Wageningen, The Netherlands
June 17, 2008
Source:
Wageningen UR
A complex of factors underlies the current, high food prices.
The effects of speculation around food crops should not be
overestimated nor should the influence of biofuels on world food
prices. In time, food prices will again decline. These are some
of the recent and most important conclusions in an economic
analysis of the development in world food prices from experts at
Wageningen University and Research Centre in the Netherlands.
Wageningen UR asked a number of experts to contribute to the
national and international discussion by offering analysis from
different perspectives. A first memorandum on the analysis of
the recent price increases has already been presented.
Influence on price formation
The long-term trend of world food prices is declining. This is
happening because, among other things, technological
developments are pushing up the production per hectare and that,
in turn, is pushing the prices down, researchers argue. Now and
then brief peaks occur in food prices. It seems that the current
wave of price surges is such a peak. The current peaks in the
prices are lower than the peak in the food prices in the 1970s,
which was the result of the oil crisis. Of course, the trend can
change, but the expectation is that the response to the current,
high prices will again cause a decline.
The effects of speculative investments in food crops should not
be overestimated. On the one hand, they can lead to a quick
increase in prices. However, on the other hand, if a decrease in
prices starts, the same investments will lead to a quick fall in
prices.
A large number of factors influence the current price
development:
- Poor harvests have caused
low wheat and barley yields in Australia, the Ukraine and
Europe. The stores of these grains are running out, and the
current barley and wheat prices are high.
- High maize yields led to a
world-wide increase of the total grain harvest in 2007.
Because of this, maize prices remained relatively low. Only
very recently have increases in maize prices been detected.
- High energy prices lead to
high costs for artificial fertilizers and fuel, among other
things. Higher transport costs lead to price effects for
transport over long distances.
- Argentine, Kazakhstan,
India, Vietnam and Egypt have levied export taxes to protect
their own food supply. This has pushed up prices on the
world market.
- The production limitations
for food products in the EU have pushed up prices.
- In the past, the low
prices for food production were not an incentive to invest
in technology that increased production.
- The demand in Europe and
North America is stable, but the demand is growing in Asian
countries as a result of income developments and changes in
diet.
- The demand for
agricultural products for the production of biofuels has a
small effect:
- Only 5 per cent of the
oilseeds goes to biodiesel or directly to the transport
sector;
- 4.5 per cent of the
grain production is used for ethanol.
Although this is a marginal
demand, it still has an influence on the development of prices
on the world market because the supply of food products on the
world market is relatively small. At the same time, the
increasing prices cause a decreasing demand from the biofuel
sector because biofuel production is increasingly unprofitable.
Price pressure
In the opinion of the Wageningen UR experts, a number of
developments will appear in response to the high prices. These
developments will, most likely, cause a downward push.
- The high prices will
lead to the use of agricultural land that is currently
not in production. Huge potential exists particularly in
Brazil and Russia. In other countries, production will
be intensified, and this will lead to a decrease in
prices.
- Because of the high
prices, investments in R & D and technology will again
become profitable.
- To dampen price
instability, strategic stocks are indispensable.
- The influence of the
biofuel directives on the development of world food
prices is relative and depends on the technological
developments around the production of biobased
commodities. The investments in second generation
biobased production are important because the production
of second generation biobased products does not use the
direct food product but the whole plant.
The development of the oil price
is significant in predicting the demand from the biofuel sector.
In the current price relation between oil and biofuels, biofuels
are not profitable. With this price relation, the volume of the
biofuel market will be limited to the commitments in the biofuel
directive. With a relatively high oil price, biofuels can become
competitive: the food and fuel markets will then be further
integrated and the food prices will be determined, to a greater
extent, by the oil price.
Unpredictable movements in food prices can still provide
problems in the future. With high prices, the consequences in
terms of hunger or malnutrition especially in poor areas will
surface, and with low prices, the consequence for poor farmers
will be large. In poorer areas of the world, the expenditure for
food makes up, on average, about 50 per cent of an individual's
disposable income. As such, price increases in these regions
have dramatic effects. This percentage climbs to 65 per cent if
the food prices rise by 30 per cent. In the wealthy lands, these
effects, on the other hand, will be limited to 1 to 2 per cent
of an individual's income.
Apart from this, the researchers state in their report that the
hunger issue is, however, only partially attributable to the
demand for biofuels and is much more attributable to bad policy
and the poor performance of the markets. |
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