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Growth rates for global food demand set to fall

In a previous post, I discussed the significance of the current buoyant markets for dairy products for the likely success in pursuing further reform of the EU dairy regime. The insight that world market conditions may influence the trajectory of CAP reform can also be extended to other CAP regimes. Producers have not been as optimistic regarding long-run price trends for agricultural commodities for many years. Food demand prospects appear bright, driven by population growth and rising incomes in many emerging markets. Non-food demand, particularly for biofuels, is a further positive driver. Many believe that, after many false dawns, we really are on the cusp of reversing the long-run decline in real agricultural prices since the Second World War and entering a Malthusian world. But at least one element in this argument does not hold water, according to a recent FAO report looking at the prospects for world agriculture towards 2030/2050. Looking into its crystal ball, FAO foresees a significant decline in the growth of aggregate world consumption (and production) of agricultural commodities, apparently running counter to the conventional wisdom. The growth in consumption we experienced in the 29 years before 2000 will now take 50 years to happen, almost two-thirds as long again.

At the world level, FAO projects that the growth of demand for all crop and livestock products will be lower than in the past, 1.5 percent p.a. in the period 1999/01-2030 and 0.9 percent for 2030-50 compared with rates in the region 2.1-2.3 percent p.a. in the preceding four decades. It observes that world agriculture will have to depend on non-food uses of commodities if growth rates are not to be sharply lower compared with the past. Its projections do allow that growth in the biofuels sector may provide some scope, perhaps a significant one, for relaxing the demand constraints represented by the declining rates of increase in human consumption.

All the major commodity sectors should participate in the deceleration of agricultural growth. The cereals sector has been on such a downward trend for some time now, with the growth rate having fallen from 3.7 percent p.a. in sixties, to 2.5 percent, 1.4 percent and 1.1 percent p.a. in the subsequent three decades to 2001. Production and consumption of meat will also experience a growth deceleration compared with the high growth rates of the past, though the milk sector should accelerate, mainly because of growth in the developing countries demand.

Why is global demand for agricultural products on a declining trend?This reflects three main factors: (a) the slowdown in population growth from the late sixties onwards; (b) the fact that a growing share of world population has been attaining fairly high levels of per capita food consumption, beyond which the scope for further increases is rather limited; and (c) the fact that those who did not have enough to eat were too poor to afford more food and cause it to be produced, or did not have the resources and other means to produce it themselves.

The report notes that it is mainly the slowdown in the growth of demand in the developing countries, and in particular in China, that accounts for a large part of the global deceleration.

China has already attained a fairly high level of per capita food consumption of the main commodities, a total of 2960 kcal/person/day in 1999/01. In the projections, it increases further to 3300 kcal. This is nearly the level of the industrial countries. The increase of 11 percent in 30 years contrasts with that of 50 percent in the preceding 30 years. This explains the drastic slowdown in the growth rate when the aggregates are measured in terms of calorie content.

However, the trend for consumption structure to change towards higher value products will continue and this will make for the price-based volume of consumption to grow faster (36 percent) than the 11 percent when measured in calories. This 36 percent in the next 30 years is still much lower than the 170 percent increase of the past 30 years, given that diet diversification towards the higher-value products has much less scope compared with the past when China’s food consumption was heavily concentrated in cereals and sweet potatoes and had little by way of livestock products. In conclusion, when such deceleration occurs in China and in a few other large developing countries, the whole aggregate of the developing countries, and indeed the world, will be affected downwards.

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The prospect that this influence of China will be much weaker in the future and that it will not be replaced by a similar boom in other large countries, is one of the major factors making for the projected deceleration in the aggregate demand of the developing countries.

However, although the new conventional wisdom appears to be based on a misunderstanding of future trends in global food demand, FAO warns that, the decline in the growth rate notwithstanding, the absolute increases involved should not be underestimated. World production of cereals will have to increase by a further 1 billion tonnes by 2050 over the 2 billion tonnes produced in 2005.

…there is no assurance that the past experience, when the world’s production potential evolved and proved to be more than sufficient to meet the growth of demand, will continue, even when demand growth will be much lower than in the past. The natural resources per head of the growing population (e.g. land and water resources per person) will certainly continue to decline and the yield growth potential is more limited than in the past. It remains to be seen whether the advances in technology and related factors (e.g. investment, education, institutions and improved farm management) that underpinned the past growth of production will continue to more than make up for the declining resources per person. The future may be different if we are now nearer critical thresholds, e.g. yield ceilings imposed by plant physiology, or availability of water resources for maintaining and/or expanding irrigation. On the positive side, there are those who think that biotechnology has the potential of helping to overcome constraints to further increases in production ….

Thus, if long term real food prices begin to trend upwards, it will have little to do with soaring global demand but everything to do with constraints on production capacity.

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