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25 April 2024

Farm goods' cost jumps amid fuel price surge

By Nitin Nambiar


Agricultural prices are expected to remain nearly flat at high levels this year, as bio-fuels production continues to ramp up in response to consumption mandates and production subsidies, according to a World Bank report.

High oil prices over the past few years have resulted in greater use of food crops for the production of bio-fuels. Prices of maize and vegetable oils increased by 33 and 50 per cent, respectively over the last year. Both maize and vegetable oils are used as the feedstock for bio-fuels.

Wheat prices jumped 30 per cent last year as global wheat stocks reached historic lows. Production of grain fell short of consumption last year partly because it has been displaced by maize and partly because of adverse weather conditions, according to the World Bank’s report.

“Continued high and increasing oil prices have stimulated the use of food crops for bio-fuels and raised fertiliser costs across the world,” the report said.

In 2006, bio-fuels accounted for five to 10 per cent of the global production of the primary bio-fuel feedstock and up to 77 per cent of the volume of trade.

The Washington-based development bank said food prices have risen nearly 75 per cent since their lows of 2000. “The increases stem partly from the stepped-up use of food crops for bio-fuels and partly from other more fundamental factors, such as rapid income growth in developing countries and emerging economies, high fertiliser prices, low stocks and droughts,” the report said.

The anticipated increase in price of grain, identified as a concern in the World Bank’s “Global Development Finance” report published last year, has “largely materialised”, the bank said.

Monthly wheat prices have increased 90 per cent since mid-2007. “Wheat stocks are expected to fall to record lows relative to consumption, and prices may increase further this year before production recoups enough to rebuild stocks,” the report said.

A large number of food-importing countries may suffer substantial terms-of-trade losses over the course this year, it added.

Food prices rose 20 per cent last year, driven by strong demand for food imports, especially by oil-exporting countries, according to the World Bank. The rise in agricultural prices over the past year also reflected a weaker dollar, higher energy and fertiliser prices, crop-specific supply shortfalls, droughts, low-carryover stocks, and strong increases in demand, especially for bio-fuels.

“While real agricultural prices have increased substantially since their cyclical lows in 2001, the increase has done little to reverse the longer-term downward trend that has seen real agricultural prices fall 56 per cent over the past 46 years,” the World Bank said.

The price of sugar, which is being diverted to ethanol production for automotive fuel in countries such as Brazil, declined 32 per cent as growing conditions in India, Pakistan, and Thailand improved.

Natural rubber (a substitute for synthetics produced from petroleum products) prices were up 40 per cent over the past year.

Higher cocoa and robust coffee prices raised beverage prices by 13 per cent, while raw materials prices were moderately higher. The increase in food prices was led by fats and oils, up 50 per cent for the year, and grain, up 22 per cent.

According to the World Bank, higher oil prices have reduced growth in global oil demand, particularly in high-income countries. Oil demand in the Organization for Economic Co-operation and Development (OECD) declined for six consecutive quarters beginning in the fourth quarter of 2005, with an average drop of more than 0.4 million barrels a day, according to World Bank data.

In non-OECD economies, the demand for oil has grown by just about one million barrels of oil a day since 2005, down sharply from the surge of 2004. Supply in several producers that are not members of the Organization of Petroleum Exporting Countries (Opec), especially Russia and countries in western Africa, has increased in recent months. Among OECD countries, Canadian production continues to grow, predominantly from oil sands, while significant new output in the United States section of the Gulf of Mexico is starting up.

“These increases have been partially offset by moderately falling production in the North Sea. As demand eased and non-Opec supply increased, Opec countries reduced their output to prevent further increases in stocks and a fall in prices,” the report said.

Oil prices are likely to remain “quite elevated and volatile” this year. The bank forecast that a barrel of oil could cost $84.10 on average this year. The bank predicts that prices could fall by 6.8 per cent to $78.40 a barrel in 2009. “However, high prices and increasing environmental concerns should continue to moderate demand,” the report said.

Timber prices are expected to increase by five per cent this year after increasing 15 per cent last year. The rise is driven mainly by strong demand from China and India and limits on timber exports from developing countries, motivated by environmental concerns and efforts to control illegal logging.

Bio-fuels drive agricultural commodity markets

Bio-fuels are playing an increasingly important role in agricultural commodity markets as their share of global production and trade increases. Last year, the supply of bio-fuels accounted for five to 10 per cent of the global production of the primary bio-fuel feedstock and up to77 per cent of the volume of trade.

Among the largest bio-fuel producers, the United States used 20 per cent of its maize production for the production of ethanol – the main constituent of bio-fuels. This figure is expected to rise to 30 per cent over the next year.

Brazil used 50 per cent of its sugarcane for bio-fuels, and the European Union used 68 per cent of its vegetable oil production for the same purpose, said World Bank data.

Such large usage has reduced supplies of these crops for food and feed and has contributed to substantial price gains, the global development bank said.

Global production of bio-fuels totalled about 45 billion litres in 2006, representing slightly more than one per cent of global road transport fuels on an energy equivalent basis.

While bio-fuels have thus far had little impact on crude oil prices, they have already had an affect on prices of commodities used as feedstock for bio-fuels, as well as for competing crops.

For example, maize prices rose by about 60 per cent from mid-2005 to mid-2006, largely because of the increased use of maize for ethanol production in the United States.

Vegetable oil [such as palm oil and soybean oil] prices have also increased because of their stepped-up use for bio-diesel production in Europe and the United States, with palm oil prices up 48 per cent in the last year and soybean oil prices up 25 per cent.

Bio-diesel fuel can be used in any blend with fossil fuel diesel in standard diesel engines, but its use is limited in colder climates.

The energy content of ethanol is lower than that of gasoline, providing about 20 to 30 per cent fewer miles per gallon than gasoline, while bio-diesel provides five to 10 per cent lower mileage than diesel.

Bio-fuels can be used to replace their fossil fuel counterparts or can be blended with fossil fuels to achieve certain benefits, such as reduced exhaust emissions and increased octane levels to improve engine performance.

Markets lead commodity price rise

The prices of metals have increased more than other commodity prices over the last four years, largely because of strong demand in China.

Following the global credit squeeze of last year, the prices of metals dropped more than 10 per cent. As a commodity, metals tend to be particularly sensitive to slowing economic activity. “[Metals] may have been exposed to speculative pressures when investors closed their positions to finance other losses in their portfolios,” the World Bank said in its report on Global Economic Prospects.

The prices of metals are expected to have peaked last year, according to the report. The Bank expects metal prices to decline by five per cent this year, and to continue lower into 2009 as rising capacity tips markets into surplus.

The Bank said that strong demand from China coupled with supply problems and delays in bringing on new capacity have caused metals prices to rise consistently. Underinvestment during earlier periods of low prices has also played a part in creating shortages, the report said.

The price of metals for which China is a net importer, especially copper, experienced sharp gains over the last year, while those for which China is a net exporter – mainly aluminum and to some extent zinc – increased much less.

Gold price increased by 35 per cent over the past 12 months. Gold prices, which were supported by a volatile oil price and weak dollar at start of last year, weakened in the second half of the year due to decreasing tensions in the Middle East.

According to economic analysts, the view for gold is bullish for this year backed by fundamentals, which keep the US dollar weak over a major part of the year.

Silver prices which saw a 16 per cent rise over the last year, are expected to decline this year. Among the other metals, zinc fell by 43 per cent over the last year, while nickel prices rose to record levels mainly due to strong global demand for stainless steel. Continued global weakness is expected to reduce the consumption of base metals in the first quarter of this year.