Growing accustomed to higher prices

After years of cheap cereals propped up by farm subsidies, the EU is in unfamiliar territory. Jarle Hetland reports on the reverberations for the Union of the global shift in commodity prices.

Prices for agricultural commodities are climbing across the world. Poor harvests have pushed up the cost of cereals and other crops. In turn the cost of animal feed has risen, pushing up the price of meat. The European Commission and the Council of Ministers last month moved to ease the shortfall of cereals in the EU by suspending the 20-year-old set-aside rule that required farmers to leave 10% of their land fallow. On 27 September the Commission proposed to suspend duties on all imported cereals - a call that is likely to be agreed by farm ministers, despite the opposition of France, which fears it would be difficult to re-establish the duties after the suspension period.

Reserves of cereals - so-called intervention stocks - have shrunk from 14 million tonnes at this time last year to 1 million tonnes this year. The good news for EU taxpayers is that buying into intervention - buying up crops at a guaranteed price in order to prop up farmers’ incomes - is no longer necessary. Farmers are instead relying on open market prices.

But while higher cereal prices have boosted farmers’ incomes, across the world consumers face an increase in their living costs. In Italy there have been consumer protests over a 20% increase in the price of pasta (usually made from durum wheat). The price of barley has also doubled in the last year. While 50% of the world’s barley production is used as animal feed, the remainder is used for malting. It is an important ingredient in whisky and beer. Some brewers, including Plzensky Prazdroj, the maker of Pilsner Urquell, plan increases of 6-8% on beer as a result of the escalating price of raw materials.

The recent claim by Michel Barnier, France’s agriculture minister, that there had been no knock-on effect on consumer goods looks over-optimistic. On the contrary, companies, from bakers to cheese producers, have raised or are likely to raise their prices.

The story is similar outside Europe. In Mexico, farmers and consumers have staged protests over the increase in the price of tortilla, usually made from white maize. In China, the price of meat has nearly doubled too.

The shortfall in cereal production has various causes. In Europe, this year’s heavy rains in the north and drought in the south hit production. Australia, Canada and central Asia were hit by droughts. Many would say that the weather extremes were symptoms of climate change.

More controversial is that agricultural land has been switched to growing crops for biofuel. Biofuels have become more attractive economically as the price of oil has risen. The Organisation for Economic Co-operation and Development (OECD) and the Food and Agriculture Organization (FAO) of the United Nations warned in their Agricultural Outlook 2007-16 that the growing use of cereals, sugar, oilseed and vegetable oils to produce biofuels could lead to high nominal prices for agricultural products in the long term as the shift, indirectly, leads to not only higher prices on cereals, but higher animal feed costs and hence, increased prices for livestock products. The report predicts that in the EU, although oilseeds will be the main crop used in the production of biofuels, the use of wheat for biofuels will increase twelvefold and reach 18m tonnes by 2016. In 2006-7, total wheat production in the EU27 was 125m tonnes.

Economic growth and a rapidly growing middle-class, especially in China and India, is also creating more demand on agricultural commodities - in particular bread, meat and dairy products. A higher living standard means people consume more. Feeding a growing global population is becoming increasingly difficult with a shortage of cereals as it takes ten calories of wheat to produce one calorie of meat.

In Europe, although prices on food are certain to rise, EU citizens are unlikely to go hungry. The real losers in all this are the ones that have already suffered shortfalls of food and high prices for decades: the developing countries in Africa, Asia and Latin America.

In the short-term it is possible that suspending the set-aside system can boost Europe’s grain reserves, although the potential is limited since much set-aside land is of poor quality and low yield.

If every summer is to be like this year, suspending set-aside will not be enough to keep prices down. It appears that after more than 20 years of falling prices, the days of cheap food are over.

After years of cheap cereals propped up by farm subsidies, the EU is in unfamiliar territory. Jarle Hetland reports on the reverberations for the Union of the global shift in commodity prices.