At the same time, there is a growing need to improve the sustainable use of available land, water, marine ecosystems, fish stocks, forests, and biodiversity. Some 25% of all agricultural land is highly degraded. Critical water scarcity in agriculture is a fact for many countries. Several fish stocks are over-exploited or at risk. There is a growing consensus that extreme weather events are becoming more frequent and climatic patterns are changing in many parts of the world.
Encouraging better agronomic practices, creating the right commercial, technical and regulatory environment, and strengthening agricultural innovation systems are essential policy challenges identified in this report.
Research conducted by Heffernan maintains the perspective of recent years that agricultural commodity prices will remain on a high plateau throughout the next decade, underpinned by the assumption that oil prices will continue to rise in both nominal and real terms.
The eventual strengthening of global economic growth and stronger demand for agricultural products, even with high and rising oil and energy prices, along with growing biofuel demand and slowing production growth, are expected to help keep the prices of agricultural products at relatively high levels over the outlook period. Higher input costs (such as for fertiliser and chemicals) reflecting increasing oil prices will tend to slow yield and productivity growth, and together with resource pressures on water and land availability for agricultural expansion will cut the pace of production increases and lead to less accumulation of stocks.
While world prices for many agricultural crops are projected to remain high, they will nevertheless decline from 2011 levels in the near term as global production continues to respond to past high prices, stocks rebuild and demand initially grows less rapidly with weaker macroeconomic conditions. Prices of many meat products are high at the start of the outlook period, reflecting reduced livestock inventories and producer margins which have been squeezed over several years by high grain and protein meal prices.
Beyond the near term, stronger demand growth and rising production costs will underpin high commodity prices over the remainder of the outlook period.
Cereal stock-to-use ratios in the decade to 2021 will remain below historical averages, posing the risk of future price volatility.
Despite record cereals production in 2011, international prices remained elevated. The bumper crop helped to replenish stocks and moderate prices in the second half of 2011, but a weakening US dollar and low freight rates bolstered export prices in early 2012.
Grain prices were further supported by excessive cold across much of Europe and the Commonwealth of Independent States (CIS), and the excessive dry conditions that prevailed in the southwest United States and portions of South America. A tight maize supply situation, following last year’s below trend yields in the United States, contributed to the increase in coarse grain prices while deteriorating conditions of the South American soybean crop put additional upward pressure on markets. Early reports revealed the intention of United States farmers to plant 38.8 Mha of maize, a level not seen since 1937, but price movements during planting showed the market bidding for more oilseeds (soybeans) area which could pull plantings down from the initial intentions. Given the low level of maize inventories, markets are expected to remain sensitive to the eventual size and progress of the maize crop in the United States, the world’s largest producer.
Despite significant losses due to floods in the second half of 2011, especially in Thailand, outstanding yields in India and several other major producers lifted world rice production in 2011. Rice prices over the year were very much influenced by the implementation of new polices in Thailand and India.
- By 2021, wheat prices in nominal terms are projected above the previous decade, but below those prices seen during the last two years. Prices in real terms are expected to remain flat to moderately declining from 2012. Coarse grain and rice prices follow a similar pattern with nominal prices dipping in 2012, and then modest growth for the remainder of the period (with declining real prices).
- World cereal production is expected to grow in 2012 as a response to higher returns, increasing gradually during the rest of the projection period. Stocks-to-use ratios will remain below historical averages, potentially adding to price volatility.
- Harvested area for cereals continues expanding, but at a slower pace than in the past. Yield growth prospects are less optimistic and mostly concentrated on maize and rice.
- Trade of wheat and coarse grain increases at a slightly slower pace than in the past. The United States keeps its leading position as maize exporter. The CIS becomes an even more important source of wheat exports by 2021 than in the base period. Trade of rice is expected to increase faster than in the past driven by growing shipments from LDC Asia, in particular Cambodia and Myanmar, and by increasing imports by African countries. Nevertheless, trade in rice remains small compared with other grains.
Poultry is expected to become the largest meat sector in the decade to 2021, according to projections in this edition of the Outlook.
