CCP 03/8

Table of Contents

I. INTRODUCTION AND OVERVIEW

II. KEY SECTOR REVIEW

III. PROSPECTS FOR THOSE COUNTRIES CONSIDERED TO BE THE MOST FOOD INSECURE

IV. CONCLUSIONS AND RECOMMENDATIONS

I. INTRODUCTION AND OVERVIEW

1. This document provides a summary of FAO’s medium-term projections for major agricultural commodities for almost all countries over the period to 2010. Projections will be published in detail later in 2003. The document also comments on the implications of the projections for food insecurity in selected countries considered to be most food insecure. Reaction and comment from delegations on the development of this analysis is sought.

2. The projections covering the cereal-feed-livestock-fats and oil complex have been undertaken with the use of FAO's World Food Model (WFM). Projections for other commodities have employed various techniques ranging from single-commodity econometric models to constant-price/constant policy projections of supply and demand. In each cases, expert judgements of commodity analysts have shaped the final results. The base period 1998-2000 was used as the benchmark for extrapolation.

3. The projections are based on assumptions in five key areas:

• Demographics. The United Nations' medium variant projections estimate that world population will expand by 1.3 percent annually between 1998-2000 and 2010. This is down from a growth rate of 1.5 percent per year recorded in the previous decade. In the 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.

• Macroeconomic context. Gross domestic product (GDP) assumptions are based on the projections of the World Bank and IMF. World GDP is estimated to increase by 1.7 percent in per caput terms, 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 3.8 percent per caput per year. In the developing countries, per caput growth is assumed to rise by 3.0 percent annually.

• Demand trends. These are assumed to continue as estimated/assumed based on historical data, apart from both price and income effects. Salient secular trends include: increased meat, particularly poultry consumption per caput; decreased rice and wheat consumption; higher vegetable oil and sugar consumption.

• Technology and productivity changes. These are estimated to continue as estimated/assumed based on historical data, adjusted by analyst judgement. In the main, the further introduction of genetically modified products is anticipated to be limited, and is not deemed to significantly affect markets during the period.

• Policy developments. The projection assumes no substantive change to the impact of these policies over the period, or effectively that policies remain as described by current legislation or practice.

4. 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 caput basis during the period to 2010. This is a decline in aggregate and per caput growth from that experienced during the 1990s. In any case, in aggregate, and by country, agricultural production is projected to grow annually, however, on average, less than the economy at large. Nevertheless, this is likely to maintain on-going pressure on resources in agriculture and for demands for increased government assistance, which if not supplied may cause declines in income and living standards in rural communities. Those commodities growing most are those most responsive to income changes including oilcrops, meat (poultry), sugar and certain tropical beverages. Cereals and especially agricultural raw materials are projected to grow least.

5. 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 (see Table 1). 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. In the OECD countries, demand growth is slow, and consumer concerns are rising, not just for safety and quality, but also for production processes. 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 – soybeans, maize and cotton, until wider consumer concerns are addressed.

6. Growth in 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.

7. The food net-import bill of basic food (cereals, livestock products, oilseeds and oils) commodities of Low Income Food Deficit Countries (LIFDC) is projected to increase from about $US21 billion in 1999 to about $US33 billion in 2010 (at constant 1999 prices)¹. A similar situation is projected for Least Developed Countries (LDC) and for Net Food Importing Developing Countries. 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.

8. World market prices in real terms have recently been all below their longer term trend levels. They are expected to return toward their trend levels over the projection period. The long term trend decline in real prices, which show prices in 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. 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.

9. 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.

10. The future prospects for countries that are the most food insecure are not encouraging. While market prices may be favourable to enhancing consumption in these countries, other factors affecting the growing populations of these countries may have a negative impact on their growth and development potential. Continued intense competition for most bulk commodities which play an important role in generating export revenues and agricultural and rural incomes, a decrease in per caput domestic food production, combined with slow to modest national economic growth likely means slow progress in reducing undernourishment in these countries. Even stronger economic growth will not significantly address their hunger problem in the short to medium term. Enhanced targeted assistance and anti-hunger programs are required.

