A favourable outlook for world cereal production in 2007 could help ease price pressures on the food industry.
The FAO said that expanded plantings in Europe and North America and generally satisfactory weather conditions could help stabilise global cereal output.
In addition, the European Commission recent reported that this year's total EU cereal harvest remains in line with the last five years.
Nonetheless, droughts continue to put pressure on prices. The geographic area affected by drought is less extended than that of the extreme droughts in 2005 and in 2003 - for instance, the area affected by the drought impact on wheat production makes up 14 per cent of the total EU area in 2006, compared with 17 per cent in 2005 and 23 per cent in 2003.
But some of the affected regions such as southern France, Catalonia in Spain, Sardinia, and central and north-western regions in Italy, show a worsening situation in terms of the water reserves accumulated since last spring.
On top of this, cereal prices - particularly wheat and maize - have already reached levels not seen for a decade. The FAO has predicted that the use of crops for fuel will also continue to support high prices.
The recent enthusiasm for biofuels has also helped maize prices in the US to double in just over a year to about $4 a bushel.
Global cereal output in 2006 was just under 2 billion tonnes, 2.7 per cent lower than in the previous year but still above average, according to FAO's latest Crop Prospects and Food Situation report .
The bulk of the decline was among the major producing and exporting countries, including the United States, several European countries and Australia.
Wheat production in 2006, at almost 598 million tonnes, was down 4.4 per cent from 2005. The report put output of coarse grains in 2006 at some 978 million tonnes, 2.6 per cent down from 2005.
The decline for rice was seen as marginal, with 2006 production estimated at 420 million tonnes, 0.4 per cent below the 2005 level.
However, production among low-income food-deficit countries increased significantly in 2006, with record or good crops in most regions of the world. As a result, cereal imports are forecast to decline in 2006/07 in many of these countries.
For low-income food-deficit countries in Africa, imports - both commercial and food aid - are forecast to decline by 10 per cent over the previous year.
The FAO report recommended local purchases of cereals for food aid programmes in order to support prices.
Despite the overall favourable food supply outlook for 2007, the FAO said that food security problems persist in 34 countries due to localised crop losses and civil conflict.