The market situation for the meat sector is characterised by high nominal output prices for all meats, underpinned on the demand side by rapidly growing developing economies and on the supply side by high input costs, notably for feed grain and energy related inputs such as transport and cold chain storage. As feed costs moderate somewhat, increased profitability should assure expansion. These factors tend to favour greater domestic supply responses in developing countries, particularly for cheaper meats and meat cuts (poultry), and also where low input systems, including pasture, predominate.
On the policy front, the prospects of a further opening of international meat trade that may result from the accession to the WTO of the Russian Federation, which is a large importer of poultry and pigmeat, will render a favourable trade environment for the sector. While growth in production and trade is envisaged in the short term for poultry, pig and sheep meats, beef will initially be constrained by herds which have depleted in recent years in major exporting regions.
- The strong rise in feed grain prices in the past five years is now moving substantially through the market chain and, with the exception of poultry where adjustments have largely been made already, is being reflected in higher meat prices. Prices are projected to remain high throughout the next decade, and in real terms about 11%, 17%, and 4% above base period (2009-11) values for bovine, pigmeat, and sheep meat respectively. Real prices for poultry are projected to remain close to current levels. For all meats, real prices are currently at their highest levels of the past 15 to 20 years, and little moderation is expected as long as feed and energy prices remain high.
- Higher prices for meat will induce supply response, albeit limited by higher input costs in addition to competition for land and water. The combined effect of these factors will slow global production growth for meat to 1.8% p.a. in the outlook period compared to 2.2% p.a in the previous decade. Bovine meat production is projected to increase 1.8% on average each year, while that for pigmeat and sheep meat may grow 1.4% and 1.8% respectively. Poultry remains the fastest growing meat sector, with growth projected at 2.2% p.a. Developing countries will increase their share of global production in all meat categories, and by the end of the period will account for 58%, 64%, 63% and 78% of bovine, pig, poultry and sheep meat production respectively. Increasing returns to scale will continue to concentrate production in fewer and larger farm units, not only in developed countries, but increasingly also in emerging countries. This structural change will continue to increase the reliance of meat production on feed grain inputs.
- World meat consumption continues to grow at one of the highest rates among major agricultural commodities. Growth in developing countries will capture 82% of the additional global consumption over the projection period. Per capita consumption will increase by 3.2 kg p.a., with poultry accounting for 70% of this increase. By 2021, consumers in developed countries will eat an extra 3.6 kg of meat per capita relative to the base period, which will also be mostly poultry, except for Eastern Europe where consumption of red meats still has a substantial growth potential.
- Despite strong meat prices through the projection, meat imports by developing countries are expected to increase, driven by population and income growth and high income elasticity of demand. Equally so, strong prices will result in sustained export earnings, which will encourage large meat exporting countries to invest in international meat markets despite the high prevailing incidence of food-safety and sanitary import bans.
The fish sector is expected to enter into a decade of higher prices and higher production, but also higher production costs.
After the recovery in 2010, the seafood sector further expanded in 2011 and early 2012, as evidenced by higher fish production, demand, trade and prices. Preliminary data for 2011 indicate that total fishery production should reach about 154 Mt, with capture fisheries recovering by about 2% and aquaculture further growing by 6% compared to 2010. Total exports of fish and fishery products (including fishmeal and fish oil) set a new record in 2011, reaching over USD 126 billion, 16% more than in 2010.
Due to growing demand, for the first time the average world apparent per capita fish consumption reached 18.8 kg (live weight equivalent). Fish accounted for about 16% of the global intake of animal protein and 6% of all protein consumed.
Fish prices sharply rose during the first part of 2011, decreasing slightly towards the end of the year and into early 2012, but still remaining higher than year earlier levels. The FAO Fish Price Index indicates that current fish prices, on average, are at record highs, with an absolute peak reached in August 2011 (14% more than in August 2010), after which aggregate price levels slightly declined.
Over the past decades, global markets for fish and fish products have changed considerably. This is an ongoing process in which operators along the fisheries value chain (fishers, fish farmers, traders, processors and retailers) seek new opportunities, reduce production costs and profitable investments in an increasingly internationalised business environment. New products and production methods, fragmentation and outsourcing of production processes, and changing value chains are characteristics of the ever evolving nature of global fish markets. The particularity about fisheries is that it is part of a global commons that demands regional and international co-operation to ensure that fish stocks are exploited in a sustainable and responsible way.
