Several factors influence 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.