Falling agricultural commodity prices might appear to be good news at first glance, but they could signal a deepening of the world food crisis.The UN's Food & Agricultural Organisation (FAO) says lower food prices have arisen not from a recovery in global supply, but rather because of a retreat in demand because of slowing economic growth.
And slowing demand will inevitably lead to reduced production by farmers.
The FAO notes that world cereal stocks still need to be replenished, with the current stocks-to-use ratio at its second-lowest level in three decades.
"To the extent that prices do reflect an anticipated slowdown in economic growth that constricts demand, lower prices may even be associated with more poverty and hunger rather than less," the organisation warns.
A preliminary estimate shows that the number of undernourished people worldwide rose by 40m this year, to 963m. This came on top of an increase of 75m in the number of people going hungry last year.
The shocking increase in world hunger has come in spite of prices for commodities such as rice and wheat falling by half from this year's record highs.
FAO director-general Jacques Diouf says weaker exchange rates against the US dollar have also meant that prices in developing countries are still at "unprecedented" high levels.
The organisation says the general fall in commodity prices across the board, including oil, is evidence that slowing demand brought about by the global financial crisis is the main driver.
In SA, the National Agricultural Marketing Council recently confirmed in its quarterly report that food inflation is slowing, with almost all the main food categories contributing to the trend.
Ernst Janovsky, GM of Absa Agribusiness, agrees that prices are under pressure because consumers simply do not have money. He notes, however, that the downward trend in food inflation in SA is also the result of surplus supply, which will continue into next year.
"The season has had a sticky beginning, with late rains meaning late planting, but farmers have caught up and the forecasts for the rest of the season, for volumes and weather conditions, are fair," Janovsky says.
"The current low demand also means that surpluses are starting to build up, and I'm not overly concerned about the food security situation."
He identifies the exchange rate as a "wild card" that could either protect the agriculture sector or "force the industry to take it on the nose".
"If the rand goes to R12 or R14 to the dollar, it will push up inflation, but our view is that with lower fuel prices and interest rates, food inflation will come down. That will increase the demand for food in SA, and benefit agriculture."
Janovsky believes the international gloom over the agriculture sector is not justified in SA's current conditions.
"Over the past two years, the price of agricultural commodities has almost doubled, so losing 20%- 30% of that is not the end of the world. It won't ruin our agriculture."
But there's little light at the end of the tunnel. Slower economic growth will continue to affect international demand, with negative market expectations possibly dampening demand even further.
Not even the rapid growth of some economies, such as China's and India's, is expected to contain fully the negative effects of slowing global demand, which will put further downward pressure on agricultural commodity prices.
The drop in oil prices is also likely to depress demand for commodities used as feedstock in biofuel production, adding to disincentives for farmers to make the investments that are necessary for greater production.
Though consumers will benefit from lower food prices, these are unlikely to compensate for their declining incomes in a global recession.
On the supply side, the FAO says production cutbacks in the face of falling prices will not be the only impact of the financial crisis.
Falling oil prices could trigger a reduction in fertiliser and energy-related costs, such as production, processing and transportation, but the speed at which input and output prices adjust to each other will be crucial, the organisation says.
"It is possible that the input prices will be more sticky' and fall at a slower pace than product prices, in which case producer margins will be squeezed further."
The most critical impact of the financial crisis, though, is expected to be the scarcity of credit, widely recognised as a significant constraint to agriculture development in developing countries.
"The combination of falling agricultural prices and reduced access to credit may have... very serious implications for global food security," the FAO says.
"A cutback in grain plantings against the background of continuing low grain stocks, which have not been rebuilt since the high food price episode, would increase the risk of a global food crisis if harvests turn out to be poor - especially if countries cannot access credit for food imports," it says.
Again, Janovsky says he does not expect a credit crunch for SA farmers in the near future. He says for the current summer season the credit advanced to farmers is "already in the soil".
"Credit for the winter season should not be a problem, but we can only finance farmers to make a profit.
"It is going to be more difficult to finance marginal farmers," he says.
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