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Developing Nations Lead Way Out of Recession

18 April 2010

The growth of biofuels and their importance on food prices will be one of the major factors as the world emerges from the effects of the banking crisis and recession, writes TheCattleSite editor Chris Harris.

The world will be led out of the recession by the strength of the economies of the developing nations and fuel prices, with oil at between $70 and $80 a barrel will be the floor and the cap for food prices.

Tom Vosa, the head of market economics, Wholesale Banking at the National Australia Bank in the UK told the Outlook 2010 conference in London that the worst of the recession is over and that the industry can look forward to a five per cent growth rate by 2012-2013.

"The worst is behind us, but any sudden increase in growth is due to the stock cycle and other time limited policy measures. It seems too early to call a firm recovery trend just yet," he said.

"Having fallen by 4.9 per cent in 2009, we only expect 0.9 per cent growth in 2010. Consensus is currently at 1.2 per cent.

"The recovery will be extremely uneven. Growth in the first quarter could even be negative, especially after extremely bad weather in the first two months.

"Having fallen back sharply in 2009, global food prices rose in the early months of 2010 due to an extremely harsh winter in the northern hemisphere," he said.

"The fall in dairy prices might already be over and oils and fats prices have still been rising."

However, he said that growth in the future will be led by the emerging economies.

And this growth in the emerging economies will have an impact on food demand.

While there will be a growth in food demand, Mr Vosa added that the era of cheap food is over.

"The era of cheap food looks to be over, aided by a growing population, the needs of biofuel and a weak US dollar," he said.

"The role of China and India in raising prices is harder to prove as both are food exporters, so should not have led to higher prices.

"The rate of return in agriculture needs to be sufficient to generate the required investment in expanding the acreage under production. With Latin America and Russia long-term projects (if ever) than Europe and the US become more likely sources of land supply, which will support land prices in both regions.

"If developing economies grow faster than advanced ones, then we could see increased demand for cereals and vegetables globally, as meat is still too expensive."

Mr Vosa added that the world is starting to run out of farmland to cultivate for food.

"So far, world agriculture has been able to respond to rising demand for crop and livestock products," he said.

"Although the world's population doubled between 1960 and 2000 and levels of nutrition improved markedly, the prices of rice, wheat and maize -the world's major food staples- fell by around 60 per cent.

"Looking forward, we expect global demand for food to slow, reflecting not only a peaking in global population growth since the late 1960s but also the fact that a rising proportion of the world's population has already reached fairly high levels of food consumption."

With little scope for increasing supply in Asia or MENA due to space constraints, the EU will become a viable source of supply.

He added that Eurozone member governments face tough budget constraints, which will ultimately affect CAP and he said that the move towards land stewardship and a rural as opposed to an agricultural policy will disproportionately benefit smaller producers at the expense of the larger.

"By 1997-99, 61 per cent of the world's population was living in countries were average food consumption per person was above 2,700 kilo calories per day.

"But, even though there is plenty of land that can be converted into agricultural use. FAO estimates suggest that, at present, 1.5 billion hectares of land are currently for arable and permanent crops, around 11 per cent of the world's surface area.

"Another 2.8 billion hectares of land are so some degree suitable for rain fed production, almost twice as much as is currently farmed. Much of this land is in effect useless, or very difficult to bring into production.

"Around 45 per cent is covered in forests, 12 per cent is in protected areas and 3 per cent is taken up by human settlements and infrastructure. The distribution of potential farmland is also extremely uneven. Sub-Saharan Africa and Latin America are farming around one fifth of their potentially suitable cropland. In contrast, there is little room for expansion in the Middle East and North Africa or in South Asia."

Mr Vosa said that the global rural economy had been well placed during the recession as agriculture was out-performing GDP in most countries.

However, Mr Vosa warned the sector that one result from the credit crunch was that there will be a lot fewer loans around from the banks as they become more cautious.

He said that food price inflation will remain volatile and vegetable prices remain the most volatile of those groups.

"Hardly surprising when supermarkets change 75 per cent of prices each week," he said.

"Energy and food prices continue to converge with each other as biofuel production gains strength. Ultimately energy will provide both a floor and a cap for food prices, but high food prices will also imply high production costs.

"As ever, the outlook remains challenging, but the underlying economics are better and UK agriculture tends to be relatively robust in a weak demand environment. But with volatility higher, careful hedging strategies are more necessary than ever."

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