Global food prices set to decline

Prices of all major agricultural products are set to decline in real terms over 2015-2024, according to a new global report.

The latest Agricultural Outlook report from the UN’s Food and Agriculture Organisation and the Organisation for Economic Co-operation and Development predicts increased production will push down global food prices, but adds that prices will remain above levels seen before the 2007-2008 surge that heralded a period of high volatility.

“Lower prices have been driven by a combination of supply and demand factors,” said Angel Gurria, OECD secretary general.

“Production has responded rapidly to higher food prices. Whereas cereal production grew by 7% in the eight years before the food price spike, it has grown by 18% in the eight years since — adding over 380 million tonnes to annual supplies.

“At the same time, demand remains subdued by the under-performance of the world economy and the fact that consumption of many products — in particular food staples — is close to saturation point in many parts of the world.

“Lower oil prices have also helped bring down costs, and they have almost eliminated the market incentive to grow crops for biofuel production,” he said.

The average global wheat price is expected to remain under €200 per tonne for the next 10 years.

The report states: “The build-up of high cereal stocks over the past two years, combined with low oil prices, should lead to a further weakening of cereal prices in the short term.

“Slowly rising production costs and sustained demand should strengthen prices again over the medium term,” he said.

Nonetheless, the report also projects that falling oil prices will see many industries shift away from their use of biofuels.

As a result, more grain will be used for animal feed, a boost for meat and dairy production that falls well into changing dietary patterns in emerging economies.

“We see consumption of staples reaching saturation in many countries including many emerging economies,” Jonathan Brooks, an economist at the OECD’s trade and agriculture directorate and one of the report’s authors, told a news conference.

“At the same time we see meat and dairy demand increasing relative to demand for crops, and that will push up meat and dairy prices relative to crop prices,” he said.

Between August 2014 and May 2015, wheat prices plunged 18%, rice prices dropped 14% and maize prices declined 6%. Over the medium term however, slowly rising production costs and sustained demand are expected to strengthen prices again.

For its part, high sugar demand in developing countries is expected to boost prices for the commodity and spur further investment in the sector.

The report suggests that the market outcome will nonetheless hinge on the ongoing competition between the profitability of sugar versus ethanol in Brazil, considered to be the world’s leading producer.