Bio-Fuel Fundamentally Changing Markets

ROME - Jul 4/07 - SNS -- Rising demand for bio-fuels around the globe is causing fundamental changes to agricultural markets that could drive up world prices for many farm products, according to a new report published by the OECD and FAO.

The OECD-FAO Agricultural Outlook 2007-2016 says temporary factors such as droughts in wheat-growing regions and low stocks explain in large measure the recent hikes in farm commodity prices.

But when the focus turns to the longer term, structural changes are underway which could well maintain relatively high nominal prices for many agricultural products over the coming decade.

Reduced crop surpluses and a decline in export subsidies are also contributing to these long-term changes in markets. But more important is the growing use of cereals, sugar, oilseed and vegetable oils to produce fossil fuel substitutes, ethanol and bio-diesel. This is underpinning crop prices and, indirectly through higher animal feed costs, also the prices for livestock products.

In the United States, annual corn-based ethanol output is expected to double between 2006 and 2016. In the European Union the amount of oilseeds (mainly rapeseed) used for bio-fuels is set to grow from just over 10 million metric tons (MT) to 21 million over the same period. In Brazil, annual ethanol production is projected to reach some 44 billion liters by 2016 from around 21 billion today. Chinese ethanol output is expected to rise to an annual 3.8 billion liters, a 2 billion liters increase from current levels.

The report points out that higher commodity prices are a particular concern for net food importing countries as well as the urban poor. And while higher feedstock prices caused by increased bio-fuel production benefits feedstock producers, it means extra costs and lower incomes for farmers who need the feedstock to provide animal feed.

The outlook also says trade patterns are changing. Production and consumption of agricultural products in general will grow faster in the developing countries than in the developed economies - especially for beef, pork, butter, skimmed milk powder and sugar. OECD countries are expected to lose export shares for nearly all the main farm commodities. Nevertheless, they continue to dominate exports for wheat, coarse grains and dairy products.

World agricultural trade, measured by global imports, is expected to grow for all the main commodities covered in the outlook, but likely by less than for non-agricultural trade, as import protection is assumed to continue to limit the growth in trade. Nevertheless, trade in beef, pork and whole milk powder is expected to grow by more than 50% over the next 10 years, coarse grains trade by 13% and wheat by 17%. Trade in vegetable oils is projected to increase by nearly 70%.