II. KEY SECTOR REVIEW

Cereals

11. Global production of cereals is projected to grow 1.1 percent annually over the projection period, continuing a decline in per caput terms from the previous decade. However, there are differences among economic country groups. A major feature is the performance of the transition economies where cereal production fell over 4 percent annually in the 1990s, but may increase by over 2 percent annually to 2010. For rice, high production growth is anticipated in Latin America and in Africa. In most regions and for each of these crops, the yield growth attained in previous decades will not be achieved. Aggregate demand for all cereals is growing slowly, especially for food use; feed demand supporting a growing livestock sector is projected to be the main source of growth. Prices in real terms have been considerably below their long term trend lines. They are projected to move back to trend levels, and perhaps in the cases of maize and rice, to move somewhat above trend as yield growth slows and demand remains steady.

12. Trade patterns for cereals are expected to change in the medium term. Aggregate wheat exports are projected to increase by over 20 percent by 2010, and countries such as Kazakhstan, Russia and Ukraine are set to become important market players. Exports by Argentina are projected to increase sharply, as are those by the EU. More traditional wheat exporters such as the United States, Canada and Australia may find their market share reduced. For rice, imports into Africa are projected to grow and several developed markets are set to increase imports as a result of new preference access programmes such as EU’s Everything But Arms initiative. In coarse grains markets, US is projected to increase market share of maize exports, mainly as China, recently a large exporter, is anticipated to become a net importer in the medium term.

13. From a food security perspective, the market situation for cereals is critical, particularly for developing countries where they are the main source of calories and protein. Current low inventory to use ratios are projected to continue throughout the medium term, largely as a result of policy reforms. With low inventories, upward price spikes are a significant risk. Given the apparent supply potential of global markets to respond to higher prices, a tight market/price spike situation would not be expected to prevail for more than two to three years. However, during this time, high prices may impact most adversely on low income and food insecure populations.

Oilseeds Complex

14. Among the major sectors, the oilseeds complex is projected to again be the fastest growing sector, with an annual production growth of oils and fats projected at 2.6 percent and oilcakes and meals at 2.3 percent. This compares to 4.5 percent and 4.0 percent respectively in the previous decade. The reduction in projected growth is attributable in particular to the recent US Farm Security and Rural Investment (FSRI) Act which is expected to slow down US soybean production growth, and to a rejuvenation cycle in the Malaysian and Indonesian palm oil sectors that should limit expansion during the period. However, robust growth in oilseed production is projected in low-cost developing countries at 3.3 percent annually, notably (soybeans) in Brazil and Argentina, and this will increase their production and export shares.

15. Several factors will condition development of the sector. Food safety and environmental concerns will increasingly affect the production and trade of oilseeds and products. Associated regulations will make markets more complex, leading to increased labelling requirements and, possibly, to identity preservation marketing systems. Such developments will inevitably affect trade. The oilcrop sector may increasingly serve a growing demand for bio-fuels, particularly as a result of policy enhancements in some, particularly OECD, countries.

16. In recent decades, the oilcrop sector has made the largest contribution to the calorie and protein requirements of the world’s population, and will play an increasing role in food security. The issues of consumer acceptance, and of growing alternative uses have potentially important implications for meeting food security needs.

Sugar

17. Global sugar production is projected to grow at the rate of 2 percent, similar to the growth of the 1990s. This reflects a continuation of high supplies in the world sugar market that has characterised much of the past decade, including several seasons of record output in major sugar producing nations and 14-year lows in world sugar prices. Record production due to high yields and efficiency gains in developing countries, particularly Brazil and India, are particularly notable in regard to projected output to 2010. Developing countries are projected to account for most of the global increase in production, thus raising their share of world production from 67 percent in 1998-2000 to 72 percent by the year 2010. Developing countries are also expected to account for virtually all of the projected increase in global sugar consumption (over 30 million tonnes to 2010), with particularly strong growth projected in Asia. Regionally, while Latin America and the Caribbean continue to play the leading role in raising output, production in Asia is projected to grow 2.5 percent per year, slightly lower than Latin America, but higher than the anticipated global average growth rate. India and Brazil would account for 18 and 17 percent, respectively, of total global production between 1998-2000 to 2010.

18. Sugar policies have remained virtually unchanged in certain major consuming countries in spite of the general trend towards policy reform. However a more significant development which will impact on developing countries is the EU’s Everything But Arms initiative, which will redistribute existing market access more toward the Least Developed Countries, albeit in this case only after 2007.

