Margins were squeezed along the food chain in 2003, particularly compounded in the ingredients to production segment, where demand outstripped supply for a number of key raw materials - notably soy and wheat. The FAO prediction means increasing pressure on prices.
"Closing inventories are expected to be down by 89 million metric tons, or 18 per cent from their opening levels,"said the report published in the UN food agency's Food Outlook.
The anticipated sharp decline in cereal stocks from the previous season would be mainly due to China, although substantial reductions are also anticipated in India, Russia, Ukraine and the European Union, mostly driven by the reductions in their 2003 cereal production, continues the report.
Brighter news also figured with the FAO predicting that world cereal production in 2004 is forecast to increase to 2,130 million metric tons, some 2 per cent up on last year and 3 per cent above the average of the past five years and that could help alleviate the tight global supply situation in the new 2004/2005 season.
Much to the relief of wheat-based ingredients users - suffering from 30 year supply lows in this cereal - the bulk of the cereals increase is expected in wheat, although rice output is also seen to rise significantly. By contrast, coarse grains production could decrease marginally, warned the FAO.
"The increase in global cereal output forecast for 2004 would come as a very welcome development for global food supply. The continued tightening of global cereal supplies for four successive years since 1999/2000 has brought international cereal prices under significant upward pressure in the past months," writes the FAO.
Because early prospects for wheat crops are favourable, some easing of wheat prices could be anticipated as the harvest approaches in the northern hemisphere in the coming months.
But, the report says that export prices for coarse grains and rice are unlikely to recede any time soon, based on current supply and demand prospects.
World cereal use in 2003/2004 is forecast at 1,971 million metric tons, up 1 per cent from the previous year, but still slightly below the 10-year trend.
The Rome-based organisation said that in spite of a significant increase in international cereal prices and major animal disease outbreaks in the second half of the season - BSE in Canada and the US, bird flu in Asia - global cereal use is expected to rise above the previous season because of strong demand for feed and industrial use, especially in the US.
Shortages in cereal supplies is not the only factor to have sorely bruised the bottom line for food firms in the food chain. In 2003 the global industry faced soaring prices for freight from the simple fact that there are currently not enough ships sailing the seas to meet demand. The entry of China onto the global food stage - and its massive cereal imports - have played a key role in the shipment shortages, and consequently the rise in prices.
The FAO said yesterday that it anticipates 'soaring ocean freight rates for 2003/2004' and 'strong international prices' for world cereal supplies.