Agricultural Commodities by junaid.haider

VIEWS: 31 PAGES: 7

									                           CONTENTS

1. Introduction
2. Market Forces
3. Production of bio-fuels and the agricultural commodities
4. Growth of developing countries economically
5. Investment
6. Speculation and agricultural commodities
7. Poor seasons of production and diseases
8. Natural disasters
9. Oil crises and Production costs
10. US Dollar and the agricultural commodities
11. Predictions of analysts
    11.1 Rice
    11.2 Wheat
    11.3 Maize
12. Bibliography
                             Introduction

Internationally traded food commodities prices have increased sharply since

2002. It has been dramatic increase in the prices of agricultural commodities

since early 2007 and according to “The IMF’s index of internationally traded

food commodities prices increased 130 percent from January 2002 to June

2008 and 56 percent from January 2007 to June 2008”(report of IMF, 2008).

Due to short term and structural factors, we have seen the sudden rise in the

prices of agricultural commodities. Some of the factors are rising in demand,

consumption of key commodities, growth of the developing countries

economically, the availability of feed and crops for food have been reduced

due to high demand of bio-fuels and number of poor seasons of production

of the agricultural commodities, natural disaster like earthquakes, hurricane,

floods, droughts, etc and due to rise in the prices of fuels which not only

affected the suppliers locally but globally, while global demand remains the

same and for few more years it is expected that the prices of the agricultural

commodities will remain high.
Market forces: Market forces (Demand and Supply) are basic components in
the determination of the price of any commodity. The demand and supply
are always based upon some factors and any change in these factors shall
affect the general price level and market forces will go for the fresh
determination of the price of the said commodity.

 The factors could be divided into sub sectors with respect to their effects,
one is called long term and other is short term. These factors are key
components in determination of price of commodities. There are some
factors have traditionally been there and some are newly been emerging as
key factors in commodity market.

Production of Bio-Fuels and the agricultural commodities:
                     Bio-fuels (also called agro-fuels) are the products that can
be processed into liquid fuels either to be used for transport or heating
purposes. Today most of the commercial bio-fuels are made of different
agricultural commodities like sugar cane, palm oil (soya oil), canola, corn. In
2007 about 7 percent of the global oil seed supply is consumed by bio-fuels
and consumed about 4.5 percent of the global cereal crops, which increases
the prices the prices of agricultural commodities by about 70 percent.
               It plays a very important role as an alternative and renewable
energy source. Due to high sharp increase in the oil industry globally makes it
more important and thus its demand is increasing day by day and due its
high demand new plans and policies are being introducing by number of
countries to increase its production to meet the requirements of the present
demand. Currently as it is produced in very limited, most of it is consumed
domestically and very little available to the international market. It is
expected that the production of bio-fuels will increased rapidly as more and
more countries are trying to produce it as much as possible.

Growth of developing countries economically:
Rapid economic growth in developing countries has lead to growing food
demand and dietary transition from cereals toward more animal protein. As a
result, global consumption of agricultural commodities has been growing
rapidly. This demand growth has been broad based. While many studies
focus attention on China and India, neither country is a major trader of most
agricultural commodities.
Agricultural commodity price increases have a much greater impact on low-
income consumers, especially in developing countries, because food is a
larger fraction of total expenditures and commodities are a larger share of
their food consumption. One side of higher commodity prices that has gotten
little attention is the potential for farmers in developing countries to increase
production and productivity. Higher prices could induce these farmers to
purchase and use such inputs as improved seeds and fertilizer, leading to
substantial increases in productivity and economic gains. For this to happen,
governments would have to permit higher prices to be transmitted to farmers,
so they could produce more and more agricultural commodities.

