Where to for global agricultural commodity prices?

The past decade has been an interesting period for global agricultural commodity prices, given that they have consistently been above long-term price trends. Whether price trends since 2001 are a result of a fundamental change in market supply and demand balances, or whether the period was an aberration and prices are about to return to the long-term downward trend of the second half of the twentieth century is an interesting question.

Agricultural economists trained during the latter half of the twentieth century became very familiar with the notion that the long-term trend in real commodity prices was always a downward sloping line, as agricultural productivity growth invariably enabled production to increase more quickly than consumption.

That was certainly the case in relation to real international grain prices from the 1950s onwards and for international meat prices after about 1970.  However, this appeared to change in the early 2000s when an upward trend become apparent in global agricultural commodity prices: this upward trend has persisted for most of the past decade. However, international commodity price trends over the past year or so have flattened out, leading to renewed questions about future prospects.  This is reflected in the latest projections released by ABARES, which are that Australian farm export earnings will decline by around 8% on the back of both lower production volumes and lower commodity prices.

A commonly referenced indices of global food and agricultural commodity prices is that published by the Food and Agriculture Organisation (FAO) of the United Nations, which is shown below.

International monthly food price indices,1990-2014
Food and Agriculture Organisation of the United Nations

It shows the generally static or downward trend in international commodity prices that persisted up until about the year 2000, the upward trend in prices between 2000 and 2010, and then the subsequent flattening (and in some commodities decline) in prices post 2010. These are nominal rather than real prices and they highlight the disparity between different commodities.

Some of the factors behind this projection include the extra 80 million hectares of land globally that has been planted to crops since grain prices began to increase in 2002 (despite doomsayers concerns about the world running out of farming land), the build-up in world grain stocks due to moderately good harvests over the last two years, and subdued growth in grain demand due to lower economic growth and lower global oil prices (and hence lower biofuel demand and prices).

The other noteworthy factor in thinking about what the future might hold is the strong parallels that have become evident between energy and food prices, as the following graph based on IMF data highlights. This is perhaps not surprising, as both energy and food consumption are related to economic conditions, and are interrelated due to the interactions between grain, biofuel and oil prices.

IMF commodity food price index and oil and metal prices 2000-2010: Strong parallels can be seen between energy and food prices
International Monetary Fund

Exactly what this all means for the future of global agricultural commodity prices is not clear but the graphs do tend to suggest that there will be a period of stagnant prices in the near future, albeit buffered in Australia by a declining Australian dollar exchange rate. It is also worth noting that much of the increase in global grain production capacity has been utilised for corn and soybean production (for animal feed and human consumption) whereas the global area planted to wheat has remained relatively static, meaning that wheat prices may not be as negatively impacted as prices of other grains.

Research and publications exploring these and other related topics can be found at www.farminstitute.org.au