Global roots of rural distress

Low farm prices may be good news for consumers but not for farmers. Recent agitations by farmers in several states were linked to low prices. The question is: what if low farm prices were not an aberration, but part and parcel of a worldwide trend?

Prices of agricultural products are likely to remain at or below current levels in real terms, according to the OECD-FAO Agricultural Outlook for 2017-2026. Prices are expected to remain well below the peaks seen in 2007-16 but above the levels of the early 2000s. An increase in supply and slowing demand will keep real prices low. (OECD is the Organisation for Economic Co-operation and Development and the FAO is the Food and Agriculture Organisation of the United Nations.)

In real terms, the price index for cereals is expected to decline from 90.15 in 2017 to 85.13 in 2026, that of dairy products from 101.24 to 97.4, meat from 79.68 to 67.54 and of oilseeds from 93.96 to 88.64. Short-term trends can deviate from these levels due to specific circumstances but demand and supply will determine the longer term price outlook. Note how prices have already come down sharply from the peaks in 2011 and 2012. (see chart-1)

From 2017 to 2026, global cereal output is expected to increase by 1% per annum, chiefly due to crop yield improvements. In dairy, it expects an increase in dairy herds to drive output growth with India expected to drive growth. India will become the world’s largest milk producer by 2026, with production rising by 49% in this period despite low milk yields.

The OECD-FAO report expects consumption growth to play a diminished role compared to the previous decade (see chart 2). The rise of China and demand for biofuels were two main reasons fuelling consumption growth. The report says demand growth in China is slowing down due to moderating economic growth, and current crude oil price trends and policies indicate subdued demand for biofuels.

It is therefore projecting subdued demand across food groups in the decade till 2026. Growth in demand will be mainly driven by population growth and not increase in per capita consumption, especially in product groups such as cereals, meat and fish. Per capita consumption will play a key role in some segments though, such as dairy, sugar and vegetable oil.

India is in a different league, however. Its economic growth is projected to be healthy and therefore per capita consumption should increase. It will also overtake China as the most populous country, which together with higher consumption is good for demand. The report projects it to be a big driver of global consumption of dairy products, cereals, vegetable oil and sugar.

Thus, farmers should have no problem finding a market for their products. There are restrictions on imports of food products, which can also protect them to an extent from weak global prices. Still, India does import food products to plug gaps in domestic supply or to build buffer stocks. A sustained period of low global food prices is, therefore, a risk to domestic prices too. That’s not a good sign for the rural economy.