The New Normal? A Tighter Global Agricultural Supply and Demand Relation and Its Implications for Food Security
Mark Rosegrant is Division Director, Simla Tokgoz ([email protected]) is Research Fellow and Prapti Bhandary ([email protected]) is Senior Research Assistant, Environment and Production Technology Division, International Food Policy Research Institute.
This article was presented in an invited paper session at the 2012 ASSA annual meeting in Chicago, IL. The articles in these sessions are not subjected to the journal's standard refereeing process.
The tight food markets and rising prices of 2005–2008 and today have been caused by various factors, such as rapid growth in demand for biofuels, bad weather, and increased demand for meat, dairy, livestock feed, rice and wheat due to rapid economic growth and urbanization, particularly in Asia and Africa. In the longer term, climate change and growing water scarcity along with worsening water quality will be major challenges to agricultural production and food security.
This paper uses IFPRI's International Model for Policy Analysis of Agricultural Commodity and Trade (IMPACT) to assess long-term agricultural supply and demand relations. Examining these new global food system realities through the lens of scenarios for agricultural supply and demand indicates that, if current policies and investment trends continue, real world prices of most cereals and meats are projected to increase in the future. Growth in demand for meat, milk, biofuels and growing scarcity in water supplies are projected to put pressure on agricultural prices and strain land and water resources further. Climate change will have negative impacts on agricultural production in much of the world. Rising prices and poor progress on food security are not, however, inevitable. Policy reforms and increased investment in agricultural research, irrigation infrastructure, and rural roads, can reduce hunger and poverty.
Prices of major agricultural commodities (wheat, rice, maize, soybeans) show a steep downward trend in real terms since 1960s (World Bank 2011). There have been some price spikes in the past, but these have been short term. Starting in 2007, the prices of major grains increased dramatically in real terms and reached their peak in 2008. Real prices of these commodities declined in 2009 and 2010, but did not go back to their previous levels, and moved sharply upward again in 2011. In the next section, we discuss the demand dynamics and supply side constraints that cause these increases. Then, we present the quantitative outlook to 2050 from the IMPACT Baseline, followed by results from scenario analyses exploring the impact of higher crop productivity growth and higher energy prices. We conclude with implications for future agricultural markets.
Demand Dynamics and Supply Side Constraints
Demand Dynamics
Demand for agricultural commodities is increasing worldwide, due to population growth in low-income countries and income growth in East and South Asia, Latin America and in recent years Sub-Saharan Africa that allows consumers to shift to meat and dairy products away from cereals. Biofuel policies have boosted demand for agricultural feedstocks, especially maize, sugarcane, and oil crops. China and India have had rapid GDP growth, with no slow-down expected in the near future. On the other hand, developed economies, like the U.S. and member countries of the European Union, have shown a declining trend in GDP growth rates, with negative GDP growth rates in 2008 and 2009 (World Bank 2010). This is reflected in the change in consumption patterns of emerging economies. China and India have significantly higher growth rates of milk and meat consumption relative to higher income countries which have already completed this transformation, or lower income countries that do not have the means to purchase these protein-rich goods (USDA 2011).
The other source of demand growth for agricultural feedstocks is the expanding biofuels sector (Oxfam International 2008; Runge and Senauer 2008). Biofuel policy initiatives by the U.S., member countries of the European Union, and other countries have increased biofuels production and diverted agricultural feedstocks.
Supply Side Constraints
The long term increase in demand for food driven by increasing population and economic growth will have to be matched by increases in food production. However, how can food production be increased in order to meet the growth in demand without rising prices? There are three sources of growth in crop production: Increased exploitation of worldwide arable land and water resources, yield increases, and increases in cropping intensity. About 1.6 billion ha of land is grown to annual and perennial crops (FAOSTAT 2005). Estimates of total potential arable area have a wide range. But the economic potential to increase arable land is much lower since conversion of potential arable land to crop production requires land reclamation, construction, farm infrastructure, and investment capital. The amount of arable land worldwide has grown by a net average of 5 million hectares per annum over the last two decades (FAOSTAT 2011). Two thirds of potentially suitable new arable land is located in developing countries and some 80 percent of this amount is found in Latin America and Sub-Saharan Africa (Rabobank 2010). In contrast, there is virtually no spare land available for agricultural expansion in South Asia, the Middle East and North Africa, which are regions with the highest population growth. The availability and productivity of land is negatively affected by degradation through soil erosion by water and wind, followed by soil nutrient depletion, salinization, compaction, sealing and crusting (Rosegrant, Nkonya, and Valmonte-Santos 2009a).