Meat and Dairy

19. Global output of meat is projected to expand by 2.1 percent annually. Output in developing countries is projected to grow 3 percent annually, compared to only 1.1 percent for developed countries. The developing country share of global animal production is projected to increase to 59 percent, from 54 percent in the base period and 46 percent in 1992. The dynamic growth in global meat trade, stimulated in the 1990s by increased market access provisions, is expected to slow. On the export side, approximately half of the export gains projected will originate from increasing supplies from developing countries, such as Brazil, Thailand and China.

20. Partly as a result of recent experience with animal diseases, but also in response to rising consumer demands for safety and quality, there has been increasing scrutiny of meat production systems. Quality systems with a “hoof to plate” approach to food safety, quality, and environmental protection are being implemented in many countries. There is a risk that further proliferation of food standards, sanitary assurances, and certification procedures that may segment markets, leading to higher compliance costs and limiting growth in trade.

21. While meat markets are among the fastest growing agricultural markets, demand in least developed countries is not projected to be strong. The role of meat in consumption in these countries accounts for just 4 percent of calorie and 14 percent of protein intake. However, nearly 70 percent of producers in these countries secure some income from livestock operations, and participation in growing markets will be important to their sustainable livelihoods.

22. World production of milk is projected to grow by 1.5 percent annually. The production share of developing countries expected to rise to 44 percent from 39 percent at the start of the decade. Consumption of milk and milk products is expected to grow most strongly in Asia as a result of rapidly growing incomes, and changes in dietary habits, and is projected to account for half the growth in world demand. Significant growth in demand is also expected in the Latin America and Caribbean region, particularly Brazil and Mexico.

23. The proportion of milk production which is traded should remain small at 8 percent, as trade barriers remain significant. Developed countries are projected to continue to account for about 70 percent of dairy product exports, but exports of low cost suppliers such as New Zealand and Australia projected to increase substantially, while those from Europe are projected to decrease, and those of North America to change little. Very few developing countries will be net exporters of dairy products by 2010; these would include Argentina, Chile, Uruguay and India. The imports of the developed countries are projected to change little and developing countries will account for the growth in imports. For countries in transition, limited growth in milk output and some increase in domestic demand are expected to inhibit export growth, but improvements in domestic processing capacity should dampen import demand. Africa is expected to register the smallest increase in demand and in many countries per caput consumption will actually fall.

Fruit

24. Aggregate production of citrus and tropical fruits is projected to grow 2.3 percent annually over the period to 2010, sustaining an increasing per caput demand. With lower costs, a greater share of production will come from developing countries particularly in Latin America. This is particularly the case for bananas where Latin American countries are projected to gain shares relative to members of the ACP group. Higher shares of citrus and tropical fruit production are also projected for a number of Southern Hemisphere countries such as South Africa and Australia. While demand for tropical fruits in quantity terms has some room for growth in many developed countries, trade is projected to grow considerably in growing middle income countries, such as China and the transition countries. Aggregate trade is expected to expand over 2 percent annually. Prices are expected to continue their long term real decline, although prices of certain fruits such as lemons are expected to recover somewhat from lows experienced in recent years.

25. During the projection period, many fruits may face productivity challenges where a number of citrus diseases (eg. CVC, canker, Tristeza) in major citrus producing areas (Brazil, Florida) are likely to reduce productivity in the next five years. For bananas, fungal disease will continue to affect productivity in the coming decade. Globally, increased use of disease management techniques is required.

26. Increasing consumer demands for quality, safety and variety are impacting these markets. Environmental and social conditions for some products (notably bananas), are a growing influence on consumer choices in major markets, leading to market niches for certified products. Supermarkets which are a growing feature of global markets, are increasingly demanding ever higher levels of quality. Furthermore, certain countries may continue to restrict imports of tropical fruits containing a determined quantity of pesticide in response to food safety concerns of consumers. These import restrictions may also inhibit trade.

Tropical Beverages

27. World production of tropical beverages is projected to expand on average by 1 percent annually, with relative strength in tea (1.9 percent) and cocoa (2.0 percent), but projected sluggish growth in coffee production (0.6 percent). Prices are anticipated to remain low during most of the period as demand also remains sluggish; about 75 percent of consumption occurs in developed countries where markets are saturated. Consumption in developing countries is projected to grow more strongly at 1.5 percent annually but from a low base. Trends indicate that higher quality or specialty teas (such as green tea), coffees and cocoas will grow more quickly, albeit in substitution for lower quality beverages. In coffee markets, exports from Asian countries, which grew strongly in the previous decade, are projected to slow. African countries may gain market share but Latin America will continue to be the dominant supplier. However, current high stock levels in importing countries will impact on trade growth in the medium term.

