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Higher food prices are here to stay: OECD-FAO report

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The world will not get respite from high and volatility in soon, according to an OECD-report that says India may play a major role in sugar price fluctuations.

The report by the Organisation for Economic Cooperation and Development (OECD) and the United Nations’ Food and Agriculture Organisation (FAO) also projected rising population and income to sustain strong demand for commodities in India.

It also projected that in the coming decade, real prices for cereals could average as much as 20 per cent higher and those for meat as much as 30 per cent higher, compared to 2001-10.

Increase in food prices however will prompt the real GDP to move from projected 8.4 per cent in 2011 to five per cent in 2020, according to the report on Agriculture Outlook for 2011-20.

“While higher prices are generally good news for farmers, the impact on the poor in developing countries, who spend a high proportion of their income on food, can be devastating,” said Secretary-General Angel Gurría.

The report said the economic growth outside OECD would be dominated by China and India. Per capita income growth in these two countries will be 7.4 per cent and 5.5 per cent respectively for 2011-12.

FAO Director General said: “In the current market context, price volatility could remain a feature of agricultural markets, and coherent policies are required to both reduce volatility and limit its negative impacts.”

The key solution to the problem, he said will be boosting investment in agriculture and reinforcing rural development in developing countries, where 98 per cent of the hungry people live on Friday and where population is expected to increase by 47 per cent over the next decades.

India’s role in increasing world commodity price is highest in rice (30 per cent), followed by vegetable oil (four per cent), while it will have a marginal role in refined sugar, corn and soybean (one per cent each).

The Indian sugar market has been discussed in detail in the report, which states that India is the second-largest global producer and leading consumer of sugar. The report indicated an increased refined sugar production to about 50 per cent higher than in 2009-10 or 32 million tonnes (mt) of sugar per year, on average, in the coming decade.

Stating that sugar demand has been growing at four per cent every year in the last 10 years in India, it said, “With the sugar production cycle in India, domestic demand can account for a large share of the global exports (seven per cent of total world exports in 2009-10) with subsequent large additional supplies coming to world markets in surplus years, contributing to volatility in international sugar markets.”

He added that any production disruptions in India and Brazil could radically change the market outlook in the near term, igniting further bouts of high volatility and prolonging the period of high world sugar prices.

The report stated that there is a cyclical nature of production in the sugar market of India where two-three years of surplus are followed by two-three years of deficit. “In recent years, there have been larger swings in production and trade. After an increase to 30.1 mt in 2006-07, 33 per cent increase over the 2002-03 crop, sugar output declined to 15.2 mt in 2008-09 and is estimated at 28.1 mt in 2010-11. Trade followed a similar trend with import exceeding 2 mt during the deficit phase replaced by high exports during the surplus phase,” it further explained.

The report also criticised the sugar pricing policy of India.

It said that in spite of policies like FRP (Fair and Remunerative Pricing), sugar levy on factories and restrictions on sugar quantities to be sold in the market, the farmers are ridden with debt as fixed sugarcane prices are disconnected from market-based sugar prices.

The report called for a market driven relationship between sugar and sugarcane prices, apart from using sugarcane by-products like ethanol, electric power as a cushion against low sugar prices. It stated that Brazil, India and China should account for 85 per cent of the ethanol production in the developing world by 2020.

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