Food oversupply – for geopolitical reasons

CalpeConception Calpe Senior Economist of the Food and Agriculture Organization of the United Nations (FAO) foreshadows a further fall in world prices in her interview to Alapblog.hu. She takes the view that the four months’ decline in agricultural commodity prices is – at the moment – just a remarkable phenomenon.  According to her, this is only partly because of the better than expected harvests in the producing countries. The other reasons lie in the geopolitical, political developments.

However, it is sure that the Russian events did not influence the recent market movements, as Russia has used its trade weapon just in the last few days. Of course, it is very difficult to forecast how the new West-Russia trade war will impact the (food) markets. Most probably, it will push down prices as it will spark an even fiercer competition among the producers, exporters of Australia, New Zealand, the EU, and America, who will try to compensate themselves for their losses in other markets. But even if this happens, the bread or meat will not necessarily become cheaper, the interviewee warns.

Zentai Péter: Is there a change under way in the global food market? Prices are significantly going down, even though a few years ago experts claimed that the essential agricultural commodities would become more expensive.

Conception Calpe: There is indeed a tendency for prices to fall. It is remarkable that the most important, basic groups of products – like cereals, feeds, and oils – have become cheaper for the last three months. That applies in particular to the price of cereals, which fell by more than 10 percent in July. There was an increase in the price of sugar and meat – but just a slight one. In the case of sugar, it was mainly due to political uncertainties in the two major sugar-producing countries (in Brazil and India); and in the case of meat, supplies were tightened in order to stabilize the market. However, the tendency is clear: prices are going down.

Does it indicate a fundamental turning point?

I would not say this is unprecedented. The trend can turn around anytime. But we will have to pay closer attention to the price developments in the next months to see whether the trend consolidates or changes in the long-term.

You have considerable, twenty-five years of experience in this field. What is your personal view, prognosis in the light of the global events?

It is very difficult to forecast prices, especially, in this market as it is not only determined by supply and demand conditions but by political events. And politics can dramatically distort the agricultural markets. The Russian food embargo, more precisely, the fact that Russia banned all imports from Australia, New Zealand, the United Stated, and Canada might have a strong effect on the global (food) market. The competition among these large meat and milk producers has already intensified as they look for alternative markets to make up for their losses. Most likely, this will result in lower world prices.

Does that mean that the last quarter’s drop in prices does not reflect these events in Russia?

Basically, it does not reflect it, it cannot reflect it. This trade war between Russia and the West is a new phenomenon. We will only see its effect on product prices in a few months.
In the recent time, the market was impacted by the tensions between Ukraine and Russia. Ukrainians were worried about access to Black Sea ports, where they export weed and grain. They believed that some supplies will not be available to the world market, thus, prices increased. Then they realized that the flow of products was not affected by the tension and prices went back down.
However, right now, cereals are not targeted by the Russian import ban. But it is likely to have significant impact on meat and vegetables. Russia is a very important market for meat; one of the largest importers in the world. Therefore, the banned exporters will make every effort to find alternative markets to sell their excess products, which will inevitably push down prices worldwide.

The situation is quite paradoxical: prices go down in a large part of the world – in Russia, however, they will increase because imports are banned.

Consumers in Russia will be definitely worse off as they will have to pay more for those products than they used to. At the same time, the Russian producers will gain because they will have much less competition.
The opposite will happen in the United States, Norway, Australia, and Canada, where producers will suffer severely. For instance, Poland has been a major potato exporter to Russia for years. Because of the ban, half of its harvest might go to waste.

Provided that the international fall in prices prove to be of lasting nature, will we consumers experience it? Can we expect lower prices of sugar, bread, and meat?

The experts of the FAO monitor the quotations of grains, oils, meat in the major exporting countries. If we see an increase in the international commodity price, it may not mean that we will be a similar increase in the end-products’ price in the domestic market. There are a lot of things that can prevent the transmission from international price to domestic prices: exchange rate changes, tariffs, energy costs, transportation costs etc. it varies from country to country. Therefore, just because weed prices fall, bread prices will not necessarily go down.

We haven’t talked about weather as a key factor influencing harvests. It importance has been very much overemphasized. Is this still the case?

Climate change brings more drastic events: long and deep droughts or heavy floods. Of course, it has a very negative impact on production but we are trying to tackle the problem – primarily, by focusing on preventing and controlling the causes of extreme weather. It is also crucial to mitigate its impact and adapt to it. There is a lot of research going on to find varieties of drought-resistant and flood-resistant crops and reduce the growing period of them. The point is that the risk of having crops affected by unexpected anomalies is reduced. This is the reason why the dramatic climate does not cause dramatic prices.

The use of GMOs on crops seems to stabilize food prices, doesn’t it?

The FAO takes no clear position on this issue. We have to be quite reasonable and not be either against it or in favor of it. There are certain countries that may find GMOs (genetically modified organisms) as solution to their problems. For instance, Bangladesh, which very frequently sees floods, is looking for flood-tolerant rice. Using genetically-modified crops is a question of food security and survivor to this country. But this issue is a subject of serious disputes; therefore, I can just reiterate that we do not want to take position on GMOs.
However, the actual developments on world markets seem to be good news to poorer countries that are not-self-sufficient and rely on food imports. But even if prices keep falling, they will not return to the levels that prevailed 2008.