28. Processing of tropical beverages continues to be largely located in developed countries, due partly to tariff escalation but also to entry barriers into the processing industries. While reductions in tariff escalation due to enhanced preferential trade arrangements should foster some growth in processing for export by developing countries, benefits from value addition in producing countries will depend critically on industry structure.

Agricultural Raw Materials

29. The market for most agricultural raw materials is projected to remain relatively stagnant over the projection period, as it was for much of the previous decade, increasing by less than 1 percent annually. Competition from synthetics is expected to maintain downward pressure on prices. By and large, developing countries are the primary producers of these products. India will continue to be the largest producer of jute and coir fibre, and Philippines the main producer of coir. East African countries such as Kenya and Tanzania are projected to increase their shares of sisal production relative to Latin American countries. Africa has emerged as an important exporter of cotton. Hides and skins markets may expand slowly and production shares of developing countries should also rise, although quality concerns may continue to limit prospects for some countries. Market prices for these products have shown large swings in recent years, and prospects are for declining real prices over the medium term, perhaps with similar cyclical patterns.

30. Trade in raw materials is projected to grow slowly. These commodities have been and will remain important to many developing countries, and are critical to many food insecure countries, where such commodities account for a large proportion of total export earnings. For cotton, the implementation of the Agreement on Textiles and Clothing has improved market prospects for trade in processed manufactures, but the export potential of many countries is dampened by the impact of subsidies on production in some developed countries. Expansion of trade preferences also may help developing value added processing and trade in the other raw material products, particularly for ones where effective protection and support in developed countries has been high. The prospects of cultivation of genetically engineered crops, particularly for cotton, hold out the potential for greater cost competition with synthetic fibres.

III. PROSPECTS FOR THOSE COUNTRIES CONSIDERED TO BE THE MOST FOOD INSECURE

31. This section focuses on the prospects for food insecure countries, in the context of medium term projections, and is intended to motivate further analysis of the role of commodity markets and commodity policies in the problem of food insecurity. It does this by examining some implications of the medium term projection for those countries which were identified in The State of Food Insecurity in the World 2002 as having 35 percent or more of their populations undernourished². It must be stressed that the existing projection framework for these countries is currently not adequate for a full review. While the country coverage of the projection is mostly complete for most food commodities, it is less so for non-food commodities; while coverage for commodity consumption is reasonably complete, it less so for commodity production. Moreover, the modelling framework does not allow the analysis to consider the implications of policy developments at the national level on the vulnerable groups in these countries. However, an examination of the prospects for these countries will help foster discussion and further study of the role of policies and markets in the food security problem.

32. Commodity market developments obviously play a significant role in the food security situation of these most food insecure countries. It is not only that agriculture’s share of total GDP averages about 30 percent, or that consistently over 70 percent of the populations of these countries are involved in agriculture. But with average per caput GDP at about $US 1/day (1995 dollars), resources expended on food are high relative to income, and for many of these countries, most calorie and protein intake is by definition low, and depends on relatively few products. Furthermore, these food insecure countries are growingly dependent on food imports, as production has not kept pace with increasing demand, with high population growth at about 2.7 per cent. Food aid in recent years has been about 3 percent of total calorie intake, and while this may be low, it may critically affect key segments of the population. Finally, earnings from agricultural exports for these food insecure countries are not diversified but concentrated among two or three bulk commodities including tropical beverages, tobacco, fruit and vegetables, and agricultural raw materials. Against this background, and depending on each country’s openness and sensitivity to international markets, commodity and commodity policy developments, both domestically and globally may critically impact the food security situation of these countries.

33. In terms of the medium term prospects for the most food insecure, several factors indicate that there may be only limited improvement in their situations. Economic projections for these countries are mixed, with per caput GDP projected to be stagnant in some countries, or to show only moderate gains in others. In no case do the macroeconomic projections anticipate “high” rates of economic growth during the period. As noted in the sectoral projection, market conditions for most of the bulk raw commodities are expected to remain weak over much of the period to 2010. Market prospects for tropical beverages and for agricultural raw materials, which form the basis of agricultural exports for these countries are characterised by relatively weak prices with high competition from other developing countries. The prospects for growth in export earnings appear limited.

