Financial crisis will hurt agricultural markets

World cereal production is expected to hit a new record this year as high prices boosted plantings under generally favorable weather conditions, FAO said today in the latest issue of its "Food Outlook", a bi-annual commodity publication. World cereal production is forecast to be large enough to meet anticipated utilization in the short-run, and help replenish much depleted global stocks.

But the agency warned that the current financial crisis will affect agricultural sectors in many countries negatively, including those in the developing world.

Greater uncertainty

This year's record cereal harvest and the recent fall in food prices should, therefore, not create a false sense of security, said Concepcion Calpe, one of the report's main authors.

"For example, if the current price volatility and liquidity conditions prevail in 2008/09, plantings and output could be affected to such an extent that a new price surge might take place in 2009/10, unleashing even more severe food crises than those experienced recently," Calpe said.

"The financial crisis of the last few months has amplified downward price movements, contributed to tighten credit markets, and introduced greater uncertainty about next year's prospects, so that many producers are adopting very conservative planting decisions," Calpe said.

The report stresses that most of the recovery in cereal production took place in developed countries, where farmers were in a better position to respond to high prices. Developing countries, on the contrary, were largely limited in their capacity to respond to high prices by supply side constraints on their agricultural sectors.

Implications for the poor

The sharp 2007/2008 rise in food prices has increased the number of undernourished people in the world to an estimated 923 million. Lower international commodity prices have not yet translated into lower domestic food prices in most low income countries.

"There is a real risk that as a consequence of the current world economic problems people will have to reduce their food intake and the number of hungry could rise further," Calpe said.

Long-term challenges

The report says that world agriculture is facing serious long-term issues and challenges that need to be urgently addressed. These include land and water constraints, low investments in rural infrastructure and agricultural research, expensive agricultural inputs relative to farm-gate prices, and little adaptation to climate change.

To feed a world population of more than nine billion people by 2050 (around six billion today) global food production must nearly double.

Population growth will take place mostly in developing countries and for the greater part in urban areas. A shrinking rural work force will thus have to be much more productive. This will require more investments in agriculture, machinery, tractors, water pumps, combine harvesters etc., as well as more skilled, better-trained farmers and more efficient supply chains.

FAO