July 20, 2011

High global crop prices to persist for two more years

High global crop prices will persist for at least two more years as "the world is walking close to the edge of food insecurity," a Purdue University report released on Tuesday (Jul 19) said.

Three university researchers identified five factors responsible for near-record grain prices this year - the weak dollar, huge soy purchases by China, bad weather in some grain-growing nations, biofuels, and unyielding demand that keeps supplies tight.

"In the absence of yields well above trend, it appears the tight world stocks situation for corn and soy cannot be overcome in one crop year and that high prices will exist for two crop years or longer," said the report, written by agricultural economists Christopher Hurt, Wally Tyner, and Philip Abbott.

"In essence, high prices, at least by historical standards, appear to be the new norm. Meanwhile, the world is walking close to the edge of food insecurity, with the potential for extraordinarily high prices in any year of major production setbacks," the report said

The report was sponsored by the Farm Foundation, which sponsored similar reports in 2008 and 2009 when prices surged. The new report does not allocate the proportion of increase due to each of the five price drivers.

Food production will catch up to demand in the longer run, wrote the economists. They said if there are poor yields this year, "much higher" corn and cotton prices would follow.

"To the extent that prices are higher in the long run, farmers globally will have reason to increase acreage (plantings) and production, ultimately moderating high prices," they said.

The report asked whether the US should shift to "policies of shortages" that encourage larger crop area and higher yields. That approach would be in tune with estimates that food production must double by mid-century and high prices are here to stay, rather than a reversion to surpluses and low farm income.

A "policy of shortage" would reduce land idling, put money into agricultural research to improve seeds and farming methods, and review policies that artificially encourage usage, such as export subsidies, biofuel mandates, and food subsidies.

"No one can answer whether the current period is truly a new era, but clearly some aspects of the current shortages are drive by public policies of countries worldwide," said the report.