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FAO says food prices stuck at “stubbornly high levels”

By Sarah Hills , 08-Jun-2011

Crop production may be rising but not enough to bring down high and volatile agricultural commodity prices this year, according to the latest analysis from the FAO.

The high pricing is also likely to remain into 2012, said the UN Food and Agricultural Organisation (FAO), which has just released its biannual Food Outlook report.

Abdolreza Abbassian, FAO grain analyst said: “It all comes down to supply and demand and the supply situation, as good as it may seem, is barely meeting demand and therefore prices remain at these stubbornly high levels.

“They have been like this for almost six months and the prospects… for the new season, for 2011/12, seem to suggest that the same situation may prevail for still some time.”

The report highlights a sharp rundown on inventories and only modest overall production increases for the majority of crops as reasons for continuing strong prices.

Meanwhile maize and wheat yields in Europe and North America face the threat of poor weather conditions, so the next few months will be critical in determining how the major crops will fare this year, the report states.

Wheat prices have been particularly volatile in recent months and the benchmark wheat price rose to a high of €242 a tonne last week, although this is still short of the three-year peak of €281 per tonne reached in February.

The FAO said that global wheat output is expected to be 3.2 percent up from last year's reduced crop, mostly reflecting improved yields in the Russian Federation.

World production of coarse grains is expected to climb 3.9 percent, exceeding the record set in 2008.

Abbassian described the production increases as very promising “especially because the wheat situation last year was terribly affected by the drought in Russia. The recovery there is going to be a very positive element”.

Likewise, sugar is expected to surpass consumption for the first time since 2007/08.

In a separate analysis of the wheat market, Francisco Redruello, senior packaged food analyst at Euromonitor International, said that in terms of production, prices are not entirely linked to global supply and demand for wheat. Other variables include energy prices, oil and corn, which is competing with wheat for land.

Similarly Rabobank said in its latest agricultural commodity market report that wheat prices would “continue to be pressured” as Russia’s export ban ends but without a significant improvement to weather in multiple production regions, the correction would likely be short-lived.

Food Price Index

The FAO said international food prices, which earlier this year soared to levels seen in the 2007-8 food crisis, dropped one percent in May due to declines in international prices of cereals and sugar - more than offsetting increases in meat and dairy prices.

The FAO Food Price Index averaged 232 points in May but was still 37 percent above May 2010.