Wheat volatility leads to surge in global food prices, finds FAO

31-Aug-2010 - Last updated on 01-Sep-2010 at 11:32 GMT

The FAO has revised downward its forecast for 2010 world wheat production levels and reports that wheat market dynamics drove international food prices up in August by 5 per cent - the biggest month-on-month increase since November 2009.

The latest revision in wheat production forecasts reflects a further cut in the estimates for this year's harvest in the Russian Federation from 48 to 43 million tonnes (mt) in August, stated the UN’s Food and Agriculture Organisation (FAO), in its latest update on the global cereals supply and demand situation.

The international organisation said that the surge in its Food Price Index (FFPI), which is measure of the monthly change in international prices of a basket of food commodities, was informed by the sudden sharp rise in international wheat prices following drought in the Russian Federation and the country's subsequent restrictions on wheat sales.

“But other drivers included higher sugar and oilseed prices,” noted the FAO report.

Comparative analysis

But the international organisation cautions that the FAO Food Price Index (FFPI), though it peaked last month to an average of 176 points, is still 38 per cent down from the highs of June 2008.

And it stressed that at 646mt the wheat crop for 2010 would still be the third highest ever.

The forecast for world wheat ending stocks in 2011 was also lowered, to 181mt, down 9 per cent from their eight year high opening level, and the stock-to-use ratio for wheat in 2010/11 was put at 27 per cent, down 3 per cent from the last season but still 5 per cent higher than the 30-year low in the 2007/08 period, added the FAO.

Grain stocks

A spokesman for flour supplier ADM Milling told our sister site British Baker last month that although wheat prices have significantly increased, the market was not in the same position as it was in 2007/08, when global wheat stocks were very low, as there have been two seasons of stock replenishment.

Nevertheless, another leading supplier, Rank Hovis, is to increase the price of flour by £89.37 per tonne, effective 6 September.

Lawrence Watson, head of sales and marketing at the supplier, said last month: “There has been a 70 per cent year-on-year rise in raw material costs. This has been driven by the prediction of a 20mt drop in the global harvest, which has impacted heavily on world prices.”

Speculation

And industry insiders claim speculation from hedge funds has been a major contributor to current price volatility.

At the beginning of this month, the European Flour Milling Association highlighted the role of food price speculators, not the Russian export ban, in driving wheat prices up.

Laurent Reverdy, the association’s secretary-general told BakeryandSnacks.com: “We consider that this situation requires a significant reaction of public authorities to fight artificial and detrimental food price volatility induced by market speculation. We are convinced that European coordinated measures by public authorities are necessary to provide a clear signal to all operators on the futures commodity markets.”

The association claims that the Russian restrictions on sales were always bound to make wheat markets volatile but that food prices speculators have only served to worsen the situation.

Reverdy’s added: “The rise in cereal prices is [being]………fuelled by statements of speculators exaggerating the current uncertainty over harvest prospects in regions hit by adverse weather conditions. This leads to increased volatility and affects the whole cereals chain.”

Meanwhile, the FAO added that recent market dynamics in the global cereal markets will be examined by delegates meeting at a special one-day session of FAO's Intergovernmental Group on Grains and Rice on 24 September at the organisation’s headquarters in Rome.