Agricultural and food prices

Over the last few years agricultural prices have been very volatile. 30 years of steady decline was broken by a big increase during 2007 which reached exceptional levels by early 2008. Since April 2008, most agricultural prices have decreased sharply. However, the structural causes of the price hike remain in place and they are expected to sustain higher prices over the next decade.

Why did prices increase?

The surge in agricultural commodity prices resulted from a combination of structural and temporary factors. Structural factors such as global population growth, rising incomes in emerging economies and the development of new market outlets have contributed to a gradual rise in world demand.

Global supply was unable to keep pace due to a slowdown in the growth of food crop grain yields and the characteristics of world agricultural markets which are thin and typically constrained by the seasonality of production.

Moreover, increasing production costs, due inter alia to rising energy prices, spilled over on agricultural commodity prices. The impact of these structural factors was amplified by large production shortfalls resulting from adverse weather conditions and trade restrictions imposed by several exporting countries. Exchange rate developments, growing speculative activity in the commodity derivative markets and the close relationship between agricultural and other commodity markets, such as the oil market, also affected agricultural commodity price developments.

The contribution of these various factors varies between sectors. For example, changes in wheat and rice prices are largely attributable to supply-side factors while maize and soybean markets have been mainly driven by a strong growth in global demand both for meat consumption and for industrial use.

Background and analysis

Why did prices decline?

Commodity prices have sharply declined since April 2008 and have come back to levels similar to or even below those before the price spikes. Moreover, the global economic uncertainty raises concerns about possible renewed price volatility. The effect of some of the short-term drivers which amplified the increase in agricultural prices in the second half of last year has diminished due to more favourable weather conditions, declining energy prices, lifting of export restrictions. Moreover, global supply has responded swiftly and strongly to higher prices, supported by a relaxation of production constraints in the CAP, notably the suspension of mandatory set-aside of arable land and the increased milk quotas from 2008 onwards. For example, world wheat production is projected to have reached an all-time high in 2008 leading to a considerable decline in wheat prices.