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1. Highlights

· Growth in global production of and demand for the main agricultural commodities is projected to grow on average by about 1.6 percent annually or 0.3 percent on a per capita basis during the period to 2010. This is a decline in aggregate and per capita growth from that experienced during the 1990s. Factors responsible for the slowing of world demand include reduced population growth, high current consumption and often saturated markets in the developed countries and, for some agricultural raw materials, increasing competition by synthetics.

· In the developing countries, aggregate production and consumption of the main agricultural commodities are projected to grow at 2.0 percent a year, considerably less than the 3.2 percent of the 1990s. In per capita terms, production and consumption are still expected to grow on average at 0.4 percent annually due to the projected slowdown in population growth.

· The growth of world trade in agricultural commodities, which was so robust in the 1990s, is expected to moderate in the projection period despite the beneficial effects of policy reforms. The slowdown in the present projections is due to the sharp falls in growth foreseen for fats, oils, oilmeals, meat, fruit, tropical beverages and most agricultural raw materials. However, the slowdown in market growth for the major agricultural products covered could be offset to some extent by other growth sectors not included in the study, particularly in the processed food products sector.

· The projections point to a deterioration in the net agricultural trade position of the developing countries. Though export volumes are projected to rise, and real earnings could also rise, population growth and the associated requirement for imports of food will absorb all or part of the increase.

· Of particular concern is the increase foreseen at constant prices in the net food imports of the low-income food-deficit countries (LIFDCs), a matter that lends urgency to incentives to boost their food production capacity. The situation of the Marrakesh Decision groups of least developed and net food-importing developing countries is similar.

· The long term trend decline in real prices, which show prices of all agricultural commodities declining relative to those of other major economic sectors over the 1970 to 2002 period, has averaged about 2 percent per year. Over the projection period, world market prices in real terms, that have recently been below longer term trend levels, are expected to return toward their trend levels.

· Further agricultural policy reforms would help to boost global agricultural markets. Farm support in industrialized areas remains high while multilateral negotiations are still at an early stage under the Doha Development Agenda in the WTO.

· Though the "baseline" projections suggest that most markets will be in fairly close balance by 2010, they are likely to be subject to instability. Crop failures both global and regional levels are an ever present threat and the cushion provided by stocks for most commodities will tend to diminish for most commodities.

· A low production scenario of selected basic foodstuffs in OECD countries indicates that assumed shortfall will not be fully compensated by an equivalent increase in production in the developing countries. Higher prices would lead to lower consumption and less imports.

· An alternative high production scenario of such commodities in the low-income food-deficit countries (LIFDCs) indicates that the augmented production would not contribute to a substantial improvement of the food situation in these countries. In fact, food and feed consumption would increase only marginally with respect to what projected in the baseline. However, their net food imports would be somewhat reduced.

· In cereal markets, stocks relative to utilization are projected to remain below their previous longer term averages, especially given policy reforms in many countries. This may also mean that the risk of an upward price movement over a shorter term period may become more frequent than in the past.

· The future prospects for countries that are the most food insecure are not likely to improve substantially in comparison to current trends in their calorie intake. While market prices may be favourable to enhancing consumption, other factors may have a negative impact on their food security. These include the continued intense competition for most bulk commodities that play an important role in generating export revenues and agricultural and rural incomes, a decrease in per capita domestic food production and slow to modest national economic growth. Together these factors would likely mean slow progress in reducing under-nourishment in these countries. Even a more rapid economic growth would not significantly address their hunger problem in the short to medium term.

2. An overview of the medium-term outlook: baseline and alternative scenarios

This section provides a summary of the main findings with regard to the baseline projections to 2010 and two alternative scenarios concerning the production of basic food products in OECD countries and LIFDCs. It begins with a review of key assumptions underlying the baseline scenario as well as of fundamental market trends and recent policy developments.

Population and income assumptions

Global demand for many commodities is crucially linked to economic and population growth and, especially in developing countries, to population shifts from rural to urban areas. Commodity projections to 2010 are based on the United Nations’ medium variant, which estimates that world’s population will expand by 1.3 percent annually over the period from 1998 - 2000 to 2010, down from the 1.5 percent per year recorded in the previous decade. In developing economies, population growth is anticipated to slow to 1.6 percent annually; in the developed countries to 0.3 percent, and in transition economies to 0.04 percent. About 97 percent of the growth in world population originates in developing countries (Table 1.1).