Investment:
Government of the different countries are trying different strategies and plans
for the foreign investors to invest in their own country. They have been
liberalizing their investment laws which are to disallow foreign ownership of
the land and in order to keep the profits in the country, they have decreased
demands on foreign companies, which makes more striking for outsider
investors to invest in the country. Due to this it has encouraged rise in the use
of agricultural land for the production of export. For example supermarkets
fund suppliers of European to grow feed or fresh horticultural products, or to
raise the livestock to desired specifications in developing countries. It is one of
the indirect competitions for local markets with the use of land for food.

Speculation and the agricultural commodities:
Speculation plays a very important role in the prices of agricultural
commodities. The effects of supply and demand on commodity prices are
clear. Less clear are the effects of changes in the structure of commodity
markets, particularly speculative activity. Speculator predicts the future prices
of the commodities, and through this the price of the agricultural
commodities are unstable. Supply and demand fundamentals do not fully
explain the recent dramatic increase in food prices.
Rising expectations, speculation are among the additional factors that have
played a role in the increasing level and volatility of food prices.

Poor seasons of productions and diseases:
Demand for agricultural commodities has increased, while growth in
agricultural productivity has slowed. Over the past four to eight years,
depending on the commodity, this combination has resulted in a change
from a surplus to a shortage era, setting the stage for commodity price
increases. When weather and crop disease problems occurred in 2006 and
2007, stocks of many agricultural commodities were already low,
exacerbating the impact on prices.
Policy actions by some countries to isolate their domestic markets through
export restraints made the situation even worse, particularly for rice.
Increased investment in agricultural research is important, but not a short-
term solution. Prices goes high when the demand is higher than supply,
because of the poor seasons of production.

Natural Disasters:
Another factor of increasing in the price of agricultural commodities are
natural disasters, which hugely affect the production of agricultural
commodities. Natural disasters are unpredicted and untimed. Some of the
natural disasters include floods, draughts, earthquakes, hurricanes etc.
                 According to world food program draught is the number one
cause of food shortages worldwide. Last year US, Australia and Argentina the
major exporters of wheat hit by weather-related crops problems, and
Australia was even the worst hit hard by draught recently. Due to the severe
draught it reduced the annual harvest of rice by 98%, and being the second
largest exporter of the wheat of the world after the US, which producing in a
good year up to 25 million of tons but however the harvest was reduced to
only 9.8 millions of tons in the year of 2006.
       Recently the Cyclone Nargis on Burma in May 2008 increase the prices
of agricultural commodities (specially the increase in the price of rice) which
is the exporter of rice and according to FAO estimation that it would export
up to 600,000 tons of rice this year but now for the first time it may be forced
to import rice.

Oil Crises and production costs: The increases in fuel prices have also raised
the costs not only of producing agricultural commodities, but also of
transporting them. It has not only affected the economies locally but has
affected globally deeply. Due to increase in prices of oil increased the cost
of agricultural commodities. As agricultural commodities have direct link with
oil for example if the oil price increases the transporting the agricultural
commodities from one place to another increases, while industrial agricultural
is hugely rely on oil, both on the upstream and farm in processing globally
and systems of distribution, so It have huge affect on the agricultural
commodities.

US dollar and the agricultural commodities:
As we all know that US dollar is the dominant currency at the moment in the
world and the trade is in US dollar all over the world. Most of the commodities
are priced in US dollar including oil and grains but are purchased by the local
market in local currency which means if the dollar falls then the price of the
commodities going to be increase as it has direct link with dollar and due to
fall of the dollar means higher the prices of oil.

Some analysts predict a long term trend of increasing agricultural commodity
prices. Comment on the extent to which you agree with this prediction:

Predictions of analysts:
According to analysts they have predicted long term increasing in the prices
of agricultural commodity prices. Some of the factors showing below
increase in the long term prices of agricultural commodities:

