No price rally seen in crystal ball: economist

Commodity prices expected to remain steady for several years, even with predictions of escalating demand from developing countries

TORONTO — Farmers need to temper their market expectations for at least another decade, according to a senior economist with the World Bank.

“We do not expect much of a recovery in agricultural prices in real terms from what we’re seeing today,” John Baffes said, speaking during lunch at the Canadian Food and Drink Conference here Nov. 28.

Baffes, in response to a question from Canadian Federation of Agriculture president Ron Bonnet, said political decisions can influence the marketplace, similar to what occurred in the 1970s when the Soviet grains purchase pushed prices to unprecedented levels.

However, those influences tend to be short term in nature, he said.

Baffes also cautioned farmers not to count on the influence of the strengthening economies of India, China and other emerging nations.

While it’s true that people spend more on food as their incomes grow, after a country’s per capita income reaches $3,000 to $4,000 per year, the influence of rising incomes on commodity prices tends to level out.

There’s only so much food people can eat, and the shift from a grain to meat-based diets may have been overstated.

One possible exception are edible oils, Baffes said. Increased consumption has been linked to a shift in eating patterns once per capita incomes move beyond the $3,000 to $4,000 threshold.

Rather than cooking from scratch in their homes, families buy more packaged, processed foods and eat away from home, consuming more edible oils in the process.

Agricultural commodities have also been influenced by food stockpiling in India and China.

In China, especially, there is no clear picture of how much has been set aside.

Another factor has been agricultural land acquisitions, such as the Chinese land purchases in Africa.

Turning to energy, Baffes said prices are poised for a modest recovery, with the price of a barrel of oil expected to rise next year to US$55, after averaging $43 a barrel this year. Members of the Organization of Petroleum Exporting Countries recently agreed to cut production slightly, a move that lifted crude markets.

However, price increases will be restrained by the resolve in the United States to move toward energy independence and the increase in supply elsewhere, he noted.

U.S. oil reserves are being tapped into far faster than even the industry itself suspected.

“The oil industry has experienced a revolution, the shale revolution. The growth in U.S. supplies was a shock to the global oil industry.”

Energy and agricultural commodity prices tend to move together, Baffes said. So, while farmers are unlikely to spend a lot more to fuel their operations, they shouldn’t expect a rally in crop prices any time soon.

“Agriculture is an energy-intensive industry. It’s four to five times more energy intensive than manufacturing,” he said.

Baffes is a senior economist with the World Bank’s Development Prospects Group. He manages the Commodity Markets Outlook, a World Bank quarterly publication.

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