Growing bio-fuel demand underpinning higher agriculture prices

Increased demand for bio-fuels 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 maize-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 tonnes to 21 million tonnes over the same period.

In Brazil, annual ethanol production is projected to reach some 44 billion litres by 2016 from around 21 billion today. Chinese ethanol output is expected to rise to an annual 3.8 billion litres, a 2 billion litres 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.