By Lindsey Partos
June, 22 2009
Prices for key commodities used by food manufacturers may have eased since their peaks last year, but the cost of cereals and vegetable oils in the near term will remain far higher than pre-2008, projects the OECD.
In a joint report with the UN’s Food and Agriculture Organisation (FAO), economists predict that average crop prices could be 10 to 20 per cent higher in real terms relative to the period 1997 – 2006, while prices for vegetable oils are expected to be more than 30 per cent higher.
"Without doubt, the influence of the macroeconomic factors in determining the contours of the world agricultural landscape has never been so profound," said the Outlook report authors, warning that continued macroeconomic "turbulence" is likely to be a feature of the near term period.
Turmoil in the global economic environment has spilled over into all commodities, transcending geographical boundaries and impacting the landscape for all agri-food players.
And although global food firms have demonstrated a certain resilience to the downturn, a decline in demand and tighter credit remain key concerns for food manufacturers in the medium term, suggests the report, with risks potentially intensifying should the financial crisis and recession be prolonged.
The credit squeeze for SMEs
While all multinational food firms interviewed by the report authors “did very well in 2008”, the most severe impacts of tighter credit due to the economic crisis were noted by the food manufacturing sector.
Already small and medium sized (SME) firms in the sector often have difficulty in obtaining bank credit due to their low levels of equity and liquidity. For the report authors, the financial crisis is likely to exacerbate this situation, forcing "financially fragile firms" to exit, and generating further economic consequences.
According to the report, in an internal survey of a major European food manufacturing association, 40 per cent of the firms were affected by the downturn, of which 70 per cent were small and medium sized.
Over 30 per cent reported that financial guarantees for loans had become a constraint and new credit was increasingly difficult to obtain.
On a more positive note however, for the financially robust firms there were no credit reductions.
The financing of transactions between firms remains an issue, even within countries. The Outlook report underlined that this was noted in the UK, where a firm’s production could be blocked due to the inability to obtain inputs – raw or processed – due to credit constraints.
A situation born from "lack of trust" and uncertainty that now dominates any form of credit transactions but should prove "a temporary disruption" as the banks regain an equilibrium.
Global agriculture responds to 2008 shortages
In the quick-stream of 2008’s high prices came a rapid response from global agriculture. High international commodity prices "transmitted signals" to farmers to allocate more resources and increase agricultural production, suggests the report.
At a global level, for example, the cereal sector responded with a 7 per cent expansion in output. Output expansion in developed countries amounted to over 13 per cent, but developing countries together "could only muster" a 2 per cent increase in their cereal production.
Oil and food interdependence
The strong decline in crude oil, and energy, prices since the soaring highs of $147 a barrel in July 2008 offers some relief going forward to food makers and their suppliers.
The Outlook economists underlined the interdependence of energy and agriculture prices. Crop prices in particular appear to have a greater sensitivity to oil price changes compared to livestock products.
The high energy share in total production costs particularly for crops through fertiliser, chemicals and fuel prices, have long influenced the supply on agricultural markets.