In France, in the United States or in the United Kingdom, the agricultural sector has so far withstood the economic and financial crisis, due in part to relatively high agricultural prices. As indicated by Thierry Pouch, Head of Economic Studies at the Permanent Assemblies of Chambers of Agriculture1
, these high prices must not let us forget their intrinsically volatile nature, all the more so in the especially uncertain current environment. Accordingly, we cannot exclude a decline––even a turnaround––of prices, which would result in lowering the “already vulnerable” incomes of farmers. At a time when the future CAP must be charted, we invite you to read this article that means to remind us that it would be very risky to underestimate the need for safety nets for agricultural incomes.
momagri Editorial Board
In the current context of economic and financial crisis, questions may legitimately be raised regarding the direction of agricultural prices on key global markets. We all remember how prices collapsed in the midst of the 2009 recession, resulting in lower revenues for farmers, especially in France.
Among the factors that could lead to a replica of he 2009 episode, we first note the weaker Euro Zone economies, as well as the slowing down of economic activity in China, which we know absorbs a significant share of the commodities traded on markets. There is also the consequence of the already lower export credits granted by the banking system. Should bank financing for export activities by businesses dry up––as it seems to be the case––the whole global commodity trade could permanently seize up, therefore duplicating the 2009 events.
What about today? According to the World Bank, agricultural prices surged by some eight percent between December 2011 and March 2012. Prices of all basic agricultural products are rising, with the exception of rice. Corn prices rose by nine percent, soybean oil by seven percent, U.S. hard red winter wheat by six percent, and sugar by five percent. However, we seem to be below the February 2012 peak, which, let’s not forget, was an all time high!
How can we explain the paradox that agricultural prices are staying high in an economic downturn? The dramatic increase in oil prices for several months is an initial motive. By averaging around $120/barrel at the end of 2011––over eight percent over prices recorded in March 2011––oil prices were passed on fertilizers and other transportation costs. In addition, weather conditions had an impact on agricultural prices. Cold and freezing temperatures on one hand, heat waves and droughts on the other, are all drivers to reduce production volumes that are confronted to a still vigorous global demand. Lastly, global demand remains strong.
As a result, the situation in global agricultural markets generates two types of responses. The first reaction concerns the consequences of continued increases. By being driven upward, agricultural prices may raise the cost of imports for the countries that are most dependent on agricultural markets for their supply. There lies the whole issue of rising food security in some regions of the world. But if the slowdown of the global economy might become permanent, these prices might retreat and erode the already quite vulnerable agricultural incomes. Consequently, there is a radical uncertainty in commodity markets.