Food Commodities and Price Spikes:
Assessing the causes, identifying the responses
Session on “Institutions and Policies to manage global market risks...”
IATRC Annual Meeting, Ft Myers, FL, December 13-15, 2009
Tassos Haniotis
Director, Economic Analysis, Perspectives and Evaluations
DG for Agriculture and Rural Development
European Commission
Outline

The global context of the current food commodity price spike

The EU context of the commodity price spike

Policy responses and implications
T. Haniotis
IATRC - December 14, 2009
2
Searching for the causes of the food price spike

It was is not so much about stronger food demand
–
–
–

Supply response exhibits mixed patterns across commodities
–
–
–

In most cases, demand growth has either slowed down (grains, soybeans, meats)...
... or demand is still growing at past trends (maize and vegetable oils)
Future food demand needs are not greater than past challenges (when math is done)
Yield growth patterns are very mixed among crops, and among countries
In livestock, supply response has so far been greater than demand growth
Supply shocks are not unknown in agriculture!
The really new story is the parallel boom in all commodities
–
–
–
Link of agricultural price developments to energy (or minerals) introduces new risks
Are farm price signals linked to farm fundamentals?
What could be trivial to overall economy is big for agriculture (e.g. role of funds)!
T. Haniotis
IATRC - December 14, 2009
3
Total grain demand growth
Source: FAO
annual rate of growth ( % )
14%
12%
10%
8%
6%
4%
2%
0%
-2%
1961-72
Rice
T. Haniotis
1973-84
Wheat
1985-96
Barley
IATRC - December 14, 2009
1997-08
Maize
Soybeans
4
Meat and feed demand growth
Source: FAO
annual rate of growth ( % )
14%
12%
10%
8%
6%
4%
2%
0%
-2%
1961-72
Beef
T. Haniotis
Pork
1973-84
Poultry
Maize for feed
1985-96
Wheat for feed
IATRC - December 14, 2009
1997-08
Barley for feed
Soybean meal
5
Ethanol and edible oil use
Source: FAO/USDA
annual rate of growth ( % )
14%
12%
10%
8%
6%
4%
2%
0%
1961-72
US maize industrial use
T. Haniotis
1973-84
Palm oil
1985-96
Soybean oil
IATRC - December 14, 2009
1997-08
Rapeseed oil
6
Searching for the causes of the food price spike

It was is not so much about stronger food demand
–
–
–

Supply response exhibits mixed patterns across commodities
–
–
–

In most cases, demand growth has either slowed down (grains, soybeans, meats)...
... or demand is still growing at past trends (maize and vegetable oils)
Future food demand needs are not greater than past challenges (when math is done)
Yield growth patterns are very mixed among crops, and among countries
In livestock, supply response has so far been greater than demand growth
Supply shocks are not unknown in agriculture!
The really new story is the parallel boom in all commodities
–
–
–
Link of agricultural price developments to energy (or minerals) introduces new risks
Are farm price signals linked to farm fundamentals?
What could be trivial to overall economy is big for agriculture (e.g. role of funds)!
T. Haniotis
IATRC - December 14, 2009
7
Crop yield growth
Source: FAO
annual rate of growth ( % )
5%
4%
3%
2%
1%
0%
1961-72
Wheat
T. Haniotis
1973-84
Rice
1985-96
Maize
IATRC - December 14, 2009
1997-08
Barley
Cotton
8
Yield compared to demand growth
Source: FAO
annual rate of growth ( % )
5%
4%
3%
2%
1%
0%
1961-72
Wheat yields
T. Haniotis
1973-84
Wheat use
Rice yields
1985-96
Rice use
IATRC - December 14, 2009
1997-08
Maize yields
Maize use
9
Searching for the causes of the food price spike

It was is not so much about stronger food demand
–
–
–

Supply response exhibits mixed patterns across commodities
–
–
–

In most cases, demand growth has either slowed down (grains, soybeans, meats)...
... or demand is still growing at past trends (maize and vegetable oils)
Future food demand needs are not greater than past challenges (when math is done)
Yield growth patterns are very mixed among crops, and among countries
In livestock, supply response has so far been greater than demand growth
Supply shocks are not unknown in agriculture!
The really new story is the parallel boom in all commodities
–
–
–
Link of agricultural price developments to energy (or minerals) introduces new risks
Are farm price signals linked to farm fundamentals?
What could be trivial to overall economy is big for agriculture (e.g. role of funds)!
T. Haniotis
IATRC - December 14, 2009
10
The recent roller-coaster of commodity prices
in current prices, 2000=100
Source: World Bank, December 2009
600
500
400
300
200
100
Agriculture
T. Haniotis
Food
Energy
June 2009
Metals & Minerals
2008
2005
2002
1999
1996
1993
1990
1987
1984
1981
1978
1975
1972
1969
1966
1963
1960
0
Fertiliser
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Functioning of the EU supply chain (COM 821)

Link of food consumer prices to food commodity prices
–

Tensions in contractual relations among food chain actors
–

Do futures markets still play essential role in hedging and price discovery?
Low and limited link between farm commodity and food prices
–

Prospects for food processing and food retail clearly better than agricultural sector
Clear lack of price transparency in food supply chain
–

“rockets and feathers”– consumer prices fast to increase, but slow to come down!
Low price transmission is complex phenomenon with different reasons
Dairy developments show different trends on gross margins
–
Food industry seems to maintain margins, unlike other actors in the food chain
T. Haniotis
IATRC - December 14, 2009
12
EU policy responses should address real problem

Do we want to limit price volatility by fixing prices?
–

Do we want to limit price volatility by fixing quantities?
–

Schemes exist, but fail to capture impact of increasing costs
Do we want to minimise farm income variability?
–

Was also tried and failed , even in a context of less flexible supply response needs
Do we want to stabilise farm market revenue?
–

High price support was tried and failed ; safety-net price level could still be useful
Decoupled support does this, despite its limitations
Do we want some alternative income safety-net?
–
Could also work, but probably with higher administrative costs
T. Haniotis
IATRC - December 14, 2009
13
Global policy responses should also be focused

Do we believe food demand would outstrip supply?
–

Are current investment levels hampering supply response?
–

One size does not fit all; same price levels imply different things to different people
Do we need buffer stocks?
–

Then we need to identify clear priorities based on real long-run market fundamentals
Do we want to resolve the rural/urban poverty split?
–

Then prices would lead production, but environmental costs risk being high
We need (and have) a rapid response policy to humanitarian crises
Are solutions to “food crisis” issues linked to agriculture?
–
Some, but others are becoming more linked to the wider economy, CC debate
T. Haniotis
IATRC - December 14, 2009
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