The Hindu Business Line : Global agri-commodity price outlook positive

Future Impact
World prices for wheat are projected to show little change
Rice market is expected to firm up in the coming years
Real prices of sugar may continue to decline
Speculators may distort commodity price outlook

Mumbai , July 8

Over the next 10 years, developing economies, especially those in Asia and South America, are going to increasingly impact the agricultural commodity market, on both demand side and supply side.

Broad-based economic growth resulting in rising incomes, rapid urbanisation and relatively high population growth (despite decline in recent years) all combine to result in higher propensity to consume in the developing markets, where changes in dietary habits lead to increased demand for livestock products, feedstuffs and processed foods.

Though developed economies represented by OECD still dominate farm goods output and exports, growth rates in developing countries are rising rapidly.

Developing Countries

Yet, with output growth trailing demand growth, major developing countries are turning major importers of commodities.

In other words, developing countries are going to increasingly determine the contours of world agricultural landscape — in terms of production, consumption and trade — according to OECD-FAO Agricultural Outlook 2006-2015. Those in the agricultural commodity market have to take cognisance of the emerging situation.

What's the outlook for world crop prices to the year 2015? On the grains front, nominal world prices for wheat are projected to show little change between now and next 10 years as supply and demand are expected to be in balance. While the five traditional exporting countries — the US, Canada, the EU, Argentina and Australia — are likely to retain their dominant position in trade, newer origins like Ukraine and Kazakhstan are expected to pose competition.

Coarse Grains

Expanding livestock production over the next 10 years is likely to push coarse grains trade higher. The main growth markets for coarse grains are Mexico, North Africa and West Asia, China, Asia and Latin America where higher incomes boost demand for livestock products, which in turn generates more consumption demand for feed grains.

Corn (maize) is the most important among coarse cereals followed by barley and grain sorghum. The US is projected to remain the world's largest producer, consumer and exporter of corn for next 10 years. However, with high-energy prices, a part of corn is diverted for production of ethanol, which may limit the country's export growth. Therefore, corn prices should receive support in the near-term. China, on the other hand, may turn a net importer of maize by 2010 given its rising internal demand for meeting the feed needs of its burgeoning livestock sector.

Rice & Oilseeds

Rice market is expected to firm up in the coming years because of tightening supplies caused by growing resource constraints in some of the major producing countries in the form of rural labour shortage, growing competition for land and water, and high fuel costs. In real terms (after allowing for inflation), rice prices may increase somewhat, while world wheat and maize prices may continue their long-term declining trend.

In case of oilseeds, market developments over the next 10 years are likely to be driven by increasing productivity; changes in area planted and rising demand as incomes and populations grow in most countries. Strong demand for vegetable oil for food consumption and protein meals for animal feeding is expected to sustain global trade in oilseeds and their derivatives products well above that of world trade in wheat and coarse grains.

China once again is seen as the epicentre of the market with huge investments in crushing capacities, which would mean larger import of oilseeds and domestic crushing to meet protein meal requirement. China will continue to be the world's largest importer of oils.

Overall, growth in import demand for vegetable oil is projected to exceed that of protein meal. In addition to China, India, Pakistan and the EU will remain large importers. The US, Brazil and Argentina will account for substantial part of global oilseed exports, while Malaysia and Indonesia will continue to be leading exporters of palm oil. Diversion of vegetable oil to meet bio-diesel demand will also add to the global requirement and create supply tightness; but output could soon catch up in response to high prices.

On balance, there could be a modest recovery of oilseeds and oilmeal prices in 2007 and subsequent years, but with real prices either flat or falling, the OECD-FAO report concludes.

Sugar Prices

Sugar is a commodity whose prices have surged to their highest levels in a quarter century during 2005-06 marketing year to reach a level nearly double that of much of the last decade. World prices are projected to rise further in 2006-07 as global consumption exceeds production for a fourth year in a row leading to a further decline in global sugar stocks.

However, global sugar production is expected to soon respond to high prices.

Over the next 10 years prices may average lower than currently prevalent, but will remain above the average of the last decade. Real prices should however, continue to decline.

Brazil will continue to dominate the global sugar market, despite increasing production of sugarcane-based bioethanol. Reforms in the EU's sugar regime — withdrawal of export subsidy, for instance — may over a period of time change EU's status from being a net exporter to a net importer of sugar.

Commodities Speculation

While the OECD-FAO Outlook for 2015 crystal gazes into the future, there could be several imponderables impacting the market. Diseases, high-energy prices (contrary to expectation) and technological breakthroughs can change the course of market dynamics. Farm subsidies of developed economies are another factor to reckon with.

An important factor affecting commodity prices in recent times is the role of funds. Commodities are emerging as an asset class and are attracting too much speculative money. The role of speculators can distort the price outlook.

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