations impacts onfoodpricesofthevarious and oilpricesastheprincipaldrivers. evidence doespointtobiofueldemand isproblematic,the their separateeffects dramatic changes.Whiledisentangling combination thataccountsforthe movements. Itistheircoincidenceand andextentofrecentprice the pattern commonly citedcannotofitselfexplain factor. Eachoneofthosecauses cannot beattributedtoanyonesingle increase infoodpricesonworldmarkets increased demandforstocks.Thesharp prices mightgoevenhigherandby also fromthedemandsidebyfearsthat pressure onpriceshasbeenreinforced costs.Upward production andtransport impact intheirownrightbydrivingup development buthavealsohadamajor have increasedinterestinbiofuel 2007 andearly2008.Recordoilprices explain theextentofpriceincreasesin However, biofueldemandalonecannot frompastexperience. major departure demand forbiofuelfeedstocksmarksa caused them.Onlytherapidexpansionin followed theincreasingpricesthantohave investment fundsaremorelikelytohave by markets.Speculationandinflowsof merited thekindofpriceriseswitnessed unexpected increasethatwouldhave demand exhibitedanysuddenor from thistrendinthatneitherfoodnorfeed recent high-priceperioddoesnotdepart supply toadjust.Thesituationduringthe progression and,inthisway, allowfor variables. driven by elasticities, technical parameters and policy is model the type, this of models most As included. sugar and palm oil. Ethanol and biodiesel are also now the main temperate-zone commodities as well as rice, for regions and countries trading and producing major and policy-specific representation of 58 of the world’s Cosimo provides a comprehensive dynamic economic Outlook 2008–2017 described in more detail in are scenarios These OECD. the FAO of and project 3 assumptions and comparing the resulting assumptions andcomparingtheresulting Aglink-Cosimo is a partial equilibrium model, a joint ajoint model, equilibrium apartial is Aglink-Cosimo Some broad indication of the relative Some broadindicationoftherelative ( OECD – FAO, 2008 ). Aglink- ). 2008 FAO, – OECD ( 3 OECD–FAO Agricultural OECD–FAO Agricultural Varying these 22 Sensitivity of projected world prices to changes in five key assumptions, Cereal production in 2007 percentage difference from baseline values, 2017 and 2008

Percentage Million tonnes 0 1 400

0.9% -10 1 200

-20 11.0% 1 000

-30 800 -40

600 -1.6% -50 Wheat Maize 400 Scenario 1: Biofuel production constant at 2007 level Developed Developing Developing Scenario 2: Scenario 1 and oil price constant at 2007 level (US$72) countries countries countries Scenario 3: Scenario 2 and lower income growth in EE5* countries (half annual growth rate) excluding BIC* Scenario 4: Scenario 3 and exchange rate over held constant at 2005 level 2007 estimate 2008 forecast Scenario 5: Scenario 4 and yields for wheat, oilseeds and coarse grains 5% higher than over the projection period * BIC: Brazil, India and China (mainland). * EE5: Brazil, China, India, Indonesia and South Africa. Sources: FAO and OECD. Source: FAO.

