Wednesday, July 25, 2012

Agriculture over next decade
Faculty member, BIRD, Lucknow
Have you wondered how raising oil prices impact prospects of agriculture?  The cost of cultivation is likely to increase due to higher energy costs. Even if fuel prices are subsidized the pressures of that subsidy would be mounting ultimately leading to pressures on agricultural growth. On the other hand, growing oil prices would spur diversion of grains for biofuel production building in pressures on the prices.  Think of US diverting 40 per cent of its corn production to ethanol production. The recently released OECD – FAO Agricultural Outlook 2012-2021 projected that 6.3 billion gallons of ethanol would be traded every year between US and Brazil, the two pre-eminent producers in the world by 2021.  Biofuels are based mainly on agricultural feedstocks and are expected to consume a growing share of the global production of sugarcane (34%), vegetable oil (16%), and coarse grains (14%) by 2021.
U.S. ethanol expansion has raised corn prices as per one estimate prices would have been 21% lower in 2010 without the rising demand from U.S. ethanol.  This has increased costs of imports for Mexico that imports one-third of its corn between $1.5 and $3.2 billion from 2006-11.  This cost is ten-to-twenty times the amount the Mexico spends on its productivity program (MasAgro) for small-scale corn farmers.  Imagine the plight of Mexicans whose staple diet is corn tortillas accounting for 40% of calories consumed in the country.  The impact naturally spreads to meat and dairy prices too due to high feed costs.  This is only an example. Other countries, especially those dependent on food-imports, also will be equally affected.  The growing biofuel economy would increase the prices of sugar across the globe and absorb larger share of crop production.  
Already, the world is under the surge of growing prices from which there does not seem to be any respite in near future, when the report points out that ‘prices have come off recent peaks, but food price inflation remains a concern in developing countries.’   Agricultural prices are likely to remain on a higher plateau.  Despite the upward trending prices, resource constraints and high costs would limit production growth.  Global agricultural output growth slowed down over time and is likely to decline from 2.0 per cent over several decades to 1.7 per cent during next decade.  Average growth during past decade and the next one is given in Figure 1.

Developing countries continue to dominate market developments and emerging economies would play a larger role in expanding world trade in agriculture.  Processed foods, proteins and fats show higher growth rates in consumption because of changing diets. Fisheries sector is likely to would grow at 15 per cent per annum and aquaculture would surpass capture fisheries as a primary source of fish consumption. Meat consumption expands in developing countries due to income effect. Poultry meat will lead this anticipated growth as the cheapest and most accessible source of meat protein, overtaking pigmeat as the largest meat sector by the end of the outlook period. Developing countries would become most important milk producers.  Projected growth of various commodities is given in Figure 2.

Significant agricultural production increase needed to satisfy future global food needs. Sustainable productivity improvement is the key to meeting rising demand.  Productivity improvements will be a key factor in reducing global food insecurity. 
Given the Outlook, the role of governments becomes critical both in framing domestic policies as well negotiating in international fora.  It also should help the stakeholders in agriculture and rural development to realign strategies and strengthen value chains that can help tap the emerging potential,  while insuring against adverse trends.
[The write up is based on the OECD/Food and Agriculture Organization of the United Nations (2012), OECD-FAO Agricultural Outlook 2012, OECD Publishing. doi: 10.1787/agr_outlook-2012-en.]