Commodity prices to stay low for now OECD

By Philip Clarke

COMMODITY prices will stay depressed for at least the next two to three years, according to the latest Agricultural Outlook publication from the Paris-based Organisation for Economic Co-operation and Development.

Any recovery thereafter will depend on governments resisting the temptation “to interfere with markets or to retreat behind trade barriers in response to current difficulties”, it says.

Two factors are singled out in the report for the current state of agricultural markets.

Many commodities are over-supplied due to the strong production response to high prices in recent years, and continuing high levels of support and protection in some OECD countries (notably the EU and US).

This has been compounded by the unforeseen collapse in demand in many emerging economies (south-east Asia, Russia and Brazil). “Disposable incomes of consumers have fallen in countries affected by the financial crisis, and prices of imported agricultural products have risen sharply in local currency terms,” says the report.

“Both factors are contributing to weaker demand and a slowdown in commercial agricultural imports.”

This will have a dampening effect on any market recovery for the next two or three years.

“Although world cereal prices are projected to be higher in 2004 than in 1998, coarse grains, wheat and rice prices should remain below the average of 1993 to 1997,” says the report.

“Supply adjustments, strengthening import demand and reduced export subsidies should contribute to higher beef, poultry and sheep meat prices. But pig prices are expected to decline over time because of continued productivity gains, particularly in north America,” it adds.

While the trade in agricultural products is being underpinned by a gradual move towards more market orientation, the OECD also warns of some worrying trends in the opposite direction.

In particular, it identifies the US governments “ad hoc” provision of $5.9 billion (£3.7bn) of aid to farmers in 1998, which could distort production and prices in the next few years. The final implementation of the EUs Agenda 2000 reforms will also be crucial in shaping world markets.

“In an oversupplied market with low prices, there is the ever-present danger of countries taking unilateral actions in an attempt to improve the income situation of their farmers. In particular, there is the risk of a reactivation of export subsidy competition,” says the report.

“Re-escalation of the grain subsidy wars of earlier years would disrupt trade in targeted markets, intensify competition for other markets and put in doubt progress achieved so far in policy reform and trade liberalisation.”