34. In terms of domestic food availability for these countries, the production – utilisation deficit in cereals is projected to widen. The gap is expected to increase to 17 percent from 11 percent on average in 1998-2000. This results from higher domestic demand given strong population growth and modest per caput income growth, but with more slowly growing domestic production. As a consequence, for the aggregate of basic food commodities, these countries are projected to increase net-import spending. This, in itself, does not necessarily have negative food security implications. But it does point to higher reliance on external markets for food requirements, and the unease which is often expressed with such a situation, particular with potentially price-volatile markets and a high percentage of income spent on food.

35. Growth in per caput calorie consumption (see Table 5) is projected to remain slow. It is important to underline that projection figures are averages; distributional changes are perhaps as critical as average changes in average consumption. However, the projections show marginal improvement in the outlook for these countries, with average daily per caput calorie intake increasing by 5 percent by 2010, to just 2027 calories. This improvement is mostly due to projected growth in consumption of roots and tubers and fruit and vegetables. Changes in national income play an important role, and elasticities of demand for purchased foods with respect to income in these countries are high. For many, however, local production also plays a major role in nutritional prospects, particularly for crops such as roots and tubers and fruits and vegetables where trade activity is more limited.

36. To evaluate the importance of increased national income to the improvement of food security in these countries, a higher income growth scenario was explored using an augmented World Food Model³. Increasing GDP growth by a further 1 percent each year over the baseline, under the assumption that the additional income was generated outside agriculture (agricultural production was not adjusted) increased average calorie intake by 5.3 percent to 2134 Kcal/day by 2010. Income-induced increases in food consumption of traded foodstuffs - cereals, meat, oil and milk explain about half of this improvement.I International market prices were unaffected by the increase in demand by these countries, given their relatively small proportion of world markets. It appears therefore that while higher income growth is obviously a key to increasing nutritional intake and nourishment, it will take much higher growth to significantly improve the nutritional situation in the short to medium term. A successful approach to addressing the food security issue must also consider the role of targeted anti-hunger programmes, such as development assistance that generates greater local production/productivity of key food crops, or food aid in meeting the needs of the most food insecure.

IV. CONCLUSIONS AND RECOMMENDATIONS

37. The projections describe an environment in which global agricultural production per caput continues to grow, but in which aggregate demand is growing more slowly than in the past. On-going adjustment pressures in agriculture persist, as relative commodity prices are projected to continue their long term decline. Trade may grow more slowly than in the previous decade, if the assumption that market access limits remain high is sustained. Progress in reducing undernourishment in the most food insecure countries is projected to be slow. While economic growth is important for addressing their situation in the longer term, they are likely to continue to have a high proportion of their populations undernourished in the short to medium term. Programmes which address the hunger problem directly are needed to address this situation.

38. Delegations are encouraged to outline:

• the market issues/problems their governments expect to confront over the next decade;
• the policy actions anticipated to address these issues, and the challenges faced in doing so;
• the information which might help to address these challenges.

39. This document has made a first attempt to examine the role of commodities in the projections for the most food insecure countries. The framework for such an analysis is currently limited. It is recommended that a more complete framework be developed that would extend commodity coverage and develop better indicators of the interaction of markets and food security performance. Such a framework would facilitate a more detailed forward looking assessment of policies (domestic and international) and their impact and effectiveness in reducing food insecurity. Examples of such policies could include support or subsidy programmes, trade policies, productivity enhancing technologies or environmental policies such as those to encourage bio-fuel/ethanol production.

Table 1: World: Projections of growth of production, demand and trade

Table 2: Developing economies: Past and projected growth of production, demand and trade

Table 3: Economies in transition: Past and projected growth of production, demand and trade

Table 4: Industrialized economies: Past and projected growth of production, demand and trade

Table 5: Consumption profile and projections for most food insecure countries

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¹ Calculation for commodities covered by World Food Model, using net trade quantity data and market prices.

² These countries are Afghanistan, Angola, Armenia, Bangladesh, Burundi, Cambodia, Central African Rep. Democratic Rep. of Congo, Eritrea, Ethiopia, Haiti, Kenya, Liberia, Madagascar, Mongolia, Mozambique, Niger, Rwanda, Sierra Leone, Somalia, Tajikistan, United Rep. of Tanzania, Zambia, Zimbabwe.

³ For this scenario, equations were added for consumption of certain commodities, most particularly roots and tubers, to enable a more complete assessment of the impact of increased income growth.