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EU De-coupling Could Ease Price Hikes, says USDA

by 5m Editor
16 January 2008, at 10:03am

US - The European Central Bank recently published an overview of recent developments of EU commodity and food prices. The analysis confirms that significant prices increases are tied to energy prices, adverse weather conditions, greater demand for biofuels and strong demand for crops in emerging economies.

In its latest monthly bulletin (Dec 2007) the European Central Bank (ECB) reports a significant increase in agricultural commodity prices over the past few months. This, says United States Department of Agriculture in part, reflects temporary factors affecting the global supply of these commodities, including adverse weather conditions in some major agricultural commodity-exporting countries.

In a recent USDA GAIN report says that global food prices have also been bolstered by a strong increase in global demand for foodstuff resulting from the changes in food consumption patterns in many developing economies. The emergence of new sources of demand for some agricultural commodities, for example biofuels, also contributes to the situation.

The rise in global food prices has already led to significant increases in food prices in Europe at both producer and consumer level. Producer prices of food products and beverages rose by 7.5 percent in annual terms in October 2007, compared with a rate of 2.2 percent on average in 2006. At the consumer level, prices are also increasing.

Variable

By contrast, unprocessed food prices seem to have been less affected by the recent developments in global food prices so far. Although food prices have risen in all european countries, the extent to which the global food price shock has been transmitted to individual euro area countries has varied significantly.

USDA says that number of factors are behind the diverse food price developments across countries. In countries where food price increases have been relatively contained, it seems that, in the context of high competition among retailers, profit margins may have acted as a buffer cushioning the steep increases in global food prices. By contrast, in countries where food price increases have been more considerable, it appears that retailers’ profit margins have not acted as a buffer.

And it says that food price inflation may increase further as increases in producer costs are passed through to retail prices. Barring further shocks in food commodity prices, food price inflation could subsequently fall back towards levels more consistent with its historical average.

Outlook

The outlook for both world and domestic food prices remains highly uncertain. Although the supply of agricultural products should eventually respond to the increase in demand, the catch-up period may be more prolonged than currently envisaged, says USDA. Moreover, food price developments depend on a number of factors which are hard to predict, including technology advances and possible changes in energy policy.

Against the background of a marked increase in international food prices, further liberalisation and reforms in the EU agricultural markets are particularly important. Currently, CAP policies still entail distortionary effects and divergence between the EU prices and the international prices of a number of agricultural products. Certain subsidies are still linked to production or land area, and thus often benefit larger farms.

USDA says the European Commission understands this distortion. Its proposals to increase the decoupling rate, as well as payment cuts for larger farms, is a welcome move as the reforms would help to enhance market efficiency and benefit European consumers in the form of lower prices and aid international trading.

Further Reading

- You can view the full ECB December Bulletin by clicking here.

5m Editor