Investment bank Goldman Sachs predicts that prices are open to upside risk, sparked by threats to the Australian wheat harvest.
"Expectations of very low global inventories of wheat and corn over the remainder of the 2004/05 crop year will leave the market extremely vulnerable to unexpected disruptions," said the bank.
In particular Goldman Sachs cites stong rains and flooding last month in Australia as a price risk factor, along with 'very low' global inventories that has left the market price exposed to unexpected disruptions.
Wheat, along with corn and soy, are the starting point for a range of food ingredients, from starch to gluten, used widely in food applications. But food makers and ingredients firms across the world have been affected by rising prices for basic food commodities.
In each of the last four years world grain production has fallen short of consumption, forcing a draw-down of global stocks for wheat, rice, corn and soybeans. Soybean prices recently hit 15-year highs and wheat and corn seven-year highs.
But signs at the end of last year that stocks would improve on 2004 harvests brought some relief to the food industry. Cautious optimism reflected in data from a recent report issued by the UN-backed Food and Agriculture Organisation (FAO) predicts world cereal production will hit a record 2.04 billion tonnes in 2004, an increase in inventories for the first time in five years.
The FAO said world cereal stocks - wheat, maize, rice, soya - are forecast to rise to 441 million tonnes by the close of the 2004/05 season, with the bulk of the increase in corn. Wheat reserves are forecast to augment slightly.
By contrast, the FAO report predicts rice inventories will fall again pushing firmer prices as a result of reduced production in several major exporting countries.
But data from the US government and investment analysts suggests that wheat and corn stocks are still exceptionally low.
In December the US department of agriculture forecast global wheat stocks-to-use ratio would rise by just four days to 86 days of cover in 2004/05 - the second lowest global inventory in 30 years. This figure compares to 1999/00 when cover hit 131 days.