World gross domestic product (GDP) assumptions are based on the projections of the World Bank and IMF. Total world GDP is estimated to increase by 2.9 percent per year, a modest acceleration compared with 2.4 percent of the previous decade. World per capita GDP is expected to increase by 1.7 percent annually, compared with 0.9 percent of the previous decade. The estimated improvement in world GDP is largely based on the continuing recovery projected for the economies in transition, which may grow at 4.5 percent per year. In the developing countries, total GDP is assumed to rise by 4.6 percent annually or by 3.0 percent in per capita terms.

Historical trends and policy perspectives

The analysis of historical trends reveals that the productivity growth in global agriculture has so far been sufficient to meet effective demand. Over the past three decades, world agriculture production has grown faster than population. Increased productivity stemming from the use of new technologies in many industrialized countries has been in part responsible for the long-term decline in real commodity prices. In practice, world agriculture has been operating in an environment where effective demand has been constrained by a number of factors. The rapid growth of agriculture has co-existed with hundreds of millions of world population not having enough food to eat.

Limits on the demand side at the global level reflected three main factors: i) the slowdown in population growth from the early 1960s onwards; ii) the saturation in the levels of per capita food consumption for a growing share of world population and iii) the difficulty in improving consumption by those who were too poor to purchase it or did not have enough resources to produce it themselves.

The first two factors will continue to dominate in the future. Their impact will be reflected in lower growth of demand than in the past and, indirectly, also of production. The third factor will also continue to play a major role, given that the overall economic outlook indicates that low incomes and poverty will remain widespread in the future. It follows that for a rather large part of the world population potential demand would not automatically translate into effective demand (see also section 3 below). Thus, the slowdown observed in the past trends of world demand is likely to persist and perhaps even to accelerate in the future.

On the production side, there is no certainty that the past experience of rapid productivity growth and extended utilization of land will continue. In terms of the natural resources that are required for food and agriculture production, there are already indications of losses of farmland, limits to freshwater supplies, erosion and degradation of soils, and declining genetic diversity. For agriculture, there are biological limits to yields, diminishing returns, and associated problems from the intensive use of fertilizers and pesticides. As hazards, there are new plant and animal diseases, increased ultraviolet radiation, air pollution, climate change, and sea-level rise. There are also socioeconomic constraints of inadequate markets, infra-structure and research investment, and limited access by poor farmers to land, capital, and technology.

As alternatives to these specific biophysical and socioeconomic limitations, there are at least four major opportunities for increasing the food supply: i) the unrealized potential to increase yields from the application of current techniques and technologies; ii) the possibilities provided by the biotechnological revolution that is now underway; iii) the development of organic and sustainable agriculture techniques which could rehabilitate degraded lands with consequent productivity gains; and iv) the opportunity to reduce food losses and to increase efficiency in the preparation and use of food.

Doubling or trebling global food production is within the range of the possible. But to do so, many changes and improvements are need in farmers' fields, in research institutions, in agricultural markets, and in the households that consume the food produced.

Further, fundamental agricultural policy reforms would help to sustain a recovery in global agricultural markets. Farm support in industrialized areas remains high while multilateral negotiations are still at an early stage under the Doha Development Agenda in the WTO.

In the following section a brief overview is given of the expected increase in aggregate volume production, demand and trade of the agricultural commodities covered in the study. The figures are obtained by multiplying physical quantities of production, demand and trade times price for each commodity and summing up over all commodities (each commodity is valued at the same average international prices in all countries and in all years).

More details on the outlook for individual commodities and countries, including related policy issues, are presented in Part II.

The baseline projection: Growth in agricultural production and demand, and main trade issues

At the world level, aggregate production of agricultural commodities is projected to grow on average by about 1.6 percent annually or 0.3 percent on a per capita basis during the period to 2010 (Table 1.2). This is a decline in aggregate and per capita growth from that experienced during the 1990s. In any case, aggregate agricultural production is projected to grow, on average, less than the economy at large. Nevertheless, this is likely to maintain on-going pressure on resources in agriculture and on demands for increased government assistance, which if not supplied may cause declines in income and living standards in rural communities. The commodities likely to grow most rapidly are those more responsive to income changes including oilcrops, meat (poultry), sugar and certain tropical beverages. Cereals and especially agricultural raw materials are projected to grow least (Chart 1).

Chart 1. Growth of world agricultural production by selected commodity groups

Agriculture in developing countries is projected to grow most strongly with aggregate growth at 2 percent annually, which is considerably less than that the 3.2 percent of the1990s, as rapid growth rates in oilcrops, meat and fruits return to more modest levels (Table 1.3 and Chart 2). In the industrialized countries, demand growth is slow, and consumer concerns are rising, not just for safety and quality, but also for production processes (Table 1.5). Development of "quality/tracking systems" is an increasingly predominant feature of agriculture and food economies worldwide, often driven by large retail chains that reach across borders. While common concerns may integrate across developed country markets, segmentation of markets will continue given differing capacities of countries to meet corresponding compliance costs. At the same time, the shares of markets continue to shift to developing countries, with potential for accommodating greater regional trade within different market segments. While uncertainty over how genetically modified organisms will impact markets will persist, the primary impact will concern those commodities currently affected, mainly soybeans, maize and cotton, until wider consumer concerns are addressed.

