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ECONOMY: 'Biofuels Will Keep Food Prices High'

Mattias Creffier

PARIS, May 29 2008 (IPS) - In the next ten years, prices for agricultural commodities will come down from current record levels but remain higher than the mean of the past decade, according to a new prediction.

Additional demand for biofuels and high fuel prices are among the permanent factors that keep food prices up and threaten food security in import-dependent poor countries, says the report from the Organisation for Economic Cooperation and Development (OECD), a grouping of 30 rich nations, and the UN Food and Agricultural Organisation (FAO).

Their Agricultural Outlook 2008-2017 presented in Paris Wednesday says the dramatic increase in food prices since 2006 is partly due to temporary bad weather conditions in major grain-producing countries. These conditions come and go, and once the supply side recovers, prices are projected to come down.

Yet the two organisations predict that in the next ten years, prices will remain at higher mean levels than in the past decade. Real prices, that is, nominal prices corrected for inflation, are projected to increase in a range from below 10 percent for rice and sugar, under 20 percent for wheat, around 30 percent for butter, coarse grains and oilseeds, to over 50 percent for vegetable oils.

The outlook is based on the expectation that the world economy and population will continue to grow steadily to reach 7.4 billion in 2007. It assumes, rather optimistically, that oil will cost 104 dollars per barrel by 2017, that the U.S. dollar will strengthen its rate against most currencies, and that biofuel production will cause additional demand for grains, oilseed products and sugar.

Continuing low stock levels and the impact of more variable weather conditions due to climate change could make agricultural markets more volatile. Adding to the instability are speculative investment funds that take up positions or leave agricultural futures markets as profit opportunities dictate.

To counter the food crisis the FAO and the OECD propose a policy mix of short-term humanitarian intervention and, in the medium term, increased investments in roads, irrigation, storage facilities and research to make the agricultural sector of poor countries more productive.

"We have to strengthen the poor countries' capacity to respond to the increased demand in agricultural commodities," FAO director-general Jacques Diouf told the press. "These price hikes are proof of the fact that agricultural development has not been prioritised enough during past decades and that its importance for economic development has been underestimated."

OECD Secretary Angel Gurría warned of "undesirable and often unintended impacts" of trade restricting policies. Export taxes and embargoes, like the ones imposed recently in Argentina, tend to discourage farmers to produce more, and make world prices more unpredictable. On the import side, tariff measures to protect domestic farmers make food more expensive for consumers in urban areas, the report argues.

Both organisations seem to disagree with French agriculture minister Jacques Barnier, who in a recent article in the Financial Times praised the European Union's Common Agricultural Policy as a model for the African continent to increase its food security situation.

"Current EU policies of direct payments to farmers are very expensive and it begs the question if they can be afforded by poor countries," said Loek Boonekamp, head of the Trade and Markets Division of the OECD's Directorate for Agriculture. "I think it is more logical for governments and international organisations to put in place the essential infrastructure and framework for smaller farmers to take their incentives from higher prices, and use them to increase their production and income."

Globally speaking, developing countries are taking up a larger market share in the agricultural commodities trade. The report expects most of the import growth for wheat, sugar, oilseeds and oilmeals to take place in Asian developing countries. For relatively expensive products such as beef, pork and cheese, rich countries will continue to dominate import growth.

Also on the export side, developing countries are gaining market share. For all products except sugar, rice and vegetable oils, export growth in developing countries is greater than in OECD countries. Nevertheless, the rich countries will continue to dominate export trade for wheat, coarse grains, pork and all dairy products, according to the projection in the report.

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