« OECD Agricultural Outlook 2002-2007 2 0 0 2 The OECD Agricultural Outlook 2002-2007, now in its eighth edition, shows that sluggish economic OECD growth, weak demand and continued high levels of spending on farm support are slowing the recovery in world prices, despite a general tightening of supplies in recent years. An economic rebound and strengthening demand beginning in the second half of 2002 should lead to increased Agricultural trade and higher prices over the projection period to 2007. This book is essential reading for all those involved with agricultural markets. It provides the reader Outlook with valuable information on market trends and medium-term prospects for the main agricultural products, shows how these are influenced by government policies, and highlights some of the risks and uncertainties that may influence the agricultural outlook: 2002-2007 • What is the role of government policies and how do they influence farmers’ decisions? • How long will the slowdown last and how fast will recovery proceed? • Which farm prices will benefit most from the expected recovery? • What is the outlook for agricultural trade? • Which countries and products stand to gain the most? • How does OECD trade liberalisation affect food security in developing countries? • How are world markets affected by developments in Russian agriculture? • What lessons can be drawn from recent animal disease outbreaks? • What are the key issues that OECD policy makers will face over the next five years? The report provides detailed commodity projections to 2007 for production, consumption, trade, stocks and prices of temperate-zone products in OECD countries, and presents selected information on other countries, including China, Argentina and the Russian Federation. O ALSO AVAILABLE ON CD-ROM E To access the complete database, which contains series going back as far as 1970 and selected C D results for the scenarios discussed in this publication, consult the OECD Agricultural Commodities A Outlook Database, available on CD-ROM. g www.oecd.org/agr r i c u l t u r a l O u t l o OECD's books, periodicals and statistical databases are now available via www.SourceOECD.org, our online library. o k This book is available to subscribers to the following SourceOECD themes: 2 Agriculture and Food 0 0 Emerging Economies 2 Transition Economies - 2 0 Ask your librarian for more details on how to access OECD books on line, or write to us at 0 [email protected] 7 www.oecd.org ISBN 92-64-18721-9 2002 2002 51 2002 07 1 P -:HSTCQE=V]\WVY: © OECD, 2002. © Software: 1987-1996, Acrobat is a trademark of ADOBE. All rights reserved. OECD grants you the right to use one copy of this Program for your personal use only. Unauthorised reproduction, lending, hiring, transmission or distribution of any data or software is prohibited. You must treat the Program and associated materials and any elements thereof like any other copyrighted material. All requests should be made to: Head of Publications Service, OECD Publications Service, 2, rue André-Pascal, 75775 Paris Cedex 16, France. OECD Agricultural Outlook 2002-2007 ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT Pursuant to Article 1 of the Convention signed in Paris on 14thDecember 1960, and which came into force on 30thSeptember 1961, the Organisation for Economic Co-operation and Development (OECD) shall promote policies designed: – To achieve the highest sustainable economic growth and employment and a rising standard of living in Member countries, while maintaining financial stability, and thus to contribute to the development of the world economy. – To contribute to sound economic expansion in Member as well as non-member countries in the process of economic development. – To contribute to the expansion of world trade on a multilateral, non-discriminatory basis in accordance with international obligations. The original Member countries of the OECD are Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The following countries became Members subsequently through accession at the dates indicated hereafter: Japan (28thApril 1964), Finland (28thJanuary 1969), Australia (7thJune 1971), New Zealand (29thMay 1973), Mexico (18thMay 1994), the Czech Republic (21stDecember 1995), Hungary (7thMay 1996), Poland (22ndNovember 1996), Korea (12thDecember 1996) and the Slovak Republic (14thDecember 2000). The Commission of the European Communities takes part in the work of the OECD (Article13 of the OECD Convention). Publié en français sous le titre: PERSPECTIVES AGRICOLES DE L’OCDE 2002-2007 © OECD 2002 Permission to reproduce a portion of this work for non-commercial purposes or classroom use should be obtained through the Centre français d’exploitation du droit de copie (CFC), 20, rue des Grands-Augustins, 75006 Paris, France, tel. (33-1) 44 07 47 70, fax (33-1) 46 34 67 19, for every country except the United States. In the United States permission should be obtained through the Copyright Clearance Center, Customer Service, (508)750-8400, 222Rosewood Drive, Danvers, MA 01923 USA, or CCC Online (www.copyright.com). All other applications for permission to reproduce or translate all or part of this book should be made to OECD Publications, 2,rue André-Pascal, 75775 Paris Cedex 16, France. FOREWORD The OECD Agricultural Outlook