Cereal prices at highest levels for a decade

Poor harvests in key producing countries and a fast-growing demand for biofuel production have driven up grain prices, while supply constraints have also dominated the rice economy, the report said.

Global expenditures on imported foodstuffs in 2006 could reach a historic high of $374 billion, over two per cent more than the previous years level. Import bills for developing countries are anticipated to rise by almost five per cent from 2005, mainly as a result of price increases rather than an increase in the actual volume of food imports.

FAO anticipates that many countries will reduce purchases, not always in response to improved domestic supplies but rather because of high international prices. Moreover, higher energy costs may force many of the poorer developing countries to curtail expenditures on imported staples to sustain their fossil fuel needs.

FAO's latest forecast of world wheat output in 2006 stands at roughly 592 million tonnes, almost 33 million tonnes, or 5.3 per cent, down from 2005. A turnaround is likely, however, with increased winter plantings and good growing conditions raising expectations for a strong rebound in 2007 harvests, FAO said.

World production of coarse grains in 2006 stands at 981 million tonnes, down by 2.1 per cent from 2005 but above the average of the past five years. Current strong prices are likely to encourage higher plantings and larger production in 2007, but if industrial use, mainly for ethanol, continues to grow at the current pace, it may take more than one good crop season for prices to retreat significantly from their current highs, the report said.

Typhoons, drought, flooding, diseases and insect attacks have marred prospects for rice crops in 2006, so virtually no growth in global production is anticipated this year. The outlook for 2007 rice crops in the southern hemisphere was also negative, according to the report.

Oilseed prices have also been on the rise, but gains have been well short of those witnessed for cereals, which is likely to trigger a shift away from oilseed cultivation towards more profitable cereal crops in the coming season. This will exacerbate current imbalances, especially in the vegetable oil markets, which have seen demand rising faster than production, FAO said.

The strength of grain markets also has ripple effects on the meat and dairy sectors. Renewed consumer confidence as a result of reduced animal disease outbreaks had raised the prospect of a rebound in global meat demand, but expectations of high feed costs are threatening to postpone a recovery in livestock and meat production, the report said.

As for dairy products, concerns over feed costs have been overshadowed by negative expectations for milk production in Australia and in the European Union, which together supply a third of world dairy exports. As a result, FAO predicts a tightening of the dairy market and an end to the softening of prices witnessed earlier in 2006.

Growth in the output of developing countries, however, is robust at over four per cent, due mainly to large gains in some countries of Asia and South America.

Global sugar production has recovered to the point that it is expected to outpace demand again after three years of deficit. Production is forecast to increase to 155.5 million tonnes in 2006/07. World sugar prices have largely retreated from the 25-year highs reached in February 2006, but the market remains particularly susceptible to large demand swings and price volatility.