OECD-FAO Outlook: growing biofuel demand underpinning higher agriculture prices

Increased demand for biofuels driven by high oil prices is causing fundamental changes to agricultural markets that could drive up world prices for many farm products, according to the new Agricultural Outlook published by the OECD and the United Nations’ Food and Agriculture Organisation (FAO). Continued high petroleum prices thus imply the era of cheap food may be over.

The OECD-FAO Agricultural Outlook 2007-2016 [*.pdf] says current hikes in farm commodity prices were not caused by biofuels, but by temporary factors such as droughts in wheat-growing regions and low stocks. But when the focus turns to the longer term, structural changes are underway which could well maintain relatively high nominal prices for many agricultural products over the coming decade (graph, click to enlarge).

Reduced crop surpluses and a decline in export subsidies are also contributing to these long-term changes in markets. But more important is the growing use of cereals, sugar, oilseed and vegetable oils to produce the fossil fuel substitutes, ethanol and biodiesel. This is underpinning crop prices and, indirectly through higher animal feed costs, also the prices for livestock products.

In the United States, annual maize-based ethanol output is expected to double between 2006 and 2016. In the European Union the amount of oilseeds (mainly rapeseed) used for bio-fuels is set to grow from just over 10 million tonnes to 21 million tonnes over the same period. In Brazil, annual ethanol production is projected to reach some 44 billion litres by 2016 from around 21 billion today. Chinese ethanol output is expected to rise to an annual 3.8 billion litres, a 2 billion-litre increase from current levels.

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The expectation that world market prices have attained a higher plateau may facilitate further policy reform away from price support. This would reduce the need for border protection and would provide flexibility for tariff reductions.

Given that in most temperate zone countries ethanol and biodiesel production are not
economically viable without government support, a different combination of production technologies, biofuel policies and crude oil prices than is assumed in the Outlook could to lead to lower prices than are projected.

The report points out that higher commodity prices are a particular concern for net food importing countries as well as the urban poor. And while higher feedstock prices caused by increased biofuel production benefits feedstock producers, it means extra costs and lower incomes for farmers who need the feedstock to provide animal feed.

Changing trade patterns
The Outlook also says trade patterns are changing. Production and consumption of agricultural products in general will grow faster in the developing countries than in the developed economies - especially for beef, pork, butter, skimmed milk powder and sugar. OECD countries are expected to lose export shares for nearly all the main farm commodities. Nevertheless, they continue to dominate exports for wheat, coarse grains and dairy products.

World agricultural trade, measured by global imports, is expected to grow for all the main commodities covered in the Outlook, but less rapidly than for non-agricultural trade as import protection is assumed to continue to limit expansion. Nevertheless, trade in beef, pork and whole milk powder is expected grow by more than 50% over the next 10 years, coarse grains trade by 13% and wheat by 17%. Trade in vegetable oils is projected to increase by nearly 70%.

The growing presence on export markets of Argentina and Brazil is staggering. While Brazil’s growth is mostly concentrated in sugar, oilseeds and meats, Argentina’s export performance also covers cereals and many dairy products. Other growing exporters in the developing and transition economies include Russia and the Ukraine for coarse grains, Vietnam and Thailand for rice, Indonesia and Thailand for vegetable oils, and Thailand, Malaysia, India and China for poultry.

Import growth is much more widely spread across countries. However, China’s dominance of oilseeds and oilseed products trade is striking. By 2016, China will have become the world’s largest importer of oilseed meals and it will have further consolidated its leading position in imports of oils and oilseeds. For the latter product, its share in global imports will have risen to almost 50%.

References:
Biopact: Growing biofuel demand underpinning higher agriculture prices, says joint OECD-FAO report - July 04, 2007.

OECD, FAO: Agricultural Outlook 2007-2016 - July 2007.