provides a medium term assessment of future trends and prospects in the major agricultural commodity markets of OECD countries. The report is published annually, as part of a continuing effort to promote informed discussion of emerging policy issues. This eighth edition of the OECD Agricultural Outlook, 2002-2007 is set against the background of a sharp drop in global economic activity at the beginning of the Outlook period, as well as prospective changes in EU and US farm policy in2002 and the planned finalisation of multilateral trade negotiations under the Doha Development Agenda in 2003. The Outlook for agricultural commodity markets, both globally and in many Member countries is highly conditional on the pace of economic recovery, on policy interventions in general by OECD governments and on the outcomes of current domestic policy reviews and multilateral trade negotiations, in particular. These outcomes have not been anticipated in this report. The projections to2007, presented in the Outlook, constitute a plausible medium-term future for the markets of key commodities. They are the result of close co-operation between the OECD Secretariat and experts in Member countries and some Non-Member Economies (NMEs) and hence reflect their combined knowledge and expertise. The projections are based on a number of assumptions relating to current or announced agricultural and trade policies in OECD countries, the underlying macro-economic environment, and developments in major NMEs. The OECD’s Aglink model is used to guarantee internal consistency in the projections. The model is also used to generate scenarios around the Outlook baseline so that sources of uncertainty in relation to key assumptions and selected policy issues can be analysed. In addition to the projections and scenarios, this edition of the Outlook also includes an analysis of the sensitivity of the projections to exchange rate assumptions and two special focus sections in which some issues of particular importance are analysed. The first of these sections discusses projections and main issues in the medium term outlook for Russian agriculture evaluating Russia’s potential to develop into a major force in global commodity markets over the medium term. The second evaluates the implications of the world market price developments as presented in this Outlook for a number of indicators of food security in NMEs. The fully documented Outlook database, including historical data, projections and selected scenario results, is available on CD-Rom. This publication is prepared by the Directorate for Food, Agriculture and Fisheries of the OECD with the active participation of all Member countries. Two other annual publications prepared by the Directorate support and extend the policy assessments provided in this report– Agricultural Policies in OECD Countries: Monitoring and Evaluation 2002 (June2002), and Agricultural Policies in Transition Economies: Trends in Policies and Support, 2002 (September2002). © OECD 2002 3 The OECD Agricultural Outlook is published under the responsibility of the Secretary-General of the OECD. The views expressed and conclusions reached in this report do not necessarily correspond to those of the governments of OECD Member countries. Acknowledgement This edition of the OECD Agricultural Outlook was prepared by the following team of economic analysts from the OECD Secretariat: Loek Boonekamp (team leader), Pete Liapis, Garry Smith (co-ordinator), Grégoire Tallard, Wyatt Thompson, Pavel Vavra and Martin von Lampe. Research and statistical assistance were provided by Armelle Elasri, Ane Kathrine Christensen, Gaëlle Gouarin and Claude Nenert. Secretarial services were provided by Christine Cameron and Michèle Patterson. Technical assistance in the preparation of the Outlook database CD ROM was provided by Frano Ilicic and final revisions to the report were translated by Armelle Elasri, Gaëlle Gouarin and Claude Nenert. Many other colleagues in the OECD Secretariat furnished useful comments on earlier drafts of the report. 4 © OECD 2002 TABLE OF CONTENTS Acronyms and Abbreviations................................................................. 6 The Outlook in Brief ............................................................................. 7 Overview ............................................................................................... 9 Economic and Policy Assumptions ....................................................... 23 Cereals................................................................................................... 43 Oilseeds................................................................................................. 61 Meat....................................................................................................... 79 Dairy Products....................................................................................... 93 Russian Agriculture: Current Situation and Future Trends .................. 109 Food Security of Non-Member Economies (NMEs): Some Implications of the Outlook .................................................... 123 Methodology.......................................................................................... 135 References ............................................................................................ 