[A-List] Prices of Major Crops Propped by Biofuels and Rapid Emerging Economy Growth

["Yoshie Furuhashi" <critical.montages@xxxxxxxxx>]

IMF, World Economic Outlook,
<http://www.imf.org/external/pubs/ft/weo/2008/01/pdf/text.pdf> April
2008, pp. 60-61

Prices of Major Crops Propped by Biofuels and Rapid Emerging Economy Growth

Food prices rose by 39 percent from February 2007 to February 2008 --
led by wheat, soybeans, corn, and edible oils, all of which reached
new highs. As in the oil market, price strength reflects tight market
balances, with inventories of major food crops at a two-decade low
despite generally robust production growth (Figure 1.20, top panels).
The tightening reflects a number of factors.

Rising biofuel production in the United States and the European Union
has boosted demand for corn, rapeseed oil, and other grains and edible
oils. Although biofuels still account for only 11â2 percent of the
global liquid fuels supply, they accounted for almost half the
increase in the consumption of major food crops in 2006-07, mostly
because of corn-based ethanol produced in the United States (Figure
1.20, third panel). Biofuel demand has propelled the prices not only
for corn, but also for other grains, meat, poultry, and dairy through
cost-push and crop and demand substitution effects.15 Strong per
capita income growth in China, India, and other emerging economies has
also buoyed food demand, including for meats and related animal feeds,
especially grains, soybeans, and edible oils.

On the supply side, drought conditions in a number of countries
reduced global wheat production in 2007 (Figure 1.20, fourth panel).
Moreover, higher oil prices have also increased production costs for
many foods products. Policies may also have contributed to upward
pressure on global prices. In view of political concern about the
social implications of rising food prices, some countries have
resorted to measures to reduce exports and increase imports of food,
thereby contributing to global market tightness. For example, in 2007,
China, Russia, Ukraine, Kazakhstan, and Argentina imposed export taxes
on grains and lowered tariffs on edible oils, while India banned
basmati rice exports and raised export taxes on palm oil.

Food prices are expected to peak in 2008, and they are forecast to
ease only gradually thereafter. In the short term, price risks are on
the upside, as demand is expected to remain strong. More generally,
although food price cycles in the past typically averaged three years,
with supply responding quickly to changes in demand conditions, the
current cycle is likely to last longer. The reason is that food demand
is expected to continue increasing rapidly for some time with rising
biofuel production in the United States16 and the European Union, and
with continued strong demand from emerging and developing economies.

-- 
Yoshie
<http://montages.blogspot.com/>