No respite from high farm prices this decade: report

Published June 17, 2011

| Reuters

By Gus Trompiz

PARIS (Reuters) - World commodity prices will keep up their relentless push higher this decade compared to previous years, supported by burgeoning demand for food and fuel as well as knock-on effects from energy costs, the FAO and OECD said.

"Commodity prices should fall from the highs of early 2011, but in real terms are projected to average up to 20 percent higher for cereals (maize) and up to 30 percent for meats (poultry) over the 2011-20 period compared to the last decade," the report said.

World food prices hit a record high earlier this year, triggered mainly by bad weather, reviving memories of soaring prices in 2007-2008 that sparked riots in countries such as Egypt, Haiti and Cameroon.

G20 agriculture ministers meet in Paris next week.

Most food commodities were set to see increased average prices in real terms versus the past decade while all were expected to rise in nominal terms, the report by the United Nations' Food and Agriculture Organization and the Organization for Economic Cooperation and Development said.

A recovery in agricultural stocks after a drawdown that fueled high prices in 2010/11 will be limited by production constraints such as declining yield growth and rising input costs, the bodies said in their joint Agricultural Outlook 2011-2020 report published on Friday.

Global agricultural output was projected to grow at 1.7 percent annually on average in the next 10 years, down from 2.6 percent in the previous decade, reflecting lower crop growth.

"The global slowdown in projected yield improvements of important crops will continue to exert pressure on international prices," the report said, adding this would be partly offset by productivity gains in emerging countries.

The FAO warned in a separate report last week that a forecast rise in world grain output this year would not be enough to build up stocks and bring much lower prices, even if its world price index has eased from a record high in February.

FEED, FUEL TO DRIVE MAIZE PRICES

Rising costs of inputs like fertilizers and other farm chemicals sensitive to oil prices would also curb output by pressuring profitability, the joint FAO and OECD report said, estimating nominal maize prices would not increase in the period to 2020 when deflated for U.S. production costs.

Like in their joint outlook last year, they pointed to growing use of grains in biofuels as contributing to price pressure by reinforcing a link with energy markets and by raising demand for foodstuffs like maize and vegetable oils.

Together with other international organizations, they have called on the Group of 20 leading economies to end subsidies for biofuels in order to help rein in food costs, adding their voice to a fierce debate over biofuels that has been framed by critics as a question of "food versus fuel."

In their new report the FAO and OECD also reiterated their support for measures to improve productivity, market information, policy coordination and risk management in order to stem price volatility, themes that are set to be endorsed by G20 farm ministers at their meeting next week.

Among cereals, the sharp rise in average prices for maize (corn), linked to robust demand for the crop in both ethanol fuel and animal feed, would outstrip stable wheat prices and cut the price spread between the two crops to close to 1.2 by 2020 versus 1.4 in the previous decade, the FAO and OECD report said.

By 2020 biofuels were projected to absorb 13 percent of global production of coarse grains, primarily maize, 15 percent of vegetable oil and some 30 percent of sugar. Sugar prices were expected to remain higher on average to 2020 versus the previous decade, after coming off a recent 30-year peak, but will see cycles linked to government policies, notably in India, and conditions in top producer and exporter Brazil, the report said.

Meat prices in real terms would also stay on a higher level, supported by growing demand in developing countries and as rising input costs limit price-driven herd expansion.

(Reporting by Gus Trompiz; editing by Eric Onstad and Keiron Henderson)

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