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Low food commodity prices

Ricardo Migueláñez. Agricultural Engineer. @rmiguelanez

The current context of declining food commodity prices in global markets is completely different from the medium-long term outlook, according to which there will be almost 2 billion more mouths to feed on the planet (an increase from 7 to 9 billion people is expected) by 2050 and, as a result, food production will have to expand by 60-70% over current levels, despite soil limitations and the impact of climate change.

It may just be a question of taking this scenario into consideration.The Food and Agriculture Organization of the United Nations (FAO) recently published its monthly report on the Food Price Index, which declined again in April 2015, to 171 points on average, i.e. 2.1 points less than in the previous month (-1.2%), and by 40.5 points (-19.2%) compared with April 2014 (211.5 points), right about when prices started to slide more than a year ago.

Dairy prices declined the most in April, although sugar, cereal and vegetable oil prices also fell. In contrast, meat prices rose for the first time since August 2014. Averaging at 171 points in April, the FAO Food Price Index is at its lowest level since June 2010.

The index is calculated as the average of the abovementioned five commodity group price indices, weighted with the average export shares of each of the groups for 2002-2004.The general index includes a total of 73 price quotations, which FAO basic product specialists believe to be representative of the international prices of food products.

In this regard, the current performance of prices and global supply and demand of food commodities don't align very well, with the result that the aforementioned statement is a potential scenario for the medium and long term. The impression is that the prices of basic foods are declining worldwide as there's still not sufficient growth in demand, as predicted, to absorb the increase in supply in recent years.

In this situation, it's very difficult to explain to the average farmer or stockbreeder that he has a future in the medium and long term, when production in the short term is worth increasingly less and when his margins are constantly reduced since the cost of inputs (goods and services) is increasing, remains stable or, in the best case scenario, declines in price by slightly less than he's able to collect for selling his products.

Beneficiaries

However, the decline in basic food commodities is not entirely bad news. Indubitably it's the consumer who benefits (albeit by less than he should) from these falling prices. This slide in quotations, in the case of basic food commodities such as cereals, oil products and vegetable oils, is also positive for stockbreeders, as it reduces the cost of animal feed, although it could decline much further. The farmers themselves could also benefit from the decline, if they're able to maintain their profitability margins, i.e. raising the production volume, by increasing performance or savings in terms of production costs, with improvements in efficiency.

According to the FAO, the world food import bill is expected to tumble to a five-year low in 2015, dragged down primarily by the decline in international prices, low freight rates, and the strength of the US dollar compared with other currencies, such as the euro. All this, in a scenario where import volumes of the various foods in the import bill changed very little, or even increased.

Low-income countries are also expected to benefit from the lower cost of food imports, on which they are notably dependent so as to be able to feed their indigenous populations.

For the FAO, abundant inventories and accumulated reserves should offset any downward pressure from the slight reduction in global harvests predicted for this year, especially for cereal and oil-crop products.

A "cushioned" impact

Worldwide cereal production is expected to slip by 1.5% from last year's record high, mainly as a result of reduced acreage planted with maize. However, the impact of this slight reduction is expected to be cushioned by "exceptionally high" levels of existing stocks.

As for cereals, including rice, the FAO expects global production of 2.509 billion tonnes in 2015/2016, provided that the weather remains stable for the rest of the season. That figure is slightly lower than the high of 2014, but would be almost 5% higher than the average of the last five years. This lower output would reduce inventories by around 3% in the new season, with a faster decline in coarse grains (maize and other grains to make animal feed) and rice than in wheat.

The FAO expects international food commodity prices to remain under pressure in the new season, due to the abundant supply and a strong US dollar. However, for 2015/2016, currency movements and macroeconomic events may very well have significant implications for food commodities in international markets.

Therefore, factors unrelated to the direct performance of supply and demand of basic foodstuffs would impact prices. In fact, according to the FAO, several years of solid harvests together with stockpiling have resulting in a surplus of the most basic food commodities. As a result, the projected decline in cereal production is not expected to impact availability of food for consumption.

The trend in dairy production is for continued stable growth of close to 2% in 2015, with lower international prices, which will support imports in Africa. The abolition of the European Union's milk quota system is expected to increase output and has been one of the main drivers of the 6.7% decline in April in the Dairy Price Index, according to the FAO.

Moreover, abundant soybean crops will drive strong growth of 5.7% in total oil-crop production in the 2014/15 season. That, together with sliding prices linked to lower demand from the biofuels sector and the increase in inventories, may lead to reduced output in the coming season, according to FAO, which also expects a slight increase in meat and sugar output this year.

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28/06/2017