Productivity growth is the other critical component of agricultural supply increase. There are a number of key factors affecting crop yields including climatic, environmental, technological, economic, and policy conditions. The factors that increase crop yields include development of new varieties, technological diffusion, input use, land improvements, and adoption of conservation tillage techniques among others. The factors that affect crop yields negatively include land degradation, adverse climate conditions, and limited resource conditions. Since the agricultural sector is a major consumer of the world's fresh water, water scarcity is a critical problem that affects food security. There will be virtually no increase in water available for agriculture due to little increase in supply and rapid shift of water from agriculture in key water-scarce agricultural regions in China, India, and Central, West Asia and North Africa (Rosegrant, Fernandez, and Sinha 2009b; Rosegrant, Cai, and Cline 2002). Precipitation changes that accompany climate change will exacerbate water shortages in some parts of the world while increasing water availability in other areas. As agriculture is the largest user of fresh water, improvements in irrigation efficiency will be essential for sustainable food production, and for meeting increased demands for drinking water and industrial needs.
Climate change adds further pressure to the dramatic transformation of global agricultural markets, due to its effect on local temperature and precipitation conditions. A recent IFPRI report (Nelson et al. 2010) utilized IMPACT together with biophysical crop models and showed that world crop prices are projected to increase due to climate change, income growth, and population growth. The report also emphasized that climate change adds a further challenge to food security and agricultural productivity.
Quantitative Outlook to 2050 from latest IMPACT Baseline
How will these demand and supply factors play out in the future? To assess this question, we utilize the IMPACT model: a partial equilibrium, multi–commodity, multi-country model which generates projections of global food supply, demand, trade, and prices. IMPACT covers over 46 crops and livestock commodities and it includes 115 countries/regions where each country is linked to the rest of the world through international trade and 281 food producing units (grouped according to political boundaries and major river basins). Demand is a function of prices, income, and population growth. Crop production is determined by crop and input prices, the rate of productivity growth, and water availability.
The baseline scenario assumes a continuation of current trends and existing plans in agricultural policies and investments in agricultural productivity growth. Population projections are the “Medium” variant population growth rate projections from the Population Statistics division of the UN and income projections are estimated by the authors, drawing upon Millennium Ecosystem Assessment (2005).
Baseline projections for world prices for agricultural commodities based on IMPACT projections of 2011 are presented in table 1. As seen below, prices increase for major agricultural commodities between 2010 and 2050, because of the growth in demand and the constraints on crop productivity and area and on expansion of livestock production described above. The highest price increase is for maize and pork, followed by poultry and wheat. As production responds to higher demand, harvested crop area increases for most of the crops. Being a major feed grain, maize area increases the most in response to demand coming from livestock and biofuels sectors. We also observe the same pattern for millet and sorghum area. Thus, farmers shift area away from rice, wheat and other grains to crops that experience a higher price growth. Overall, world harvested crop area increases putting additional pressure on limited natural resources.
| Commodity | World Price (Percent Change between 2010 and 2050) | World Area in 2010 (Million Hectares) | World Area in 2050 (Million Hectares) |
|---|---|---|---|
| Beef | 19% | ||
| Pork | 54% | ||
| Lamb | 1% | ||
| Poultry | 45% | ||
| Eggs | 19% | ||
| Milk | 7% | ||
| Rice | 27% | 155.4 | 141.1 |
| Wheat | 34% | 235.9 | 234.0 |
| Maize | 54% | 149.0 | 170.7 |
| Other Grains | 11% | 76.7 | 69.2 |
| Millet | 2% | 37.3 | 42.7 |
| Sorghum | 25% | 48.8 | 57.9 |
- a Source: IFPRI IMPACT projections 2011.
