FOCUS

In spite of strong gains in recent weeks, international prices of most agricultural commodities have fallen in 2009 from their 2008 heights, an indication that many markets are slowly returning into balance, in sharp contrast to what was witnessed this time last year. The apparent easing of market conditions is reflected in the benchmark FAO Food Price Index, which has fallen by one-third from last June’s peak.

So far, the improvement has largely concerned cereals, the critical sector for food security, after production in 2008 overshot prior expectations, yielding even larger crops than originally forecast. The increased global production was sufficient to meet demand for food and other uses but also facilitated a replenishment of global reserves to pre-crisis levels. With the new 2009/10 marketing seasons commencing, prospects continue to be positive, as world cereal production is expected to be the second largest ever, after last year’s record.

By contrast, for oilseed products and sugar, production setbacks in major producing countries together with expanding consumption are stirring up prices on world markets. And the surge in soybean quotations in recent weeks, on the back of shrinking world reserves, is emerging as a cause for concern given its strong bearing on food and feed prices. On the other hand, expansions in fish, meat and milk production have coincided with faltering demands, in the wake of slowing or contracting economies and recurring animal diseases. Prices have tumbled, seriously eroding the profitability of the sectors.

The impact of sudden and sharp corrections to high prices of last year in several markets will have major repercussions for many producers. That markets can swiftly swing from shortages into surpluses, especially when trade is thin, is being illustrated by recent developments in the dairy economy, which, following sharp recovery in outputs, has seen prices plummet. The return to the use of export subsidies, following three years of extensive use of export restrictions bears evidence of such extremes.

Lower international prices are largely behind the latest forecast drop in the global food import bills in 2009, by as much as USD 226 billion, with lower expenditures on cereals accounting for over half of the reduction. Despite these welcome declines, the deteriorating economic environment in which the falls are taking place could offset much of the benefit. Eroding purchasing power through a combination of falling incomes and real exchange rates over much of the past twelve months afflicts the affordability of food however cheap it has become on the international market place.
Indeed, concerns over the economic downturn and its potential negative impact on the demand for higher value food, especially livestock and fish products, superseded fears associated with surging prices that prevailed last year. But the growing linkages between the agricultural sector and the energy, financial and currency markets make them increasingly vulnerable to external shocks.

In this connection, a continuation of the weakening of the US Dollar and of the sharp rebound in energy prices, witnessed in recent weeks, could exert renewed upward pressure on international prices. However, barring major crop setbacks, with world staple food stocks at more comfortable levels than in 2008, the food economy looks less vulnerable to those external developments than was the case last year.