Agricultural commodity prices will remain high for the next 10 years. Income growth in most developing countries will rise. Commodity prices will remain strong and will boost long-term farm sector profitability and encourage more investments in research and production that will improve yields and increase production area. The Foreign Agricultural Service (FAS), the export arm of the United States Department of Agriculture (USDA), identified eight key factors that will dominate global agriculture in the coming decade.
- Rise of the middle class
Economic growth— especially from emerging markets—is expected to drive the global economy, as the middle-class population is estimated to double within the next 10 years. Following the recession in 2010—the worst recession in decades—growth and development, particularly in developing countries, will prompt future growth despite the current economic weakness in developed regions such as the U.S., Europe, and Japan. The middle class from developing countries is estimated to expand up to 104% until 2020, compared with 9% from developed countries. Much of the increase will come from China and India (see figure, click to enlarge). Interestingly, while the threat of a new global recession looms, the rise in the middle-class demographics will not only create a significant global food demand but also reveal higher income elasticity for food in emerging markets. Consequently, it will affect consumption patterns, as buying decisions based on price and food choices can shift quickly between commodities.
- Falling dollar
USDA expects the agricultural trade-weighted value of the U.S. dollar to weaken further through 2021 and thus put more upward pressure on commodity prices. Commodity prices are inversely related to the dollar, and a relatively weaker dollar raises a foreign buyer’s purchasing power and hence demand for those commodities. Since 2002, the U.S. currency has been trending down and most private economists believe that its value will ease against a broad range of currencies.
- Demand for biofuel
Demand for feedstock such as grains, vegetable oils, and sugar has been boosted by the continuously expanding production of global biofuels, especially in the U.S. and the European Union, driven by the Renewable Fuels Standard in the U.S. and the Renewable Energy Directive in the European Union. In total, 36 countries (mostly in the Western Hemisphere) have adopted policies encouraging the use of biofuels. There is, however, a “new generation” of biofuels that are not based on food crops (such as algae), which could help reduce the world’s reliance on food-based feedstock for energy.
- Trade liberalization
After a 150% increase in trade liberalization since 2000, trade has grown to $700 billion and it is projected to cross the $1 trillion mark by 2020. China and Southeast Asia, in particular, have seen a significant increase in trade, and the growing list of Free Trade Agreements at bilateral and regional levels is expected to fuel production growth in exporting countries.
- Policy “errors”
Restricting exports is usually a reaction to market scares such as shrinking supplies and inflation. However, export bans distort markets and increase world prices just like the rice crisis in 2008. Moreover, although these decisions boost the domestic market and reduce food inflation in the short term, they also lower producers’ prices and profitability, thereby affecting long-term production. These policy measures also discourage investors since their earnings will be subject to unpredictable government actions.
- High input and energy prices
Agriculture is about planting, harvesting, transporting, and processing. When energy-intensive inputs such as diesel, fertilizers, and agricultural chemicals become more expensive, farmers’ profits and output are affected. The limited sources of energy and global growth of the middle class are anticipated to drive energy prices up.
- Increasing role of biotechnology
Between 1996 and 2010, an 87-fold increase in area of biotech crops made them the fastest-adopted technology in the history of modern agriculture. In 2011, 16.7 million farmers grew biotech crops—and over 90% of them (or 15 million) were small resource-poor farmers. Hence, developing countries grew close to 50% of global biotech crops in 2010 and they are expected to exceed similar output from industrial countries by 2015. Based on this trend, biotechnology will have a bigger role in developing agricultural production to support future needs.
- Increase in production area
Production is also expected to receive a boost from increases in cultivation areas, particularly from South America (Brazil) and the former Soviet Union (Russia and Ukraine). Africa also offers a massive land resource, but, given its poor infrastructure and relatively high transport and distribution costs, its role in supporting increased production looks limited, for now.
These eight points reveal key indicators that can shape global agriculture in the next decade. Asia will drive much of the demand, as this region’s economy (particularly China and Southeast Asia) is expected to grow the fastest, alongside the Middle East, North Africa, and Latin America. In the near future, though, a new recession in Europe and, consequently, a slowdown in economic growth in China could sooner or later curb the growth of the middle class in emerging markets (a major factor in many of the points raised). Such a recession could also increase the value of the dollar, cut global trade, reduce all dollar-denominated commodity prices, and lower farm incomes. In other words, it might challenge almost every point that had been identified as a key factor that would drive global agriculture. This possibility, however, would seem to only delay, rather than prevent, the overall positive outlook.
This article is based on a speech presented by Mr. Michael J. Dwyer at the USA Rice Outlook Conference in Texas. Mr. Dwyer is the director of global policy analysis of the USDA Foreign Agricultural Service.