- World fisheries and aquaculture production is projected to reach about 172 Mt in 2021, a growth of 15% above the average level for 2009-11. The increase should be mainly driven by aquaculture, which will rise by 33% over the Outlook period compared to the 3% growth of capture fisheries. However, a slowing down of aquaculture growth is anticipated, from an average annual rate of 5.8% in the last decade to 2.4% during the period under review.
- The fish sector is expected to enter into a decade of higher prices, but also higher production costs. Due to the growing prices of fishmeal, fish oil and other feeds, the average price of farmed species should increase slightly more than that for wild fish during the Outlook period.
- Fisheries supply chains will continue to be globalized, with a significant share (34%) of total fishery production being exported.
- Apparent per capita fish consumption is expected to reach 19.6 kg in 2021, 16% more than the average level for 2009-11. Due to high fish prices, fish consumption growth is projected to slow to 0.3% per year over the projection period compared to 1.7% per year over the previous decade.
Biofuel trade is expected to expand in the decade to 2021, with cross trade likely to occur.
World ethanol prices increased strongly in 2011 well above the levels of the 2007/08 highs in a context of strong energy prices, although the commodity prices of ethanol feedstock, mainly sugar and maize, decreased from their peaks in 2010. The two major factors behind this increase were the stagnating ethanol supply in the United States and a drop in Brazilian sugar cane production. Additionally, ethanol production was also significantly below expectations in developing countries having implemented mandates or ambitious targets for the use of biofuels.
World biodiesel prices also increased in 2011. Contrary to the global ethanol market, production did not stagnate in 2011; the four major biodiesel producing regions (the European Union, the United States, Argentina, and Brazil) increased their supply compared to 2010. This increase was moderated by a decreasing biodiesel production in Malaysia (from about 1 Bnl in 2010 to almost nothing in 2011).
- Over the projection period, ethanol and biodiesel prices are expected to remain supported by high crude oil prices and by the implementation and continuation of policies promoting biofuel use. Changes in the implementation of biofuel policies can strongly affect biofuel markets.
- Global ethanol and biodiesel production are projected to expand but at a slower pace than in the past. Ethanol markets are dominated by the United States, Brazil and to a smaller extent the European Union. Biodiesel markets will likely remain dominated by the European Union and followed by the United States, Argentina and Brazil.
- Biofuel trade is anticipated to grow significantly, driven by differential policies among major producing and consuming countries. The United States, Brazil and the European Union policies all “score” fuels differently for meeting their respective policies. This differentiation is likely to lead to additional renewable fuel trade as product is moved to its highest value market, resulting in potential cross trade of ethanol and biodiesel.
Focus: Biofuel mandates in the United States to encourage trade?
There are many uncertainties concerning the future of biofuel policies. An important one concerns the policy options faced by the US Environmental Protection Agency (EPA) in the implementation of the US biofuel policy.
The Outlook report provides a scenario analysis of three alternative policy implementation options that take into account the fact that the cellulosic mandate as defined in the Energy Independence and Security Act of 2007 (EISA) will not be met. Those scenarios have been produced to illustrate the policy space, and not to promote any particular policy option. The results of the scenario can be summarised as follows:
- If the shortfall in the cellulosic mandate in the global US mandate is met by raising the mandate for advanced biofuels or by allowing more corn-based ethanol, the impacts on world prices for biofuels (in particular ethanol) as well as for biofuel feedstocks (coarse grains, sugar cane) are likely to be important. Spill-over effects on other agricultural commodity prices (including meat and fish) would occur.
- Meeting the adjusted US biofuel mandate will require some adjustment in terms of ethanol production and consumption patterns, as well as in terms of ethanol feedstock use around the world. Food is likely to cost more as a result of such adjustments.
- An important policy driven two-way ethanol trade is likely to emerge between Brazil and the United States under certain conditions. Brazil is likely to be the sole country able to adapt and respond to US demand. This is due to the nature of its ethanol production based on sugar cane, its flexibility to switch between ethanol and sugar production, and to the rising demand for ethanol used for flex-fuel vehicles in Brazil.
Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.
Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.Read the Terms of Service
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