RAWALPINDI, Oct 7: While commodity prices have always risen and fallen with fluctuation in supply and demand, the world agriculture now appears to be undergoing a structural shift towards a higher demand-growth path, according to the ‘State of Food and Agriculture 2008’ released by the Food and Agriculture Organisation (FAO) on Tuesday.

Many countries, especially in Asia, have entered a period of faster economic growth that is generating strong demand for higher-quality diets, including more meat, dairy products and vegetable oils. The rise in demand arising from stronger income growth is certainly welcome news, but higher prices pose challenges for all consumers, particularly the poorest, fears the report.

Among the factors responsible for the recent surge in commodity prices are higher costs of production driven by rising petroleum prices, weather-related production shortfalls in key exporting countries and strong demand growth – including for bio-fuel feed stocks.

Some of the emergency measures implemented to protect consumers from higher prices, such as export controls, have further destabilised world markets.

The FAO index of nominal food prices doubled between 2002 and 2008. Energy prices, led by crude oil, began rising earlier, in 1999, and have trebled since 2002. The real food price index began rising in 2002, after four decades of predominantly declining trends, and spiked sharply upwards in 2006 and 2007. By mid- 2008, real food prices were 64 per cent above the levels of 2002.

In the meantime, food-aid volumes have fallen to their lowest levels in 40 years even as the number of countries requiring emergency assistance has grown.

Decades of depressed commodity prices have led many governments in developing countries to neglect investments in agricultural productivity, and higher petroleum prices may signal a long-term shift in the cost of agricultural production, making it more costly for farmers to intensify production, the FAO report observed.

A low degree of price transmission should not be taken to mean that consumers have not been affected by rising prices. Prices rose by 25 to 30 per cent in Bangladesh, India and Pakistan. Furthermore, world prices surged further in the first quarter of 2008, almost doubling between Dec 2007 and March 2008, and have led to substantial price increases in many domestic markets. At the global level, total production of key traded crops: wheat, rice, coarse grains, rapeseed, Soya bean, sunflower seed, palm oil and sugar rose by almost 6 per cent in 2007 compared with the 2003–05 average.

Looking ahead to 2010, world output of these crops is projected to rise by 7 per cent compared with 2007. However, this outcome depends on weather and the effective transmission of price signals to producers in countries that have the capacity to expand production, points out the report.

Global food-import expenditures, in value terms, are forecast to reach $1,035 billion in 2008, 26 per cent higher than the previous peak in 2007.

A good year for growing crops in most key producing areas could lead to a partial respite from the tight market. In either case, the implications are lower domestic prices but further upward pressure on global prices.

The lower domestic prices will reduce domestic producers’ incentives to increase output and will consequently tend to impede their supply response, thus protracting the situation of high prices. The impact of export restrictions is illustrated by a hypothetical scenario considering Egypt, India, Pakistan and Vietnam, which together accounted for 38 per cent of global rice exports in 2007. If these countries were to engage in policies that halved their rice exports in 2008, the global price would rise by an estimated 20 per cent in that year.

Relative to a situation with no export barriers, domestic rice prices would fall by as much as 40 per cent in Egypt and Vietnam, where exports account for 20 to 25 per cent of the local production, and by even more in Pakistan, given that a larger share of Pakistan’s production is exported. The lower domestic prices in 2008 would depress production significantly in 2009.