193 Annexes Annex I. Statistical Tables................................................................. 137 Annex II. Glossary of Terms................................................................ 203 LIST OF BOXES Box 1. Sensitivity analysis: effects of exchange rate changes .................. 30 Box 2. The effect of the economic downturn on agricultural markets .... 33 Box 3. The Farm Security and Rural Investment (FSRI) Act2002-07 ...... 41 Box 4. Market impacts of changes in the European Union’s set-aside policy ....................................... 56 Box 5. Some possible effects of changes to the US marketing loan rate ........................................................ 66 Box 6. Developments in selected OECD biofuel policies and consequences for crop markets............................................... 70 Box 7. Market and trade impacts of the BSE crises ................................. 83 Box 8. An analysis of dairy support schemes in Japan and the United States ...................................................... 106 © OECD 2002 5 ACRONYMS AND ABBREVIATIONS Acronyms ABARE Australian Bureau of Agricultural and Resource Economics ALIC Agriculture and Livestock Industry Corporation AMAD Agricultural Market Access Database AMF Anhydrous milk fat BSE Bovine spongiform encephalopathy CAP Common Agricultural Policy CEEC Central and Eastern European Countries CFIP Canadian Farm Income Program CIS Commonwealth of Independent States CPI Consumer price index CRP Conservation Reserve Program DEIP Dairy Export Incentive Program (US) EU or EU15 European Union of 15 Member States EEP Export Enhancement Program (US) ERS Economic Research Service of the US Department for Agriculture Euro The single currency of the twelve EU countries participating in the European Economic and Monetary Union EUROSTAT Statistical Office of the European Communities FAIR ACT Federal Agriculture Improvement and Reform Act (US) FAO Food and Agriculture Organisation FAS Foreign Agricultural Service of the US Department of Agriculture FMD Foot and mouth disease FMMO Federal Milk Marketing Orders FSRI ACT The Farm Security and Rural Investment Act FTAA Free Trade Area of the Americas GATT General Agreement on Tariffs and Trade GDP Gross domestic product HIV Human Immunodeficiency Virus IEA International Energy Agency IGC International Grains Council IMF International Monetary Fund JRIS Rice Farming Income Stabilisation Programme LDC Least Developed Countries MAF Ministry of Agriculture and Forestry (New Zealand) MAFF Ministry of Agriculture, Forestry and Fisheries (Japan) MBM Meat and bone meal MERCOSUR Common Market of the South MFN Most Favoured Nation MLC Meat and Livestock Commission (United Kingdom) NAFTA North American Free Trade Agreement NFIDC Net Food Importing Developing Countries NIS New Independent States NISA Net Income Stabilisation Account NME Non-Member Economies NZDB New Zealand Dairy Board OECD Organisation for Economic Co-operation and Development OIE Office International des Épizooties OIS Other Independent States OTMS Over Thirty Month Scheme PAPP Production Adjustment Promotion Programme PFC Production Flexibility Contract PSE Producer Support Estimate SMP Skim milk powder SPS measures Sanitary and Phyto-Sanitary Measures SRM Specified Risk Material TRQ Tariff rate quota TSE Total Support Estimate UAA Utilised Agricultural Area UK United Kingdom URAA Uruguay Round Agreement on Agriculture US or USA United States USDA United States Department of Agriculture vCJD Variant Creutzfeldt-Jacob Disease WFM World Food Model WMP Whole milk powder WTO World Trade Organisation For an explanation of technical terms, see the Glossary Abbreviations and symbols ARS Peso (Argentina) GBP Pounds (United Kingdom) mha Million hectares AUD Dollars (Australian) Ha Hectare mn Million Bn Billion hltr hectolitre mt Million tonnes CAD Dollars (Canadian) IDR Rupiah (Indonesia) NZD Dollars (New Zealand) CNY Yuan (Chinese) INR Rupee (India) PLN Zloty (Poland) cwe Carcass weight equivalent JFY Japanese fiscal year (beg. 1April) pw Product weight cwt hundredweight JPY Japanese yen rtc Ready-to-cook c.i.f. Cost insurance freight KRW Won (Korea) rwt Retail weight cts/Ib US cents per pound Kg Kilogram t Tonnes dw Dressed weight kt Thousand tonnes t/ha Tonnes per hectare EUR European currency unit L Litre RUR Russian ruble HUF Forint (Hungary) lw Live weight THB Baht (Thailand) f.o.b. Freight on board MXN Peso (Mexican) USD Dollars (United States) 6 © OECD 2002 THE OUTLOOK IN BRIEF (cid:127) Subdued conditions are expected in agricultural markets at the start of the Outlook period as slack demand and trade reflects the general downturn in world economic growth. However, as world economic recovery gets underway in the latter half of2002 and strengthens into2003, it should underpin rebounding global demand and trade. This, in turn, should fuel gradually rising world agricultural prices up to2007 –though more for some meats and dairy products than for cereals, oilseeds and their by-products. Real, inflation-adjusted prices remain little changed during the projection period, but their longer-term trend continues downward. (cid:127) A return to higher, sustainable global economic growth lays the foundation for strengthening demand and expanding trade