In spite of improved supply prospects and weakening demand, agricultural commodity market conditions remain fairly tight, which is the major factor underpinning prices.
Production forecasts for nearly all key food crops in 2011 have risen steadily since the previous report in June. For cereals, while the forecast for ending stocks in 2012 has also been revised up significantly, larger anticipated inventories reflect not only improved production prospects but also expectations of a slowing demand growth because of the unfavourable macroeconomic environment. In spite of these developments, however, international prices of all commodities covered in this report continue to be high and, in most cases, above the previous year. Strong underlying demand in certain countries, where economic growth is robust, is price supportive. Aside from being high, most prices are also extremely volatile, moving in tandem with unstable financial and equity markets. Fluctuations in exchange rates and uncertainties in energy markets are also contributing to sharp price swings in agricultural markets.
Given all these uncertainties, it is difficult to predict how markets will evolve in the near-term. While there is some room for optimism that, for most commodities, prices could remain below their recent highs, the general picture still points to firm markets well into 2012. For most food commodities, next year’s production will have to increase in order to meet the expected demand, albeit moderately. However, if this demand were to rise faster than currently envisaged, which is a possibility even assuming a slow economic recovery, then a more significant production expansion will be required. The question therefore is: do the current market signals convey the correct information for producers to adjust their production plans for next year?
More critically, will there be enough time for an adequate production response in the event of an unexpected surge in demand? Input costs, from fertilizers to energy, remain high, interest rates have climbed in many emerging economies, all of which could dampen production next year and, hence, draw down stocks and boost prices further. This year’s global food import bill is expected to approach USD 1.3 trillion, with the cost of food purchases for the Least Developed Countries (LDCs) soaring by over a third from last year.
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