Working Paper No. 29, OECD Publishing, Paris, Abler, David, 2010

A critical review of studies on agricultural demand in BRIIC countries derives implications for markets and prices, finding that as wealth increases demand will grow for most food categories except cereals, consumption levels will become less susceptible to changes in income, and that prices of agricultural commodities will become less susceptible to the economic cycle but more susceptible to supply shocks.

The five largest developing and emerging economies, or the BRIIC countries (Brazil, Russia, India, Indonesia, and China), are each achieving GDP growth rates between 4 and 8% per annum. These statistics are impressive on their own and in comparison to the world economy; BRIIC growth accounted for more than one-half of non-OECD GDP growth in 2008.

Abler relates rapid economic growth to agriculture, analyzing in particular the effects of growth on demand for agricultural products. Two dimensions of demand are considered; types of agricultural goods, and their quality. This report reviews and evaluates studies of agricultural product demand, and the structure of demand, in BRIIC countries to arrive at implications for agricultural markets and prices. The studies consulted in this report use data collected during the last 30 years. Despite the relevance of more recent data, studies of developing countries are subject to interment data collection and irregular flows of published research.

The effect of economic growth on food demand is measured using the income elasticity of demand, in other words, the percentage change in consumption of a good due to a 1% increase in income. While the magnitude of the measure is not equivalent across studies, some important inferences can be drawn about demand growth for agricultural products. Future growth in demand for fruit vegetables is likely to be significant, as is the demand for sugar with the exception of Indonesia for which there is no data. The demand for meat and seafood is also expected to increase significantly, notably in urban China where even the rate of demand growth is expected to rise (elasticity will rise). Whereas future demand growth for fats and oils is expected to be significant in Russia, it will likely be low in Brazil, China, India, and Indonesia. Significant demand growth for dairy is expected in Brazil, China, and Indonesia, with inconclusive evidence for Russia and India.

Demand growth for cereals will likely be minimal or even negative. This, along with the demand growth in food categories described above, is consistent with logic that dictates that demand for cereals declines as income rises. While it is also found that as income rises, so does the variety of foods demanded, a conclusion cannot be drawn about changes in food quality. This is mostly due to methodological gaps and is identified as an area of further research.

Since prices ultimately depend on demand in relation to supply, the study of agricultural demand can provide implications about price volatility. Findings show that as income rises, income elasticities of demand will decrease, such as in OECD countries where the measure is very low. In other words, demand patterns will be less affected by changes in income. Lower elasticities in urban areas as compared to rural areas, as found in this report, provide evidence of declining elasticities since urban incomes tend to be higher on average.

Declining income elasticity of demand will result, firstly, in mitigation of the shocks of recession or financial crises to agricultural demand and prices.  For example, in the limiting case where income elasticity of demand equals zero, a recession would have no impact on agricultural demand. Secondly, shocks to supply (i.e. a drought) will lead to greater price volatility, since prices will compensate for a level of demand that is more constant. If there is good weather and greater yield, households will demand the same amount but prices will fall since the supply is more abundant. Finally, there will be less of a “spill over effect” of a change in the supply in one good on the demand or price of another. The author also points out the influence of political economy in wealthier countries, where policy tends to buffer the agricultural sector from shocks to stabilize demand and prices. How quickly the BRIIC economies are moving toward low OECD-country elasticities is a subject for further research.