Cereals prices in 2020: how worried should we be?

12 September 2011
Comment
By Steve Wiggins and Sharada Keats

Ever since cereals prices spiked on the world market in 2007/08 and, after a brief decline, rose again from mid-2010 onwards (see Figure A), there has been concern over what the future may hold for the cost of staples and the resulting impacts on food security and poverty. So, how high will cereals prices be in ten years?


Figure A: Cereals prices on world markets, 2000 to 2011, constant 2000 prices

Recent forecasts reveal vastly different perspectives on future prices: on the one hand seeing substantial increases by 2020, and on the other, seeing a gradual decline from current levels — both in relative terms, accounting for inflation.

Why do these forecasts differ? Which is more likely to be correct? And what do they imply for policy?

Forecasts: cereals prices to rise or fall by 2020?

Every year teams from the Organisation for Economic Cooperation and Development (OECD), the Food and Agriculture Organization (FAO), and the US Department of Agriculture (USDA) forecast expected cereals prices (world prices for OECD/FAO, and US farm prices for maize and wheat for USDA) and other agricultural products over a nine-year horizon. The 2011 forecasts from both OECD-FAO and USDA look forward as far as 2020. Their projections of cereals prices agree on two things:

  • Real prices in 2020 will be higher than prices in 2006, before the spike — with the exception of OECD/FAO’s projection for wheat where prices are expected to fall; and
  • From 2010 to 2020 cereals prices are expected to fall, by 10% to 35% in real terms.

For maize and rice — although not for wheat — forecasts have been rising since 2008. It is reasonably easy to understand why maize forecasts have risen, as there has been an extraordinary increase (and much more than was expected a few years ago) in the amount of US maize used to produce ethanol. In addition, forecasts of oil prices have also risen, pushing up expected costs of production. But it is less clear why projected rice prices have risen so much.

In marked contrast to the OECD-FAO and USDA projections, Oxfam’s Grow campaign reports results of modelling by Dirk Willenbockel at the Institute of Development Studies (IDS) that show cereals prices in 2020 as being 20-30% higher in real terms than in 2010. By 2030, real prices are expected to increase still further to 70-80% higher than equivalent prices in 2010 and factoring in the effects of climate change pushes the cereals prices in 2030 to an alarming 110-175% more than 2010.


Figure B: Projected real price changes from 2010 to 2010: A comparisonWhy the differences in projections?

Different models make different assumptions about the growth of demand for cereals, but more importantly, about technical progress and policy changes. Willenbockel’s work, for example, shows that if technical improvements accelerate, the expected price increases are much reduced.

While the OECD-FAO and USDA reports do not provide detail of their assumptions on demand, technical change and policies, it is very likely that the main difference between these and the Oxfam projections lie in the former having more optimistic views of technical progress and policies.

What do these projections tell us?

Oxfam’s vision represents what is likely to happen if business proceeds as usual. This may be the outcome if nothing is done to stimulate technical progress, to invest in rural public goods, and to otherwise encourage farmers to produce more. It also shows what may happen if responses to climate change are delayed. In line with other analyses – see Foresight’s Future of Food and Farming – it concludes that business as usual runs unacceptable risks.
OECD-FAO and USDA, on the other hand, do not have to make unrealistic assumptions to reach more optimistic conclusions – changes to business as usual do not need to move mountains. It is not necessary to raise the growth rate of cereals production to unimaginable levels: demand is not growing that quickly. Hence, relatively small increases in research and extension budgets, investments in rural areas, and more encouraging policy for farmers — especially smallholders in the developing world — will do the trick.

What needs to be done? With such contradictory projections, it would be reassuring to know exactly why they differ so much. We’ve already speculated as to likely explanations, but we’re guessing all the same. Bringing the modellers together should get a better answer.
The medium-term prospects for cereals prices depend much on policy. If too little is spent across much of the developing world on rural roads, health, education, water, and agricultural research and extension, then the outcomes could be as gloomy as those projected by Oxfam and Willenbockel. This applies all the more so if OECD countries do not support international public research for agriculture, and continue their beggar-my-neighbour polices of agricultural trade restrictions, and export and farm subsidies that distort world markets.
On 7 October 2011 ODI will be hosting an event with some of the key institutions closely involved in forecasting cereals prices to try to better understand these vastly different projections.