Agriculture Production and Prices

Stephen DeAngelis

October 30, 2009

This is the third post in a series dealing with agriculture and food security. In the first and second posts of the series, entitled Agriculture Old and New and Agriculture: The Bumpy Road Ahead, I noted that some analysts believe that global warming will make it harder to feed the 9 billion people who are expected to live on earth by 2050. I also noted that food prices are so variable that farmers often have a difficult time making a living when prices decrease and the poor have a difficult time feeding their families when they increase. This recession has been unusual in the fact that some food prices have actually risen as the global economy has collapsed. Unfortunately, those rising food prices have affected most those least able to absorb the increases. In the meantime, dairy farmers in Europe are dumping milk into the streets. Ross Tieman reports on this mixed picture [“Forecast is for prolonged high after cool spell,” Financial Times, 16 October 2009]. He writes:

“After their unprecedented highs in early 2008, the price of commodity foods has fallen sharply. European farmers are again pouring away milk in protest at collapsing prices, lamenting year-on-year cuts of up to 20 per cent in their incomes, and demanding government intervention. Yet high food prices, which provoked street protests in developing countries, and export bans by some producers less than two years ago, have not gone away.”

Tieman reports that analysts believe that food prices will continue to rise but not as sharply as they did in 2007-2008. He continues:

“A joint report from the Organisation for Economic Co-operation and Development and the Food and Agriculture Organisation (FAO) of the United Nations projects that food commodity prices will be 10 to 20 per cent higher in real terms in the decade ahead than during the 10 years preceding 2006. Prices of vegetable oils are expected to be more than 30 per cent higher. Even the price of butter, note European farmers, is expected to rise 12 per cent. But the price of meat may remain below its long-term average if the economic recovery is slow, the report concluded, because slow income growth will delay the pace at which some consumers trade up to higher-protein foods.”

As noted above, the pricing picture is mixed. Overall, Tieman reports, “price falls for many internationally-traded commodity foods have been steep. From an average of 191 in early 2008, the FAO’s food price index fell to 153 in September this year.” This decrease was led by cereals (whose index fell from 238 to 158) and dairy (whose index is down to 144, from 220). The meat index is down slightly from its September 2008 peak of 137 and now sits at 120. Tieman continues:

“In theory, this makes food more affordable for the world’s poor, and cuts costs for nations that buy staple foods on world markets to top up inadequate home-grown supplies. But the period of price consolidation has also been accompanied by greater differentiation, says [Abah Ofon, agricultural commodities strategist at Standard Chartered]. One reason cereal prices have fallen is because farmers surprised experts by responding to higher prices with a 7 per cent increase in output during 2008. Such increases may not be sustainable. Falling prices deter farmers: the FAO predicts a 3.4 per cent fall in world cereal production this year, because less has been planted in developed countries, and yields may be lower too. Prices of sugar, wheat, maize and soy beans have all increased in 2009.”

Sugar prices illustrate why some prices go up while so many other commodity food prices are down.

“White sugar prices hit 28-year highs of $539 a tonne in August, up more than 75 per cent since January. The explanation illustrates the complexity of factors at work. India consumed 24.3m tonnes of sugar in 2008, nearly 15 per cent of global demand. But farmers in India, the world’s second-largest producer, planted less after their government’s export ban led to price falls in 2008. This year, their output has been hit by poor rains: expectations that India will import more sugar have helped push up global prices.”

Rising prices of edible oils was of particular concern during the 2007-8 food crisis. Although some prices have begun to fall, the decreases haven’t been dramatic and some edible oil prices have continued to rise.

“Edible oils … have fallen markedly less than those of other food commodities. Palm oil, for example, which finds its biggest markets in China and India, has seen its prices rise to M$2,150 per tonne ($632) in October; Mr Ofon expects them to reach M$3,000 per tonne next year. Edible oils are easily converted into biofuels meaning people now have to compete with cars to consume them.”

Another factor that affects food prices is geography. Logic tells you that food grown close to markets will be cheaper than food that must be transported great distances and that fresh foods should be cheaper than processed foods. What a commodities trader in Chicago sees can be much different than what a consumer in Africa sees. Tieman explains:

“Changes in international commodity prices are often not mirrored by falls in prices in national markets. The price of maize futures traded in Chicago this week (October 12) were little changed from June 2007, at $3.71 a bushel. Yet according to the FAO, in Uganda and Kenya, prices of maize in June this year were almost double their level of two years earlier. Henri Josserand, head of global information and early warning systems at the FAO in Rome, says: ‘There are big differences between international commodity prices and the scale of falls in domestic prices in many regions. Almost nowhere in the world have they come down as much as the international commodity prices.’ Not only do prices in many countries lag behind falls in internationally-traded commodity prices, but market imperfections, government policies and other factors may mean the poor are paying very different prices from their peers in developed countries.”