Cereal production in developing projections gives an indication of the vegetable oils, reflecting presumably a and developed countries strength of each influence. The five key much higher income elasticity of the assumptions examined were: (i) biofuel demand and a greater influence of the five Million tonnes use of grains and oilseeds; (ii) petroleum countries in world trade, the simulated 1 300 prices; (iii) income growth in major price difference exceeds 10 percent. A Developing developing economies: Brazil, China, fourth scenario simulating a stronger countries 1 100 India, Indonesia and South Africa (EE5); US dollar raises prices in domestic (iv) the exchange rate of the US dollar currency terms in exporting countries, 900 relative to the currencies of all other providing greater incentives to increase Developed countries; and (v) yields. supplies. At the same time, a stronger countries For coarse grains and vegetable oil, the US dollar reduces the import demand in 700 price outlook would be most affected if importing countries. The combination of biofuel production were to remain constant greater export supply and weaker import 500 at 2007 levels. Changes in demand for demand puts additional downward these commodities as feedstocks for pressure on world prices. By 2017, wheat, 300 biofuel production are a source of coarse grain and vegetable oil prices would 65 70 75 80 85 90 95 00 05 08* * Forecast. Source: FAO. uncertainty irrespective of whether the all be some 5 percent below the cause is an oil price change, a change in corresponding baseline projection. The biofuel support policies or a new scenario under which cereals and oilseeds technological development that leads yields are assumed to be 5 percent higher expansion in global production of cereals. processors to buy different feedstocks. leads to projected wheat and maize prices However, this supply response has been Holding biofuel production constant at its for 2017 that are 6 and 8 percent lower, concentrated mostly in the developed 2007 level results in a 12-percent decline in respectively, than the corresponding countries and, among developing the 2017 projected prices for coarse grains baseline value, but make little difference to countries, Brazil, China and India. With the and around 15 percent in the projected projected vegetable oil prices. exception of these three, cereal price of vegetable oil. The second scenario production actually fell between 2007 and shows that wheat, coarse grains and Why have prices fallen? 2008 in developing countries. Therefore, it vegetable oil price projections are all highly is clear that high food prices were not an sensitive to petroleum-price assumptions The sharp fall in international food prices opportunity seized by the majority of poor and would be a further 8–10 percent lower since July 2008 has reversed their equally farmers in developing countries – their if oil prices fell to their 2007 level. The sharp rise up to that point and pushed supply response was limited in 2007 and reduced gross domestic product (GDP) them back towards their 2007 levels. The virtually zero in 2008. Falling food prices growth scenario produces wheat and underlying causes of the reversal are a have little to do with increasing global coarse grains prices that are only modestly mixture of supply and demand factors. supplies. The explanation lies more in (1–2 percent) below the baseline. For High prices have encouraged an terms of slowing demand as the financial

The State of Agricultural Commodity Markets 2009 23 What happened to world food prices and why? factors that underlay the high-price factors thatunderlaythehigh-price problems aresolved.Mostofthe critical as implyingthattheglobalfood system’s for consumers,theyshouldnot betaken prices arealsobeingaffected. raw materialssuchasrubber, butfood on themarketsandpricesofagricultural been havingmostimpact,atleastinitially, have tumbled.Thedecliningdemandhas reduced economicactivityandoilprices crisis andemergingglobalrecessionhave absence ofasimilarorstronger decrease in balance ofpaymentsproblems inthe materials andtropical products willface countries dependentonexportsofraw and demandismaintained.Developing be less,asconsumptionlevelsare defended impact onbasicfoodssuchascereals may income elasticitiesare relatively higher. The hit, followedbylivestockproducts forwhich rubber andfibres willbehardest andfastest prices of,rawmaterialssuchasnatural recessions suggeststhatdemandfor, and will benegative.Experienceofprevious the nearfuture. developing countryagriculturalprospects in agricultural commoditymarketsand growth willbethemajorinfluenceon However, thereduction inglobaleconomic funding,includingaid. other external of credit andchangesintheavailabilityof changes, changesintheavailabilityandcost and demandbutalsothrough exchangerate through reduction ineconomicgrowth rates demand sideandthesupplyside,notonly and priceswillbeaffected onboththe the firsthalfof2008.Agriculturalmarkets overshooting ofpricesupwards in2007and expected marketadjustmentstoapparent impacts ofthecrisisandrecession from the prices. However, itisdifficulttoseparatethe to thedramaticfallinagriculturalcommodity global recession haveobviouslycontributed financial crisisand,more significantly, the reduced tozero orevennegative.The growth inmajordevelopedeconomies recession hasaccumulatedwithprojected 3.8 percent in2008.Evidenceofglobal only 2percent in2009compared with The globaleconomyisexpectedtogrow by The financialcrisis,recession andagriculturalcommodityprices While falling food prices are good news While fallingfoodpricesaregoodnews The impactsondemandforcommodities The State of Agricultural Commodity Markets 2009 fallen and new ethanol production fallen andnewethanolproduction remains strongasfeedstockprices have have fallendrastically, biofueldemand five-year average.Althoughoil prices ratios forcerealsin2008/09belowtheir stocks arestilllowwiththestock-to-use production elsewhere.Globalcereal expansionof not encouragefurther increase andweakerpriceincentiveswill production hasnotseenanysignificant remain.Developingcountry episode andtheresultingthreattofood for investment,includinginagriculture. workers fall.Remittancesalsoprovide funds employment andincomesofmigrant demand indevelopingcountriesas could haveanindirect impactondomestic inthedevelopedeconomies downturns also highlydependentonremittances, so recession. Manydevelopingcountriesare employment intheeventofworldwide incomes, whichwillfallalongwith consumers dependsonwhathappensto falling pricesare really goodnewsfor scope forrebuilding grainstocks.Whether production mightbeexpected,alsoreducing producers reduced, somecutbackin medium andlongterm.Withincentivesfor to achievegreater foodsecurityinthe producers tomaketheinvestmentsneeded consumers butwillaffect incentivesfor extent ofbiofuelpolicysupport. price movementsrelative tooilandthe However, theneteffect willdependontheir as feedstocksinbiofuelproduction. pressure onpricesforcommoditiesusable Falling oilpriceswillcompounddownward prices butalsoreducing tradevolumes. the downward pressure oninternational is constrainingagriculturaltrade,addingto downwards. Availability ofcredit andliquidity projected growth hasbeenrevised world nowlooklesstenableastheir rapidly growing economiesinthedeveloping growth ratesinChinaandIndiaother might besustainedbycontinuinghigh Hopes thatcommoditydemandandprices are likelytodampenoveralldemandfurther. consequent negativemarketexpectations depend. Theprevailing uncertaintyand the costoffoodimportsonwhichmanyalso Lower pricesingeneralare goodnewsfor 24 Medium-term projections for selected commodity prices