The profile of cereal and meat production over time is presented in table 2, which shows steady trends of output growth to 2050. Cereal production is projected to grow steadily across all regions, with Sub-Saharan Africa and Latin America and the Caribbean regions leading in production growth rates. Cereal production in East Asia and Pacific, although growing slower, still is the highest in volume. World cereal production grows more than 50 percent between 2010 and 2050 responding to higher demand. Meat production also grows steadily across all regions, with South Asia having the highest growth rate. World meat production grows more than 60 percent between 2010 and 2050.
| Cereal Production (Million Metric Tons) | Meat Production (Million Metric Tons) | |||
|---|---|---|---|---|
| Region | 2010 | 2050 | 2010 | 2050 |
| East Asia and Pacific | 520.8 | 714.8 | 102.2 | 138.7 |
| Europe and Central Asia | 278.2 | 467.4 | 19.5 | 29.4 |
| Latin America and the Caribbean | 156.4 | 313.9 | 41.6 | 80.2 |
| Middle East and North Africa | 69.0 | 126.9 | 6.2 | 17.8 |
| South Asia | 286.4 | 386.8 | 9.5 | 35.3 |
| Sub-Saharan Africa | 96.1 | 226.2 | 8.5 | 25.7 |
| Developed | 711.9 | 985.6 | 91.2 | 129.2 |
| Developing | 1,407.2 | 2,236.1 | 188.0 | 327.8 |
| World | 2,119.1 | 3,221.7 | 279.2 | 457.0 |
- a Source: IFPRI IMPACT projections 2011.
In terms of per capita food demand for cereals, a more static picture emerges for the world, with regional differences, summarized in table 3 below. East Asia and Pacific and Latin America and the Caribbean regions experience negative growth in cereal consumption due to income growth and consequent dietary pattern changes. Sub-Saharan Africa, on the other hand, is projected to increase its per capita cereal food demand, although per capita demand remains below other regions.
| Per Capita Cereal Food Demand (kg/capita) | Per Capita Meat Food Demand (kg/capita) | |||
|---|---|---|---|---|
| Region | 2010 | 2050 | 2010 | 2050 |
| East Asia and Pacific | 176 | 172 | 50 | 74 |
| Europe and Central Asia | 164 | 172 | 48 | 56 |
| Latin America and the Caribbean | 121 | 116 | 58 | 74 |
| Middle East and North Africa | 215 | 224 | 26 | 39 |
| South Asia | 151 | 151 | 7 | 17 |
| Sub-Saharan Africa | 117 | 145 | 12 | 19 |
| Developed | 115 | 132 | 90 | 99 |
| Developing | 156 | 157 | 31 | 41 |
| World | 150 | 154 | 40 | 49 |
- a Source: IFPRI IMPACT projections 2011.
The impact of income growth is most clearly seen in per capita food demand for meat summarized in table 3. East Asia and Pacific and South Asia demand growth rates far outstrip other regions, in keeping with their rapid growth in per capita income compared with other developing and developed regions. Other regions that show large increases in per capita consumption of meat are Sub-Saharan Africa, which grow steadily from relatively low levels owing to their steady income growth over the period.
Given the patterns of supply and demand that have been highlighted, the IMPACT model estimates levels of malnourishment among the most vulnerable demographic of the population – children aged 0 to 5 years. The baseline trends for malnutrition are illustrated in table 4, which show variation in the rates of change in malnutrition by region and slow progress overall. The decline in malnutrition prevalence is faster in Asia than in Sub-Saharan Africa. The South Asia region has the highest overall levels of prevalence, but is able to make significant reductions by 2050. Reduction in the number of persons at risk of hunger is also slow for many regions as seen in table 4. The decline is faster in Asia relative to Latin America and the Caribbean. For Middle East and North Africa and Sub-Saharan Africa, this number increases in the baseline.
