|No.2 December 2006|
|Global Market Analysis|
As 2006 draws to an end, the most prominent feature of the food and feed markets in 2006 has been the surge in the prices of cereals, in particular wheat and maize, which, by November, had reached levels not seen for a decade. Poor harvests in key producing countries and a fast growing demand for biofuel production have been the main drivers of the grain markets. Supply constraints also have dominated the rice economy.
The exceptional increase in cereal prices bears strong implications for the other agricultural commodities: although prices in the oilseed complex have also been on the rise, gains have been well short of those witnessed for cereals. This is likely to trigger, in the coming season, a shift away from oilseed cultivation, as farmers turn towards more profitable cereal crops, a move that will exacerbate current imbalances, especially in the vegetable oil markets, which have seen demand rising faster than production.
The strength of grain markets also has ripple effects on the meat and dairy sectors via their feed linkages. For instance, expectations of high feed costs are threatening to postpone a recovery in livestock and meat production. This comes at a time when more pondered consumer reactions to animal health scares have raised the prospect of a demand rebound. As for dairy products, developments in the sector’s own fundamentals currently overshadow concerns over feed costs. Negative expectations for milk production in Australia and in the European Union, which together supply a third of world dairy exports, forewarn a tightening of the market and an end to the softening of prices witnessed earlier in 2006.
After three years of deficit, global sugar production has recovered, so much so that it is expected again to outpace demand. While the turnaround appears to have been factored in by the market, as evidenced by the slide in prices since the highs reached in February 2006, the sugar market remains particularly susceptible to large demand swings and price volatility.
On the policy front, animal disease-related import bans are gradually being lifted, but governments have intensified their interference in the basic food and feed markets. In the case of cereals, interventions on the export side, in the form of export ceilings and temporary export bans, have multiplied, as governments stepped in to avert domestic supply shortages. Actions on wheat and sugar were also geared towards facilitating imports. Interestingly, in the European Union, the first effects of sectoral reforms have already become evident in the dairy and sugar markets. Accession of Bulgaria and Romania to the European Union as of 1 January 2007 is also an important development that will influence global food and feed markets.
While the general policy setting will continue to be of utmost importance in 2007, the attention is now turning to external factors, in particular, crude oil prices and macro-economic variables such as exchange rates and income growth. Given current market tightness, weather is another uncertainty that will weigh heavily on food and feed crop prices, and indirectly, also on the prices of meat and dairy products.
|GIEWS||global information and early warning system on food and agriculture|