Wheat Maize Rice US$/tonne US$/tonne US$/tonne 400 200 400

300 150 300

200 100 200

100 50 100

0 0 0 1997 2007 2017 1997 2007 2017 1997 2007 2017

Nominal price Real price Source: OECD–FAO, 2008.

capacity comes on line. The impact of pattern of past commodity price the context of low stocks – some have falling oil prices on agricultural prices is behaviours where price spikes have been permanent elements that are expected to complicated. Lower oil prices reduce short-lived and followed by prolonged sustain higher prices over the next ten energy and fertilizer costs but will slumps. More generally, as noted above, years. In particular, the Outlook pointed to compound the downward pressure on with the significant exception of oil prices, biofuel demand and oil prices. While prices of those commodities usable as the factors that contributed to high food globally, and in absolute terms, food and feedstocks as biofuel becomes less prices remain unchanged. Supplies have feed remain the largest sources of demand competitive. The net effect will depend on not increased substantially and stocks growth in agriculture, there is now a fast- the relative price movements between oil remain low. growing demand for feedstock by the and feedstocks, notably maize. The OECD–FAO Agriculture Outlook bioenergy sector. Biofuel demand is the 2008–2017 (OECD–FAO, 2008) indicated largest source of new demand in decades What about that both nominal and real agriculture and is seen as a strong factor the medium term? commodity prices would fall from the underpinning the upward shift in record levels reached in early 2008 but agricultural commodity prices. Biofuels The fall in food prices on international would remain higher over the next decade have forged a new link between markets has been sharp but prices remain compared with the previous one. This agricultural product prices and oil prices, substantially above their average of the decline has already begun, but more which also has the potential to break the last five years. The big question is whether rapidly than expected as a result of the pattern of long-run decline in real prices will fall further or remain at these financial crisis and the downturn in the agricultural commodity prices, at least in historically high levels. Prices fell in the world economy. How long that decline will the medium term. second half of 2008 as dramatically as continue will depend on the speed of they increased in the first half. In either recovery from the recession. However, the case, some overshooting is likely, Outlook argues that among the prime reflecting the much-increased volatility, so factors in the latest price spike – droughts it is difficult to distinguish an adjustment to in key grain-producing regions, increased a new trend. However, some of the factors biofuel feedstock demand, high oil prices, cited as explanations for high prices US dollar depreciation and a changing suggest that they will persist, against the demand structure for commodities, all in