The major economic change in the projection period is the turnaround in transition economies which has been underway in the past few years, and is expected to continue (Table 1.4).

Growth in world trade, which was so robust in the 1990s, is projected to moderate in the projection period, particularly for oilseeds and meats. Annual growth in total exports (volume basis) is projected to fall to 2.1 percent from 2.9 percent in the 1990s. There are several reasons for the decline in the growth of trade, one of which is simply that high growth for certain commodities started from a low base. Another one is trade reform, especially through regional agreements and through WTO, which contributed to growth in the 1990s. Without further reform, aggregate trade growth can be expected to slow as market access continues to be highly restricted, particularly for certain commodities, such as sugar, and dairy products. However, even without further trade reform, low cost suppliers continue to increase trade shares for most commodities. Preference arrangements, either in the form of regional trade agreements, or new trade preferences may help generate trade diversion and some trade growth, particularly in further processing of value-added products.

Chart 2. Past and projected growth of agricultural production by economic areas

Factors in the projected increase of world demand include the relatively strong economic growth still expected in the developing countries and the recovery in the demand projected for some of the economies in transition.

The developing countries will account for much of the growth in overall commodity demand because of their comparatively buoyant per capita GDP expansion and the greater responsiveness of demand to income growth (Chart 3). By contrast a slow growth in demand is foreseen for the developed countries, because high current per capita consumption and slow growth of population are expected to limit the demand growth rate for many commodities. Aggregate demand of basic foodstuffs in the developing countries is projected to grow by 2.0 percent annually over the period 1999* - 2010[1], i.e. slower than the 3.2 percent annual rate during the previous decade but still allowing for increases in per capita consumption. By contrast, the developed countries are projected to raise their demand of basic foodstuffs by 0.9 percent annually and the economies in transition by 1.3 percent annually. The aggregate imports, however, of developing countries for the commodities covered in the projections are expected to rise by 2.4 percent annually over the period 1999* - 2010, thus increasing their share of world agricultural imports.

Chart 3. Past and projected growth of demand for agricultural products by economic areas

The net imports of low-income food-deficit countries for basic foodstuffs (cereals, livestock products, oilseeds and oils) are projected to increase from about US$21 billion in 1999* to about US$33 billion in 2010 (at constant 1998 - 2000 average prices).[2] A similar situation is projected for least developed countries (LDCs) and for net food-importing developing countries (NFIDCs). This pattern not only reflects growth in demand in these regions relative to the capacity domestically to meet that demand, but also the growth in excess supply from other regions.

World market prices in real terms have recently been all below their longer term trend levels (Charts 4 to 6). They are expected to return toward their trend levels over the projection period. The long term trend decline in real prices, which shows prices of all agricultural commodities declining relative to those of other major economic sectors over the 1970 to 2002 period, has averaged about 2 percent per year. Such a trend decline has reflected relatively greater productivity growth in agriculture.

Chart 4. Cereals: world market prices, 1980 to 2002 (constant 1990 US$)

With indicators in this projection showing a slowing of productivity growth, without a major shift in technology, the projection results indicate a decline slower than that implied by the trend over the 1970 - 2002 period. Some commodity prices are currently moving higher; this development should be viewed in response to short term factors which may not persist in the longer term. Despite low real prices, opportunities do exist for producers and countries that are able to be at the forefront of technology/cost reduction or exchange rate driven change. They will gain market share. The agricultural turnaround in transition countries may impact on markets, both as exporters and importers.

In cereal markets, stocks relative to utilization are projected to remain below their previous longer term averages, especially given policy reforms in many countries. This may also mean that the risk of an upward price movement over a short term period is more likely than a further fall in prices. However, given the ability of world supply to respond in a context of slow demand growth, such price strength would likely be short lived.

Chart 5. Oilseeds and sugar: world market prices, 1980 to 2002 (constant 1990 US$)

Chart 6. Tropical beverages: World market prices, 1980 to 2002 (constant 1990 US$)

Alternative scenarios for basic food products

Two alternative scenarios to the baseline scenario for basic food products are explored in this section. These are: a low production scenario of basic foodstuffs by OECD countries and a high production scenario by LIFDCs.

