Oil price rise could destabilize cereal markets, warns FAO

In a statement, the organisation’s David Hallam, director, Trade and Market Division, said: "Unexpected oil price spikes could further exacerbate an already precarious situation in food markets. This adds even more uncertainty concerning the price outlook just as plantings for crops in some of the major growing regions are about to start."​

Global food prices climbed for the eighth consecutive month in February, with prices of all commodity groups monitored rising again, except for sugar, reports FAO.

In response to food price rises, the FAO is to run seminars with local partners in Africa, Asia and the Pacific, Central Asia, Europe, Latin America, and the Near East to help governments to make informed decisions on how to respond to high food prices.

Global cereal supply​

The organisation expects further tightening of the global cereal supply and demand balance in 2010/11. Sharp falls in global cereal stocks, particularly the inventories for wheat and coarse grains, are expected this year as demand grows coupled with a fall in world cereal production last year.

World cereal prices have soared over the past year with export prices of major grains up at least 70 percent from February 2010.

FAO grain economist Abdolreza Abbassian told FoodNavigator.com that cereal prices were particularly vulnerable to oil price rises. “Oil​ (prices) can affect the market in a number of ways. Sustained high prices affect productions costs for inputs such as fertilizers and they also impact transport costs​,” he said.

Higher energy prices also impact cereal and food markets via the futures markets. “A growing number of index funds have both food/grains and energy in portfolios​,” said Abbassian. When investors buy energy funds, their purchases also increase agricultural prices included in the same index.

Also, a consistent pattern is emerging of a low $ value combining with rising oil and grain prices.

Meanwhile, the FAO Food Price Index averaged 236 points in February, up 2.2 percent from January; the highest record in real and nominal terms, since FAO started monitoring prices 11 years ago.

Highest level​
The Cereal Price Index, including wheat, rice and maize, climbed by 3.7 per cent in February to reach its highest level since July 2008.
The FAO Dairy Price Index rose 4 per cent to average 230 points in February, but significantly less than its November 2007 peak.

The forecast for world cereal consumption in 2010/11 has been revised up by 18m tonnes since December reflecting adjustments to the feed and industrial use of coarse grains.

The main reasons are the larger use of maize for ethanol production in the United States and statistical adjustments to China’s historical (since 2006/07) supply and demand balance for maize.

The estimate for the world cereal production last year is 8m tonnes more than was forecast in December but slightly below the 2009 level.