The OECD-FAO Agricultural Outlook 2016-2025 Report: is this the end of the discourse on “9 billion mouths to feed”?
Momagri Editorial Board
“The period of high agricultural prices is probably coming to an end but we should remain vigilant” this is the message put forward by the OECD and the FAO in the “Agricultural Outlook 2016-2025” annual report early July, which analyses the evolution of agricultural markets.
For both institutions, the prices of agricultural commodities are expected to remain “relatively stable” over the next decade: “The main factors behind lower prices have been several years of robust supply growth, weakening demand growth due to the overall economic slowdown, lower oil prices and further accumulation of already abundant stocks”1.
Key points of the new report
Firstly, it appears that the OECD and the FAO have still not properly developed their analytical framework. Every year the AGLINK general equilibrium model demonstrates its inability to represent the dynamics of agricultural prices and therefore to predict anything at all and though it holds a central position, this is never brought into question. Moreover, the report makes a point this year in predicting stable prices, because this type of model, based on the assumption of market balance, can only predict the evolution of stable prices!
And for good reason: no major sources for instability in agricultural markets are represented in this type of model: expectations are rational (producers know the price of their crop at planting), everything immediately adjusts (there are no fixed costs) and the level of stocks have no role in price formation! The graph below represents most of the wheat price forecasts by the OECD since 1999.
It appears that the forecasts made each year by the OECD are almost linear over a decade when the reality of price changes (black curve) is chaotic. The simple comparison of past forecasts and actually observed prices should be call for more restraint when publishing the results of a model whose assumptions disconnected from the reality of structurally volatile agricultural markets.
This explains why, year after year, the OECD continues to announce stable prices. That it continues to use this type of model and give weak results that are still used as a reference in most international forums, including the European Commission, is an institutional incongruity that must be dealt with.
As a reminder on this subject, Momagri has developed a simulation model to explicitly represent the main sources of instability such as weather, delays between the start of production and harvest, the various forms of storage and even a representation of the financialization of agricultural markets2. For several years, this model has provided more realistic simulations and is an otherwise more serious basis for representing the structural volatility of agricultural markets.
Source : OECD data. Momagri shaping based on J. Ramanantsoa
The second lesson from this report is that it marks a significant break with the widespread discourse of considering the prospect of 9 billion mouths to feed by 2050 as the major factor of the evolution of agricultural markets for coming years. The direct implications of this recital are that prices will be driven up by a growing demand that production will fail to meet for lack of available land in particular.
Furthermore, by professing an insatiable demand, the discourse “of 9 billion mouths to feed by 2050” is often accompanied by radical proposals aimed at ending the principal measures for agricultural policies, be it those for the management of agricultural stocks or those necessary for protecting farmers against low prices.
Of course, we can only applaud such a turnaround: the production potential is important, as proof, studies identified a lot of cultivable land as being uncultivated3 or those based on simple comparisons of crop yields. The fact remains that the updating of recommendations in terms of agricultural policies has yet to be done!
However, one would expect a retrospective analysis on the reasons for the revision. The 2013 version of the report in fact ruled as follows:
“The OECD-FAO Agricultural Outlook 2013-2022 expects prices to remain above historical averages over the medium term for both crop and livestock products due to a combination of slower production growth and stronger demand, including for biofuels4”.
Unfortunately, the new report says nothing of the end of the commodity “super cycle”, of this period of irrational exuberance where the hunger for commodities exceeded the rational foundations of the real economy to be turned into a self-sustaining speculative mimetic belief. This is damaging both for the causes of the crisis in overproduction which took root during the decade of high prices which excessively stimulated investments in production capacity in a context of ample liquidity.
The third lesson of this report appears explicitly in comments reported by Angel Gurria, Secretary General of the OECD, in the official press release5 : "Although we are now witnessing a period of lower agricultural prices, we need to remain alert as changes in markets can take place rapidly.The key priority for governments in the current context is to implement policies that will increase agricultural productivity in a coherent and sustainable way. Getting our agricultural policies right is critical to end hunger and undernourishment in the decades to come."
It would appear that low prices are not a problem and it is simply a matter of boosting production... only to enter into a period of overproduction! These words mark a misunderstanding of the definition of food security, officially established by FAO in 1996: under no circumstances, is the price level a good indicator for food security problems and particularly if we remember that 70% of the malnourished are rural households, prices that are too low directly affect the living conditions of many people, just as prices that are too high also exclude a large part of the world's population to access to food. This shows how the excessive price volatility is a major problem for the future of humanity.
Beyond food security, the report only seems concerned with low prices, but at no point is it contemplated that these prices are, or may become too low. As we have already pointed out6, while a lot of production descends into the crisis overtaking Europe and the world, the word crisis is no longer found in the OECD glossary, as this report confirms.
Ultimately, this report shows the inability of these organizations to think about possible evolutions in agricultural markets and consequently to formulate the appropriate recommendations in terms of agricultural policies. By underestimating the structural instability of agricultural markets and its harmful consequences, they are currently incapable of outlining a possible scenario, that of a general decline in international prices of agricultural produce with in turn, an increase in protectionist measures.
For it is increasingly clear that many governments make such decisions to avoid brutal shocks to the agricultural sector which is often key to their development as well as their political, social and economic stability. And how can we blame them if the institutions that are supposed to reflect on the cooperation between States do not offer them any new perspectives in terms of global governance to address this problem? Consequently, because of too much faith in the stabilizing virtues of markets, these institutions create the conditions for a loss of openness in trade and cooperation between countries; objectives which they should be statutorily focussing on.
2 For a presentation of the model in Risk and Decision Analysis review
3 Read the following study led by Laurence Roudart
6 Read Momagri’s article on this subject “OECD ministerial meeting on agriculture:The Château de la Muette remains deaf to the global agricultural crisis”