If you thought that the current spell of low agricultural commodity prices-fuelled by demand destruction as a fallout of the global economic slowdown-will continue for long, then think again. A recent report prepared jointly by Organisation for Economic Cooperation and Development (OECD) and Food and Agricultural Organisation (FAO) said that average crop prices are projected to be 10-20% higher in the period between 2009-2018 as against 1997-2006, while for vegetable oils, prices are expected to be more than 30% higher.
OECD and FAO feel that the recent period of economic prosperity and relative income inelastic demand for food will keep agriculture better off despite significant impact of the global financial crisis and economic downturn on all sectors of the economy.
?Reduction in agricultural prices, production and consumption, associated with lower incomes is likely to be moderate, as long as economic recovery begins within 2-3 years,? the report titled ?OECD-FAO Agricultural Outlook 2009-2018?, released on Wednesday in Paris said.
The report said that meat prices in real terms are not expected to surpass the 1997-2006 average, while reduced consumer incomes in the beginning of the projection period will tend to encourage substitution to cheaper meats, favouring poultry over beef. Average dairy prices in real terms are likely to be slightly higher in 2009-18 relative to 1997-2006, driven by rising energy and vegetable oil prices, with a 12% increase in average butter prices being the most notable.
Conversely, the study also reveals that prolonged recession in major world economies, demand for higher cost livestock products, such as beef, pork and dairy, would be the most seriously affected.
?Beef prices would be about 9% below those projected in the baseline, while among cereals, maize prices were the most likely to be responsive to lower GDP, reflecting its use primarily as a feed ingredient rather than a biofuel feedstock,? the report said. On the impact of emerging economies like India and China, widely believed to recover the fastest from the economic downturn, on food prices, the report said that once recovery begins most of the growth in farm production and consumption will continue to come from developing countries. This is particularly evident for livestock products where the primary drivers are income and population growth, with a trend towards higher animal protein diets and continuing urbanisation.
The report also said that if crude oil prices increased to the $90 to $100+ per barrel level, agricultural prices would be significantly higher; with the largest impact on crops, driven mainly by reduced crop production with higher input costs, but also increased feedstock demand for biofuels.