Rice:
If we look at the last few years that is from 2001/02 to 2006/07, we will come
to know how consumption outpaced production and as a result of it 20% of
uses of world stocks fell below significantly in 2004. According to FAPRI by
2017 the uses of the stocks would even decline further by approximately 15%,
which means we will see increase in prices. According to the estimation of
FAPRI the reference trade price for rice (Thailand the leading exporter) would
increase by 64% compared to the average for the past decade and by
2017/18 it would reach 450 US dollars. It is less than half the level of prices
seen in April 2008.
                  According to the calculation of FAPRI, the growth of demand
(+1%) would be higher than Production (+0.9%) in the next decade.
          The trade of rice has considerably increased from the mid nineties
and according to FAPRI, the supply will grow faster compared to production
in coming decade and also exports are expected to rise by 20% in the next
decade.
      The top five net exporter of the world which exports 90% would still
account for trade over the projection period. According to the expectations
of FAPRI, the two countries would be able to increase their exports by 40%
that is Pakistan and Thailand. Vietnam will be able to increase by one third
while exports will remain close to their average for the last 10 years for India
and the US.
    Trade is less concentrated on the import side, with the top-5 net importers
only accounting for 30% of world trade. FAPRI expects a significant increase
(+50%) for the biggest importing country in Africa, Nigeria. Imports are also
projected to rise in Saudi Arabia and in the Philippines (+40%). By contrast
imports would decline in Indonesia and Iran.

Wheat:
As the growth of the world is increasing, it is the clear that demand will be
increasing. For this countries are trying to produce more than they produce in
last decade. Major exporting countries like Canada, Australia, EU and Ukraine
should increase production. According to FAPRI the production of wheat is
going to increase from 603 million tonnes in 2007/08 to 648 million tonnes in
2008/09 and it will continue to increase to 687.7 million tonnes in 2017/18.
The consumption of wheat will increase and it will grow 1.1% annually that is
686.6 million tonnes in next decade. Still the forecasted growth rate is lower
for feed uses (+0.7%) than for the rest of the users that is food and other
including bio fuels. As the growth of the world increases specially in Asia,
Africa and Middle East which means the demand will be going to increase in
the next decade and the net exports of the wheat would increase and it will
reached to 107 million tonnes in the next decade.
               According to FAPRI, the prices of wheat will remain high that is
+75% over the projection period, compare to the average prices in the past
10 years, which means with growing population of the world, the demand will
increase even though the production will increase as well but demand will be
higher than the supply in the next decade.




Maize:
Maize is another agricultural commodity which will be affected in the long
trend. Its production will increase in future but demand would be higher than
the production.
  In 2007/08 its consumption increased and stock-to-use ratio saw declined
up to 13.3%, the main reason was the demand from the ethanol sector.
    As the demand for maize is getting higher, countries are trying hard to
increase the production of it and in 2007/08 area for the maize has increased
to 157.1 million ha and according to FAPRI by the end of next decade it will
be increased to 163.2 million ha because of growth in area, the production
will also increase and it is expected that the production will reach to 895.9
million tonnes in 2017/18, as the production increases we will see in increase
in demand as well and by the end of 2017/18 , the consumption will rise to
895.7 million tonnes compare to 771.3 million tonnes in 2008/09.
                    From the above facts and figures, it is clear that in future
the prices will agricultural commodities will rise and the prediction made by
analyst is true and I do agree with the prediction that we will see the rise in
prices of agricultural commodities.




                              BIBLIOGRAPHY
McAleese (2004) Economics for Business 3rd Edition. Pearson Education Ltd.

Sloman, John (2005) The Economic Enviroment of Business, Pearson Education Ltd.

Organisation for Economic and Co-operation and Development:
http://www.oecd.org/home/0,2987,en_2649_201185_1_1_1_1_1,00.html

International Monetary Fund:
http://www.imf.org/external/np/pp/eng/2008/091908.pdf

The Global Research:
http://www.globalresearch.ca/index.php?context=va&aid=9191

Food and Agricultural Policies Research Institution:
http://www.fapri.org/

United States Department of Agricultural:
http://www.ers.usda.gov/features/commoditypricefactors/

The global food crises (September 2008)
http://www.tradeobservatory.org/library.cfm?refID=104147

								
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