World prices may never recover World Bank

By Robert Harris

WORLD prices for agricultural commodities may never recover from current low levels.

This stark message was delivered by John Baffes of the World Bank at a recent Agra Europe Outlook conference in London.

Falling values were partly related to the economic crises in Asia and Russia, he said.

But other, longer-term fundamentals could create a “structural break” in prices even after those economies recovered, he warned.

“The cyclical decline in commodity prices had already begun well before the Asian crisis started (in July 1997),” he said. “The World Banks food price index, for example, peaked in May 1996 and had already declined by almost 30% by the time the crisis began.”

The average world wheat price fell from $262/t in May 1996 to $108/t sixteen months later, he said.

The main reason was a surge in supplies in 1996/97 brought about by more plantings encouraged by high prices, and favourable weather which increased yields.

“World grain production increased 10.5% from 1995 to 1997. Soya bean production rose by 13.2% over the same period.” This compared with long-term global growth of 1.4% and 3.6% for the two crops respectively, he added.

Global growth would be needed to help absorb the surplus, said Mr Baffes. However, world gross domestic product growth had slumped to just 1.8% a year, due to the collapse of former Soviet Union countries and the East Asian crisis. The World Bank reckoned it would take at least two years before growth returned to pre-1997 levels.

Even so, Mr Baffes doubted prices would recover fully, due to policy changes and technological improvements.

For example, a cut in export taxes saw Argentinian grain production almost double to 40m tonnes from 1995-97, he said. And reduced barriers to international trade would encourage further expansion, he added.

Advances in technology, including genetically modified seeds and other inputs would also put pressure on prices by increasing output and cutting costs, said Mr Baffes.

“Commodity prices may have taken another step down in the long history of declining prices.”