Demand: global growth to slowdown

Compared to previous peaks, international food commodity prices are projected to remain low over the next decade, with demand growth in a number of emerging economies expected to slow down considerably and biofuel policies to have a diminished impact on markets, according to the latest edition of the OECDFAO Agricultural Outlook 2017-2026, published in July. Over the outlook period (2017-2026), growth in the demand for virtually all the commodities covered by the report is projected lower than the previous decade.

Over the last decade, the increase in the demand for agricultural products was driven by two main factors: China and the biofuels sector. In China, income growth pushed up food demand, in particular for meat. In the developed world, while the demand for food stagnated, biofuel support policies strengthened the global demand for maize, sugarcane and vegetable oils.

Globally, per capita food consumption of cereals is expected to be flat until 2026, with growth expected only in least developed countries (LDCs). Prospects for expansion in meat demand are likely to be limited based on recent trends observed in many countries around the globe, where dietary preferences, low relative incomes and supply-side constraints are affecting consumption growth. It also foreseen that additional calorie and protein intakes will come from vegetable oils, sugar and dairy products.

As regards biofuels, the demand for ethanol and biodiesel has weakened as a result of lower fossil fuel prices and fewer policy incentives by governments. Even though energy prices are projected to increase over the coming years, the demand for biofuel feedstocks, particularly maize and sugarcane for ethanol and vegetable oil for biodiesel, is projected to grow slowly, except in some developing countries where demand increases will be induced by policies.

Production: yield growth to drive global crop output

Over the next decade, expansion in crop production will be mostly attained by increasing yields. World production of cereals is projected to increase by about 1 percent per annum, leading to a total increase by 2026 of 11 percent for wheat, 14 percent for maize and 13 percent for rice, with the bulk of the additional output to occur through higher crop yields. The global area cultivated to cereals is projected to increase only marginally, while for soybeans a further expansion of area is foreseen in order to meet the increased demand for animal feed and vegetable oil.

Growth in crop yields is expected to satisfy most of the increasing demand for cereals over the next decade. However, yields may show wide year-to-year variations, depending on weather and climate conditions, such as the El Niño phenomenon. But this is not new. In 2012, for instance, maize yields in the United States fell by 12 percent compared to 2011, reducing the US share in world maize production from 35 to 31 percent. By 2013, US maize yields had fully returned to their long Term trend. Such events can have direct impacts on international prices.

By contrast to the cereals sector, future growth in meat and dairy products will be achieved from both larger herds and higher yields (output per animal). Growth in poultry production is projected to account for almost half of the expansion in total meat production over the decade. Milk production is expected to accelerate compared to the 2007-2016 decade, with a greater share of the growth driven by increases in dairy herds. Production of processed dairy products is projected to grow annually between 1.4 percent for cheese and 2 percent for skim milk powder.

Trade: growth to continue but at a slower rate

Future trade in agricultural commodities is projected to continue to increase, but at a slower rate than in the past. Along with global supply and demand, trade is expected to expand less over the next 10 years than in the previous decade. The slower growth is most apparent for cereals and oilseed, which together account for about 45 percent of the global value of agricultural trade. Modest increases in trade volumes are expected for sugar, sheep meat, butter and cotton.

The slowdown in agricultural trade is not an isolated phenomenon. The growth of global merchandise trade (including agricultural and non-agriculture goods) has been slowing down due primarily to lower GDP growth. Potential reasons for this include: reduced demand growth; slower growth in global supply chain formation; and stagnation in trade reforms. The pace of policy reforms following the Uruguay Round have diminished, and some countries are actually pursuing self-sufficiency, especially in staple crops, to reduce dependency on imports. Removing distortionary domestic production and trade-related policies could stimulate global trade.

Food imports are becoming increasingly important for food security, particularly in Sub-Saharan Africa, North Africa and the Middle East. While for some countries this may reflect increasing demand but insufficient natural resources to grow food domestically, for other countries it may be an indication of agricultural development problems that need urgent attention.

On the export side, agricultural exports are traditionally concentrated among a small number of countries. The largest five exporting countries typically account for 70 percent or more of global export volumes. This export concentration is expected to persist over the next decade. The highest five-country concentration ratio is projected for soybeans, at 95 percent. The concentration ratio for rice is projected at over 80 percent and that of wheat at about 75 percent.

The increased concentration of food exports among a small number of countries may imply a greater susceptibility of world markets to supply shocks, whether stemming from a natural or a policy factor, rather than demand shocks.

World prices: real prices expected to remain at or below current levels

Under the baseline projections of supply and demand conditions, international real prices of most agricultural commodities over the next 10 years are anticipated to follow a slightly declining trend, which would keep them below the peaks reached during the 2006-16 period but above the levels seen in the early 2000s.

However, it must be noted that agricultural prices are by nature subject to considerable volatility and may show large swings from one year to the next. It is essential, in this regard, that governments and all relevant actors continue their efforts to provide stability to world agricultural markets. This should lend more confidence in world markets on the side of importers.

The OECD-FAO report could be accessed here: http://www.fao. org/publications/oecd-fao-agricultural-outlook/en/