| Number of malnourished children (Millions) | Population at risk of hunger (Millions) | |||
|---|---|---|---|---|
| Region | 2010 | 2050 | 2010 | 2050 |
| East Asia and Pacific | 20 | 8 | 179 | 120 |
| Europe and Central Asia | 4 | 3 | 24 | 21 |
| Latin America and the Caribbean | 8 | 4 | 62 | 44 |
| Middle East and North Africa | 4 | 2 | 17 | 24 |
| South Asia | 75 | 50 | 328 | 226 |
| Sub-Saharan Africa | 41 | 38 | 258 | 265 |
| Developed | 12 | 11 | 50 | 50 |
| Developing | 151 | 105 | 868 | 700 |
| World | 164 | 117 | 918 | 749 |
- a Source: IFPRI IMPACT projections 2011.
Scenario Analysis
In the next step of the analysis, two scenarios are compared to the baseline to further understand the main dynamics that underline world agricultural markets. Since recent increases in agricultural commodity prices have highlighted the importance of crop productivity increases and the role of agricultural research and development in bringing about these increases, in Scenario 1, we analyze the importance of crop productivity, where we increase the productivity growth rate for each crop such that the projected crop prices in 2050 in real terms are approximately the same as crop prices in 2010 in real terms. The increase in productivity growth rate required to generate this price differs for each crop; it is 32 percent for rice, 65 percent for wheat, 100 percent for maize, 15 percent for other grains, 30 percent for soybeans, 23 percent for sweet potato, 35 percent for cassava, 10 percent for chickpeas, 30 percent for sorghum, 50 percent for sugar cane and sugar beet, 65 percent for rapeseed, and 45 percent for other oilseeds.
One of the critical changes in agricultural markets in recent years has been the intensification of the linkage between energy and agricultural sectors, which also contributed to the price increases. In Scenario 2, we analyze this linkage through two channels: crude oil price's impact on biofuel demand and production and crude oil price's impact on costs of production for agricultural crops through fertilizer prices (since natural gas price moves closely with crude oil price). We incorporate the impacts of a 100 percent increase in crude oil price in 2035 compared to the crude oil price in 2035 in the baseline and incorporate its effect on agricultural markets into IMPACT1. This assumption increases the biofuel sector's demand for feedstocks by 67 percent in all countries and crops (first-generation biofuels) by 2035. To generate this percent increase in biofuel demand for feedstocks we utilize the U.S. Department of Energy, Energy Information Administration's Annual Energy Outlook Reference Case and High Crude Oil Price Case projections. We also increase the annual growth rate of the fertilizer prices index in IMPACT by 75 percent throughout the projection period (2000–2050). This increase in the growth rate results in an increase in the fertilizer prices index for IMPACT countries and regions by 103% on average, with a range of 85%–162% in 2035.
As seen in table 5, in Scenario 1 crop prices decrease with higher yields that increase production. Lower feedstock costs lower costs of production for the livestock sector, leading to expansion in production and therefore lower prices. Scenario 2 shows that energy sector has an impact on prices through higher costs of production and higher demand for feedstocks. Prices of crops used in first-generation biofuels increase the most. As area shifts away from crops that are not predominantly used for biofuels, their prices increase as well. Higher feed grains prices also affect livestock markets, with meat and milk prices increasing, though in single digits.
| World Commodity Prices | World Commodity Yields | |||
|---|---|---|---|---|
| Commodity | Scenario 1 (Yield Increase) | Scenario 2 (Energy Shock) | Scenario 1 (Yield Increase) | Scenario 2 (Energy Shock) |
| Beef | −4.9% | 2.2% | ||
| Pork | −5.8% | 2.2% | ||
| Lamb | −3.1% | 2.0% | ||
| Poultry | −8.8% | 2.5% | ||
| Eggs | −6.5% | 2.1% | ||
| Milk | −3.4% | 1.1% | ||
| Rice | −20.2% | 9.8% | 11.8% | −4.7% |
| Wheat | −26.3% | 10.1% | 27.8% | −3.7% |
| Maize | −36.3% | 13.4% | 45.6% | −2.5% |
| Other Grains | −12.0% | 6.4% | 5.3% | −2.8% |
| Millet | −8.0% | 5.6% | −0.9% | −2.1% |
| Sorghum | −17.7% | 6.5% | 12.0% | −2.6% |
- a Source: IFPRI IMPACT projections 2011.