The State of Agricultural Commodity Markets 2009 25 What happened to world food prices and why? The impactsofhighfoodprices impacts. these of discussion adetailed for 2008a) (FAO, poor households had to adjust their food poor householdshadtoadjusttheirfood addressed inpolicyresponses. have agenderdimensionthatneedstobe negative impactsofhighfoodpricesalso onbothcounts,sothe disproportionately most. Female-headedhouseholdsfigure access toassetssuchaslandwhosuffer their incomeonfoodandwhohaveno the poorwhospendlargestshareof itisthepoorestof Whether urbanorrural, that aremostlyengagedinagriculture. households and thisholdsevenforrural especially thepoorarenetbuyersoffood, households inthedevelopingworldand negative. Theevidencesuggeststhatmost which casetheimpactisunequivocally principle bepositive,ornetfoodbuyers,in sellers, inwhichcasetheimpactcould onwhethertheyarenetfood crucially of higherfoodpricesonthepoordepends food marketsmightbeweaker. Theimpact though theirconnectionstointernational even poorarealsoaffected the rural impact ofsoaringfoodprices.However, ofthe highest andconsumersfeelthebrunt foodpricesisprobably international foodandexposureto imported are theareaswheredependenceon mostly concentratedinurbanareas.These soaring foodprices.Thedisturbanceswere aroundtheworldtriggeredby that erupted impact wasthesocialunrestandrioting The mostvisibleindicatorofthisnegative quality, butalsotheirspendingingeneral. ofquantityand consumption interms notonlytheirfood higher pricesaffect 70–80 percentoftheirbudget.Thus, account foratleast50percentandupto the poorindevelopingcountries,foodcan T on consumers The impactsofrisingfoodprices 4 See Faced with sharply rising food prices, Faced withsharplyrisingfoodprices, The State of Food Insecurity in the World 2008 World the in Insecurity Food of State The who rely on purchased food. For who relyonpurchasedfood.For obviously mostsevereforthepoor he impactofhighfoodpricesis 4

The State of Agricultural Commodity Markets 2009

imported cerealsincreased. imported but foods asthecostsofpreferred tomoretraditional consumers returning However, therearealsoinstancesof high levelsofundernourishment. income countries,includingthosewith This trendisthesameformostlow- the resilienceofpercapitaconsumption. use ofthesekeycommoditiesillustrate maize), themostrecentdataonfood tradable staplessuchaswheat,riceand of commodity markets(inparticular spite ofthesoaringpricesinglobal productsandvegetables.In meat, dairy higher-quality foodgroups,including diet awayfrommoreexpensiveand as consumersshifttoacereals-based may evenriseinspiteofincreasingprices groups, percapitacerealconsumption items. Amongthepoorestpopulation expensive foodsandothernon-food reducing theirspendingonmore or tohaveattemptedmaintainitby tohavereducedtheirfoodintake reported Householdsare consumption patterns. Haiti, KenyaandMalawi. income incountriessuchasBangladesh, higher, absorbingmorethanhalfoffamily expenditure inhouseholdbudgets ismuch In developingcountries,theshareoffood shares rangebetween10and20percent. developed countries,foodexpenditure food pricesfuelgeneralinflation.Formost the householdbudget,morerising budget. Thegreatertheshareoffoodin of eachgoodinthetypicalhousehold with theweightsreflectingimportance fixed basketofgoods,includingfood,and changes inthepricesofarepresentative (CPI). Thisisaweightedaverageofthe as measuredbytheconsumerpriceindex component ofthegeneralrateinflation, in foodpricesareanimportant including developedcountries.Changes rate ofinflationinmostcountries, Rising foodpricescontributetotheoverall fuel inflation Rising foodprices 26 In addition to imposing a heavy burden on the cost of living, rising food Selected annual consumer price indices as of September 2008 prices can have further indirect effects on inflation if they prompt pay increases – higher wage demands have been at the Senegal core of several protests. An inflation- Togo targeting central bank might have to curb Ecuador inflationary pressure from higher food Mauritania prices when the effect on non-food prices Philippines is significant, and this would mean raising Niger interest rates. This has become a growing tendency in developing countries, but United Rep. of Tanzania higher interest rates would undermine the Dem. Rep. of the Congo much-needed investment in sectors that Bangladesh provide a path out of poverty for Honduras vulnerable countries, especially the agriculture sector. Zambia Higher food prices mean higher food import bills Mozambique In spite of the recent falls in international food prices, the global cost of imported Sierra Leone basic foodstuffs in 2008 is forecast to Haiti reach more than US$1 trillion, nearly Egypt 25 percent higher than in 2007, driven by Pakistan substantially increased prices of rice, Sudan wheat, coarse grains and vegetable oils Nicaragua and compounded by increased freight costs, which nearly doubled for many Azerbaijan routes. Many of the poorest countries are Sri Lanka food importers, heavily dependent on cereal imports. Higher food prices on Kenya world markets mean higher food import Mongolia bills and a balance of payments problem. 01020 The total cost of food imports for 30 Percentage developing countries was already Source: FAO.