in farm products. Trade in both bulk and processed products should increase to2007 with the steepest rise in net dairy product exports by OECD countries, followed by cereals and meats. Demand for agricultural products in general is expected to be more brisk in Non-Member Economies (NMEs), boosted by faster economic and population growth, rising personal incomes, increasing urbanisation and changing diets. (cid:127) World and OECD production of agricultural products is projected to expand steadily over the Outlook period with the fastest growth in the NME region. Livestock products and feedstuffs continue to expand their share of trade at the expense of food grains while yield and productivity increases continue to contribute most to crop expansion. While the NMEs account for the bulk of growth in world agricultural production, their total demand expands even faster, met by higher imports from OECD countries to fill shortfalls. (cid:127) Farm support in the OECD area remains high and continues to have a major impact on agricultural markets. Fundamental reform has been slow and insufficient and sometimes, such as with the new US farm legislation, it has resulted in additional budget allocations for farm support. Multilateral negotiations are still at an early stage under the Doha Development Agenda in the WTO. Changes in national farm legislation are expected over the Outlook period. Governments in reviewing policies should recognise that the long term prosperity and competitiveness of their farm sectors is best served by a market-orientated approach rather than by insulating producers from markets through high levels of subsidies and protection. (cid:127) The policy context is becoming more complex. A key challenge facing governments in the period ahead will be to better match domestic priorities to international obligations. Countries must find effective ways of tackling their legitimate internal policy issues without harming their trading partners. Further, fundamental agricultural reforms will also be needed to encourage broader participation of developing countries in a new WTO agreement and to share its benefits across all countries. Further integrating the farm sector more effectively into the multilateral trading system would help to sustain a recovery in global agricultural markets. © OECD 2002 7 OVERVIEW Outlook at a glance – economic rebound will eventually boost markets Improved market conditions OECD agricultural markets are subdued at the start of the Outlook period in prospect… as commodity demand and trade slows amid significantly weaker world economic growth. Global economic activity fell sharply over the last year as a synchronised downturn spread from the United States and Japan to other OECD countries, then to the rest of the world. However, economic recovery is expected to be underway in the latter half2002 and to strengthen in2003. In later years of the Outlook, a sustained upturn in economic activity, especially …but the long term in developing countries, lays foundations for strengthening demand, trade downward trend in real and prices for agricultural products. However, higher farm incomes and commodity prices continues continuing productivity growth are expected to boost global output of cereals and oilseeds sufficiently to restrain world price increases for these commodities over the Outlook period. Atlantic and Pacific meat markets are initially held back by animal disease outbreaks, particularly beef, but overall prospects for the meat sector improve during the medium term. For many agricultural products covered in the Outlook, projected world prices for2007 are above the average for1996-2000. However, real prices, adjusted for inflation, remain relatively flat to2007, but with a longer term declining trend. The macroeconomic context is weak but should improve Weaker global economic The projections for OECD countries show how both global and domestic conditions… forces are shaping the agricultural sector. The world economy has been weaker and more variable since the late1990s but went into a synchronised downturn in2001 for the first time since the1970s. The trough deepened following the terrorist attacks in the United States on 11September 2001, as weaker commodity demand pushed down market prices. Dairy products were hardest hit, falling sharply from their August2001 peaks in a display of volatility typical of these thin markets. Meat prices also declined with …and regional disease recession and the impacts of Foot and Mouth Disease (FMD) outbreaks in the outbreaks… European Union and Argentina and BSE in Europe and Japan. Some crops proved more resilient to the weakening economic conditions as lower global production outweighed weaker demand, drawing down stocks and firming prices at the beginning of the Outlook period. The impact on agricultural markets of the downturn in economic growth in OECD countries is examined in Box2 of the Economic and Policy Assumptions chapter. …signal a slow recovery Two distinct phases of the global macro economic forecast impact on the at first… agricultural baseline. Economic slowdown dominates the near term, the main uncertainties being its depth and duration, followed by the timing and strength of the expected recovery. Beyond the recovery phase, agricultural © OECD 2002 9