Table 5 shows the changes in crop yields in both Scenarios. In Scenario 1, we see that maize yield growth is the highest since maize has the highest price increase in the baseline, followed by wheat. In Scenario 2, we observe that the impact of higher fertilizer prices outweigh the impact of higher crop prices and thus crop yields decline. Under Scenario 1, higher productivity of crop production increases available supply, lowering prices and therefore boosting food demand. Lower feedstock prices also affect meat consumption since lower costs of production in the livestock sector increase the meat available to consumers. On the other hand, higher prices in Scenario 2 result in lower food consumption of both cereals and meat, highlighting the importance of the food versus fuel debate.
One important measure of food security is the number of malnourished children from both Scenarios. As seen in table 6, higher yield growth that decreases prices and increases food consumption leads to significantly lower numbers of malnourished children and people at risk of hunger. Scenario 2 shows the impact of higher biofuel production and higher costs of production on food security around the world. The largest increase in number of malnourished children is in Latin America and the Caribbean, followed by Middle East and North Africa.
| Number of Malnourished Children | Population at Risk of Hunger | |||
|---|---|---|---|---|
| Region | Scenario 1 (Yield Increase) | Scenario 2 (Energy Shock) | Scenario 1 (Yield Increase) | Scenario 2 (Energy Shock) |
| East Asia and Pacific | −8.6% | 4.1% | −11% | 6% |
| Europe and Central Asia | −12.9% | 5.4% | −4% | 2% |
| Latin America and the Caribbean | −15.5% | 8.2% | −19% | 17% |
| Middle East and North Africa | −16.6% | 7.6% | −16% | 8% |
| South Asia | −5.1% | 2.3% | −32% | 19% |
| Sub-Saharan Africa | −10.9% | 4.2% | −32% | 15% |
| Developed | −7.4% | 3.7% | −1% | 4% |
| Developing | −8.3% | 3.5% | −26% | 14% |
| World | −8.2% | 3.6% | −24% | 14% |
- a Source: IFPRI IMPACT projections 2011.
Conclusions
The baseline scenario shows that a new normal is likely in world food markets. Real world prices of most cereals and meat are projected to increase in the coming decades, reversing trends from the past several decades. Rising prices will slow food demand growth for poor consumers and will adversely impact food security and human well-being. The new normal is created by both demand and supply factors. Rapid growth in meat and milk demand in most of the developing world will put strong demand pressure on maize and other coarse grains as feed. Population growth and recovery and strengthening of economic growth in Sub-Saharan Africa will drive relatively fast growth in demand for food. In developing Asia, rising incomes and rapid urbanization will change the composition of cereal demand. On the supply side, water scarcity and climate change will reduce yield growth in many regions and globally. With declining availability of water and land that can be profitably brought under cultivation, expansion in area will contribute little to future production growth.
The intensified linkage between energy and agricultural markets, through growth in biofuels production and higher input costs to agricultural production, together with the potential for higher energy prices, could drive food prices still higher. The food versus fuel debate is a critical one with repercussions on food security of developing countries through higher agricultural commodity prices. There are various policy initiatives that can be undertaken by governments to alleviate these pressures such as elimination of subsidies and trade barriers supporting crop-based biofuels.
The agricultural productivity scenario shows that the projected new normal of higher agricultural prices can be overcome if significantly higher resources are diverted to efforts aimed at productivity growth. This requires renewal of the attention paid to science and technology policy by public and private sectors. Agricultural growth can be revitalized by expanding funding for agricultural research and technology, extension services, and rural infrastructure.