Food import bills of developed Forecast changes Food import bills in 2007 and 2008 and developing countries in global food import bills by type, 2008 over 2007

Million US$ 2007 2008 Index (1998–2000 = 100) 300 350 Rice 300

250 Vegetable oils

200 200 Sugar

150 Coarse grains 100 Meat 100 50 98 99 00 01 02 03 04 05 06 07 08 Wheat World LDCs NFIDCs Developing countries Dairy LIFDCs Developed countries 0 Note: NFIDCs, net food-importing developing Sugar Dairy Meat Oils Cereals countries; LIFDCs, low-income food-deficit countries; 0 20406080100 and fats LDCs, least-developed countries. Percentage Source: FAO. Source: FAO. Source: FAO.

The State of Agricultural Commodity Markets 2009 27 What happened to world food prices and why? things, on whether a country is an isan things, onwhetheracountry commodity pricesdepends,amongother level. are nowmorethandoubletheir2000 income food-deficitcountries(LIFDCs) billsforlow- and annualfoodimport 33 percenthigherin2007than2006, Dem. Rep.oftheCongo Forecast changesinfoodimportbillsofselectedLIFDCs,2008over2007 United Rep.ofTanzania At the national level, the impact of high At thenationallevel,impactofhigh Guinea-Bissau Mozambique Côte d’Ivoire Bangladesh Zimbabwe Mauritania Cameroon Nicaragua Swaziland Honduras Pakistan Lesotho Senegal Somalia Gambia Zambia Guinea Angola Yemen Liberia Eritrea Kenya Benin Niger Togo Haiti 204060800 The State of Agricultural Commodity Markets 2009 materials, for which prices have increased materials, forwhichpriceshaveincreased tropical productsoragriculturalraw of energysupplies)andonexports dietary (in somecasesforupto80percentof on increasinglycostlycerealimports exchange ratepolicy. LIFDCsdependent itstradepolicyand or exports, oranexporter, whatitimports importer Percentage Source: FAO. 28 less, and with currencies linked to or majority of LIFDCs have witnessed a prices increase the funds available to depreciating against the US dollar are decline in the value of their currencies producers for investment, leading to the most vulnerable. The situation of against the US dollar, which has further increased agricultural growth and poverty countries that in addition are food- increased the cost of their food imports. reduction. In this sense, higher food insecure (in the sense of more than These countries find themselves under prices might be considered an opportunity – 30 percent of the population being economic pressure from all sides. at least for windfall gains for some. undernourished) and net fuel importers In addition, the financial crisis could Access to means of production and assets is obviously extremely precarious. There have serious implications for food such as land is a critical factor in are more than 20 developing countries security in many developing countries. determining who reaps the benefits of with these characteristics, at least 16 of The tight credit situation may restrict higher food prices. Large landholders will them in Africa. access by poor countries to finance, thus benefit most. Households highly It is apparent that the most vulnerable limiting their ability to import food. specialized in agriculture are also likely countries bore the highest burden of the LIFDCs in particular can have difficulty winners, although these constitute a increasing cost of imported food, with financing their cereal import needs rather small proportion of the population, total expenditures by LIFDCs some through debt and may face increased relative to the rest. However, will 35 percent higher in 2008 than in 2007 – fiscal pressure. producers respond by increasing supply? the largest annual increase on record. It appears that the high food prices have Compared with other developing Consumers lose but not been an opportunity for most countries, LIFDCs already tend to have do producers gain? developing country farmers and a supply significantly greater current account response has not materialized. As noted deficits as a percentage of their GDPs, Clearly, the impact of high food prices on above, in spite of enormous increases in spend a much greater share of the value of consumers is unequivocally negative. prices, developing countries increased their merchandise exports to import food However, in principle, high prices should their cereal production by less than one and have lower income per head.5 The have been good news for farmers around percent in 2008 and production actually the world. Higher food prices stand to decreased in the vast majority of them. 5 On average, LIFDCs had significantly lower annual improve the incentives for those The hoped-for supply response simply GDP per capita (US$2 213) compared with other producing the particular products failed to materialize. Understanding the developing countries (US$7 453) in the period 2000–04. concerned. In principle, higher food reasons for this and, hence, what needs to be done to promote supply response are crucial strategic and policy issues. These are addressed in detail in Part 2 of Vulnerability of LIFDCs according to risk factors this report.

Current account balance/GDP*

Commercial food import bill/GDP**

Commercial food import bill/merchandise exports***

Import dependence (calorie basis)*

-100 1020304050 Percentage Other developing countries LIFDCs Note: Differences in group means: * = significant at 5% level; ** = not statistically significant; *** = significant at 10% level. Source: FAO.

The State of Agricultural Commodity Markets 2009 29