IICA: Increase in prices of agricultural products is temporary

San Jose, Costa Rica, September 5, 2012 (IICA).The current increase in the international prices of corn, soybeans, and wheat is a temporary phenomenon and limited to three crops. Nevertheless, the countries of Latin America and the Caribbean (LAC) need to monitor the evolution of the situation and analyze domestic and international price transmission mechanisms in order to adopt measures to counteract the negative effects and ensure their farmers take advantage of the opportunities created.

Those are the conclusions of the latest report delivered to the ministers of agriculture of the hemisphere by the Director General of the Inter-American Institute for Cooperation on Agriculture (IICA), Víctor M. Villalobos.

The price increase is due mainly to a fall in production caused by the drought in the United States, and, to a lesser extent, by the reduction in rainfall in Russia, Ukraine, Kazakhstan, and Turkey, a delay in the start of the monsoon season in India, and high precipitation in China and the Koreas. Additionally, several regions of Central America have experienced dry conditions, which have affected their agricultural production.

The document explains that the impact of greater climatic variability on agriculture will continue to be felt in the years ahead, making it increasingly necessary for the countries to implement policies to adapt to climate change and mitigate its effects on the agricultural sector.

“…it is recommended that he countries proceed with caution and not overreact to the current situation of the prices of agricultural products, in order to avoid trade-distorting policies that, rather than helping, would merely push up prices further and increase volatility,” says the note sent to the ministers.

According to the technical report, it is to be expected that the current price levels will spur producers in LAC and other regions of the world to plant more corn, soybeans, and wheat. Increased production would then push down prices in international markets. In LAC, the grain harvest could rise by 4%.

The current situation is similar to the crisis in 2007-2008. The prices of corn and soybeans are even higher than the peak levels observed on that occasion, but the structural and cyclical elements that threatened food security during those years are not present. For example, the international prices of commodities like rice have remained stable, as have those of oil and fertilizers, while cacao, sugar, and coffee prices are falling.

Another important difference between the two situations is that global corn and soybean reserves are larger than last time, the most developed economies are growing slowly –or are in recession– and the emerging economies have lost steam, which suggests an easing of world demand for commodities and less pressure on the markets.

The technical note adds that the hikes in the international prices of corn, soybeans, and wheat will have two main effects on LAC: one direct (on consumption), and another indirect (on food chains).

“From the consumption standpoint, the first point that has to be considered is the importance of the products whose prices are rising in the diet of the population, especially the most disadvantaged groups,” says the document. In this instance, it is the price of yellow corn that is rising the most, which has less impact on hunger and poverty than higher rice or wheat prices, except in Mesoamerica.

The impact is greater in the case of wheat. According to IICA’s technical note, “Most of the Latin American and Caribbean (LAC) countries depend heavily on imports of wheat; hence, the international prices of this grain are transmitted rapidly to domestic markets, affecting the prices of flours and pastas. This may lead to higher consumption of substitute products, such as rice and potatoes, whose prices are bound to rise as well, though only slightly, because local supplies of those products are relatively plentiful.”

The evolution of the prices of grains and oilseeds will depend on the weather in the U.S. and the south of the hemisphere in September. The LAC countries’ vulnerability to the effects of price increases will depend on the importance of each product in the national diet, and on the source of imported items.

The document goes on to explain that “… countries that import their agricultural products from the United States … will be more vulnerable than those that import them from Argentina, Brazil, or other countries where production has not experienced a sudden fall. Furthermore, countries that are net exporters of corn, soybeans, and wheat would benefit from higher prices.” It can be downloaded from here.

For more information, contact: 
rafael.trejos@iica.int
Technical Note