The FAO’s short-term forecasts predict a record world cereal production in 2013; meanwhile the USDA announced that world rice crops reached a record level of 469 million tonnes in 2012 and 2013. But though global production is on the increase, as recently indicated in the OECD/FAO 2022 Agricultural Outlook, supply is still below demand. Thierry Pouch, Head of Economic Studies of the Permanent Assembly of Chambers of Agriculture (APCA), suggests that this might be an opportunity for French agriculture to regain its former glory on international agricultural markets.
However, the task is daunting. Because, as Thierry Pouch reminds us, due to the financialization of agricultural markets, what was true yesterday is no longer true today. It is therefore currently extremely complex to anticipate changes in agricultural prices simply by analysing physical supply and demand, because these markets are structurally unstable and highly volatile.
So it is clear that despite the realities of global agriculture addressed by the OECD and the FAO (price volatility, the dependence of the agricultural sector on markets ...), the only certainty is the intrinsic volatility of agricultural markets and therefor the predictive capacity of forecasts should be used with caution.
momagri Editorial Board
2022 forecasts produced jointly by the OECD and FAO estimate that the global demand for food and agricultural products will remain strong, particularly in emerging countries and to a lesser extent in developing countries.
Global supply on the other hand will evolve at a slower pace than demand.
Could this be a great opportunity for French agriculture to compete in global markets to partially meet this demand?
For many years in agricultural markets, market imbalances were explained by an excess of supply over demand, which maintained prices on a downward trend. In Europe, producers were able to count on instruments implemented under the Common Agricultural Policy to avoid low prices, which could harm their investments and the sustainability of their operations.
With the advent of globalization at the turn of the 1980s – 1990s, the imbalance was reversed. Now, demand is consistently above the global supply of agricultural products and foodstuffs, driving prices upwards. The upward trend which began in 2007 and which corresponds to years of crisis is beneficial for grain and oilseed producers, but has detrimental effects on the users of these products, particularly breeders because of the cost of animal feed.
Six years after the outbreak of the crisis and the concomitant rise in agricultural prices, many question the stability of this trend. To answer this question, the OECD and the FAO invite us to consider the evolution of the global demand for agricultural products and foodstuffs. This macroeconomic indicator is, in fact, considered one of the driving dynamics of agricultural markets.
The contrasting trends in agricultural prices
The rupture that occurred on commodity prices in 2007 generated a vast body of economic literature, which does not seem about to end.
Firstly, because the main factors that triggered the rise had to be sought and prioritized, then their real impact on upward-trends had to be measured, secondly because of ensuing debate.
Much of the debate focused first and foremost on the medium or even long-term stability of rising prices for agricultural raw materials.
While tracing the agricultural outlook, the OECD and the FAO took the option of distinguishing the short-term from the long-term1
According to these two international organizations, agricultural commodity prices are expected to decline in the short-term because of the abundance of crops and the replenishment of global stocks.
This downward trend has been apparent since the beginning of 2013. This price reversal for the year 2013 can only be temporary, as pointed out by the Director General of the FAO at the Ministerial meeting on world prices in Rome on 7th October, inviting players and observers to prepare for new market turmoil.
In contrast, prices are quite stable in the livestock sector, firstly because of the feed costs incurred by farmers, secondly because there is shrinkage in worldwide livestock.
In the longer-term, agricultural prices will remain stable, maintaining levels higher than those recorded before the onset of the 2007 crisis. Therefore, according to the two institutions, we can deduce that price volatility around this trend could continue until 2022.
The origin of price movements should be investigated in the context of the global imbalance of supply and demand.
Over the reference period, the growth rate of the global supply of agricultural products is not high enough to meet the increased demand from emerging and developing countries.
If global agricultural production remains low, it is on the one hand because of high energy prices which increase production costs for farmers (we known that the impact of gas prices on fertilizer is significant) and on the other hand because of yield caps in some parts of the world and finally because of the diminution of arable land world-wide.
Towards historically high prices
The OECD and the FAO have once again called on players and observers to prepare for historically high prices if there is no macroeconomic impact of a similar magnitude to that of 2009 to counteract this trend.
They add that this perspective will be accompanied by periods of sometimes large fluctuations in agricultural prices. In 2022, the price of a tonne of wheat would be set at around $275, while that of a ton of rice would cross the threshold of $470.
One consequence of this upward trend in prices over the long-term lies in the ripple effect it will continue to have on the decision to invest in agricultural production. Such productive investment opportunities arise therefore for producers, opportunities they should seize to innovate.
The OECD and the FAO point out that the global consumption of agricultural and food products remains one of the key drivers of market dynamics. This consumption is largely due to emerging and developing countries, firstly due to population pressure, then the evolution of living standards and the formation of a middle class, and finally the on-going changes in nutritional choices.
However, the originality of the forecasting exercise resides in the long development opportunities granted to Chinese demand. The big question that remains unanswered about China is the following: will the performance achieved by Chinese agriculture since the late 70s continue to meet the growing demand for domestic agricultural and food products?
Overall, China's agricultural production cannot respond to human and animal domestic demand, forcing the authorities to import more and more, or even, and this is not mentioned in the OECD-FAO report, continue its investment in land abroad either by renting or buying agricultural land. This last point is related to the evolution of arable land in China where there is significant erosion.
1 Read the full article (french) by following this link http://www.chambres-agriculture.fr/fileadmin/user_upload/Revue/Article/Revue_1027/Revue_1027_Produits_alimentaires.pdf