Low production scenario in the OECD countries

The "baseline" projections indicate that, as world population expands by about 900 million inhabitants in the current decade, food consumption will increase by almost 20 percent worldwide and by one-fourth in the developing countries. To match this increase world output of basic foodstuffs will have to grow by 1.6 percent per year. This will add considerable pressure on natural resources: Farmers have two options: to intensify production on areas already in use or to expand cultivation into new areas.

In the past decade, all of the increase in world cereal production was due to increases in yields while area has actually declined by 27.9 million hectares or 4 percent. In the developed countries, yield increase has been even greater. In these countries cereal production has increased by 108 million tonnes while area was reduced by 11.7 million hectares or 8 percent: But intensification can also produce problems. Rising yields by increasing the use of chemicals, diverting more water for irrigation and intensifying cropping also with the use of genetically modified seeds can create problems for the environment. Runoff of fertilizers and animal wastes can cause algal blooms and the eutrophication of lakes and enclosed seas. Although these problems are more common in Western Europe and North America, pollution from agricultural activities is becoming significant in Eastern Europe and in certain areas of the developing world.

To simulate the impact of environmental concerns on food output, a low production scenario was considered for the current decade. This scenario assumes a reduction of 5 percent in the area projected for wheat, rice, coarse grains and soybean under the "baseline" scenario in the OECD countries with the exception of Australia and New Zealand. The reduction could either derive from unilateral changes in national set-aside programmes or result from changes in crop support policies associated with the outcome of the WTO trade negotiations on agriculture.

World cereal production would fall by 18.7 million tonnes below the level projected for the "baseline" scenario. The large drop in the cereal output of the OECD countries, i.e. about 28.1 million tonnes, will be partly offset by an increase of about 5.8 million tonnes in the cereal output of the developing countries. The compensation would be only 23 percent for maize and 30 percent for wheat, thus leaving large shortfalls at the global production levels.These low rates of replacement mainly reflect the relatively isolated domestic market behaviour of the developing countries in relation to changes in international market prices.

As a consequence of the 6 percent rise in international cereal prices, aggregate world consumption of cereals would drop by 16.5 million tonnes or by 0.8 percent below the level projected in the baseline scenario. In the developing countries consumption of wheat and maize would fall by 0.8 percent and 1.3 percent, respectively.

International trade in cereals under this scenario would decline by 6 million tonnes over the level of 280 million tonnes projected in the baseline scenario. Developing countries would reduce imports and expand exports with a consequent large decline in their net import position. Net import of wheat would decline by 7.8 percent with respect to the "baseline" scenario; that of maize would fall by 20 percent while net export of rice would increase by 70 percent.

The impact of this scenario on the projected production of soybean would be even larger in relative terms. The developed countries would reduce their output of soybean by 3.6 million tonnes or by 4 percent with respect to the level of 86 million tonnes projected in the baseline scenario At the world level, the drop in the soybean output of the OECD countries would be marginally offset by an addition of 0.9.million tonnes in the output of the developing countries over the level projected by the year 2010.

High production scenario in the LIFDCs

A bumper crop scenario, almost a mirror image of the assumed low production scenario in the OECD countries, was run to assess the impact of increased cereal output on the food supply situation of the low-income food-deficit countries (LIFDCs) excluding India and China.

This scenario assumes a 5 percent increase in the cereal yields with respect to those projected in the baseline scenario, possibly associated with simultaneously favourable weather conditions and technological improvements in these countries.

The aggregate effect of the simulated shock is an increase of 12.4 million tonnes or 4.6 percent in the cereal production of the LIFDCs with respect to the level projected in the baseline. It should be noted that the increase is slightly smaller than the assumed rise in cereal yields due to the reduction in the area under cereals associated with lower producer prices (Chart 7).

Chart 7. Cereals: world market prices, past and projections (constant 1990 US$)

International trade in cereals would decline by 1.8 percent and the imports of the LIFDCs would fall by 8.7 percent.

Overall, the increase in cereal output would not contribute to a substantial improvement in the food supply situation in these countries. In fact, there would be only a 0.3 percent increase in food and feed cereal consumption. About 64 percent of the increase in cereal production would be allocated to domestic market and 28 percent to export which would expand by 62.6 percent compared to the level projected in the baseline. As a result, trade market prices of cereals are expected to decline by 1.8 percent.

With the reduction of imports and the increase of exports, the net import cereal bill of the LIFDCs would be US$2.3 billion lower than that projected in the baseline, i.e. US$14.7 billion evaluated at constant 1998/2000 prices.

[1] Throughout this report, a year marked with an asterisk (*) signifies the average of the three years centred on the year shown.
[2] Prices are world export unit values.

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