In my discussions about Development-in-a-Box™, I often stress the importance of basic infrastructure for attracting foreign direct investment. Infrastructure is a critical piece often missing in the agricultural sector of developing countries. Crops must get to market and, if plentiful, must be stored in warehouses. Too often, however, roads are bad, warehouses non-existent, and ports inefficient. As Tieman puts it, globally “farming is under-invested, and the infrastructure to connect producers with global markets is inadequate.” The solution, he claims, is simple: “Only investment in farming will fix the problem of the supply of commodity foods.”

One of the most controversial methods proposed for increasing food production is genetically modifying plants. Some scientists want to modify plants to resist certain diseases, others want to modify plants to furnish consumers with nutritional benefits not normally provides by unmodified plants. Regardless of the motives, many people are concerned about the unintended consequences of introducing genetically-modified (GM) food into the food chain [“Genetic engineering conquers new ground,” by Clive Cookson, Financial Times, 16 October 2009]. Cookson reports:

“The European Union may still be resisting genetically-modified crops but GM plants continue to spread across farmland elsewhere. The leading annual survey of GM in agriculture, published earlier this year by the International Service for the Acquisition of Agri-Biotech Applications (ISAAA), showed the worldwide area of ‘biotech crops’ increasing from 114m hectares in 2007 to 125m ha in 2008, producing a harvest worth $7.5bn. The number of farmers planting GM crops rose from 12m in 22 countries to 13.3m in 25 countries. Clive James, ISAAA chairman, says the most significant development last year was the first commercial planting of biotech crops in two African countries: maize in Egypt and cotton in Burkina Faso. Both crops contain Bt genes from bacteria, which kill insect pests. In 2007, South Africa had been the only country on the continent with GM plants: cotton, maize and soya.”

When one considers that there are 194 countries in the world, the fact that only 25 of them grow GM crops highlights the fact that many people remain skeptical of such crops. James believes that as more countries demonstrate success with GM crops, resistance to them will diminish.

“Mr James, a strong supporter of GM in agriculture, says: ‘Future growth prospects [in Africa] are encouraging. The positive experiences in these new regional footholds will help lead the way for neighbouring countries to learn by example.’ The third country where GM crops were planted for the first time last year was Bolivia, where farmers grew herbicide-resistant soya; it is the ninth country in Latin America to adopt the technology. One new GM crop, herbicide-resistant sugar beet, was launched last year in the US and Canada.”

The United States has more acres devoted to GM crops than any other country (nearly half of the world’s GM acreage). Cookson reports that many of these GM crops use “stacked traits” plants.

“Produce with ‘stacked traits’ is becoming increasingly important, the ISAAA report shows. These contain two or more genetic modifications in the same plant – usually a combination of herbicide and insect resistance. Planting with stacked traits increased by 23 per cent … in 2008. The ISAAA review argues that biotech crops ‘make an impressive contribution to sustainable agriculture’, by increasing yields of food, fibre and biofuels while reducing agriculture’s environmental footprint.”

I’ll write more about agriculture’s environmental footprint in the next post of this series. That discussion will add to the information introduced in the first post of this series. Cookson’s article provides a good segue to that discussion.

“Another pro-GM report this year, by the UK-based consultancy PG Economics, estimated that biotech crops cut greenhouse gas emissions by the equivalent of 14.2m tonnes of carbon dioxide in 2007. According to PG, biotechnology has reduced the amount of pesticide sprayed on the world’s fields by 8.8 per cent or 359m kg since the first GM crops were commercialised in 1996.”

Proponents of GM crops are quick to point out their benefits, but skeptics believe they ignore the potential drawbacks. Cookson concludes:

“Of course many environmental groups take a very different view of GM crops. Friends of the Earth points out that their cultivation ‘is still confined to a handful of countries with export-oriented intensive farming. ‘The most widely-grown GM crop, soy, is grown mostly as high-protein animal feed for export to the UK and Europe. GM soy monocultures in South America are wiping out forests, causing massive climate emissions and forcing communities off their lands,’ says the environmental campaigner. Today’s four main GM crops are soybeans, maize, cotton and canola (oilseed rape). The most important addition in the near future will be rice – leaving wheat as the biggest crop without commercial GM varieties during the first part of the next decade. … A report published last month by the European Commission’s Joint Research Centre predicts that the number of commercial GM crop varieties will quadruple from about 30 today to 120 in 2015. By then, new traits will be available, including drought tolerance, improved nutritional quality, and optimised oil and starch content. Drought tolerance is likely to be the most important new trait because lack of water is the greatest constraint to increased agricultural productivity worldwide. … An international research team based at the University of Adelaide in Australia announced a significant advance in July, with the development of a GM technique that restricts salt to parts of the plant where it does less damage. By keeping salt away from the growing shoots, the scientists hope to enable plants to grow in conditions too saline for conventional farming.”

I suspect that GM crops will play a significant role in helping feed the world as its population continues to grow. They will be particularly important in developing countries where soil conditions may be poor and rain scarce. Growing crops closer to consumers will help reduce some of the differences found in global commodity prices. That is important in helping provide food security for the poor.