Last week, on the eve of this week's high-level conference on world food security in Rome, the UN's Food and Agriculture Organization (FAO) and the Organization of Economic Cooperation and Development released a report (Agricultural Outlook 2008-2017) on the food crisis that concluded that grain prices may recede from their record highs, but warned that there are "...permanent factors underpinning prices that will work to keep them at higher average levels than in the past."
One of those "permanent factors" is population. The report noted that:
Population dynamics are important determinants of the future global economic environment, directly affecting demand for agricultural commodities. Population growth over the next decade will decline relative to the last 10 years to an average of 1.1% annually to reach approximately 7.4 billion in 2017. The fastest population growth is expected in Africa (annual average above 2%), whereas in Europe, population is expected to essentially stabilise over the coming decade.
Population growth is most pronounced in what the FAO classifies as the Low-Income Food-Deficit Countries (LIFDCs). The danger, of course, is that the rapidly growing LIFDCs will not be able to feed their populations if food prices remain high. In the past year, food riots have broken out in more than a dozen LIFDCs and more riots are anticipated unless grain prices retreat from their record highs.
Last week's FAO/OECD forecast predicted that food prices:
....over the medium term will average substantially above the levels that prevailed in the past 10 years. When the average for 2008 to 2017 is compared with that over 1998 to 2007, beef and pork prices may be some 20% higher; raw and white sugar around 30%; wheat, maize and skim milk powder 40 to 60%; butter and oilseeds more than 60% and vegetable oils over 80%. Over the Outlook period, prices will resume their decline in real terms, albeit at a slower rate. However, the impact of various supply and demand factors on prices will differ across commodities.
....prices may also be more volatile than in the past: stock levels are not expected to be replenished substantially over the Outlook; demand is becoming less sensitive to price changes at the farm level as the commodity share in the final food bill falls and as industrial demand grows; weather conditions and agricultural product supply may become more variable with climate change; and speculative non-commercial investment funds enter or leave agricultural futures markets as profit opportunities dictate.
As sobering at that assessment is, it assumes that the price of oil will fall substantially in the years ahead:
The world oil price assumption underlying this year’s Agricultural Outlook is based on that published in the OECD Economic Outlook n° 82 (December 2007). It assumes prices to slowly increase over the outlook period from USD 90 per barrel in 2008 to USD 104 per barrel by 2017.
In light of the recent spike in oil prices, how realistic is that December 2007 forecast? Long-term futures contracts for delivery oil in 2015 are presently running at about $140 per barrel, substantially above the assumption used in last week's FAO/OECD report. An analyst for Goldman Sachs said last week that oil prices could average $200 a barrel next year. Higher energy prices will translate into higher than anticipated prices for fertilizer and will, likewise, boost the cost of cultivating and transporting crops. Higher energy prices will also boost the growing demand for biofuels and lead to further diversion of croplands to fuel production.
For the foreseeable future, it appears that global food security may be less than secure. Let's see what comes out of the food summit that convened today in Rome.
