World cereal prices surge to 10-year highs due to poor harvests, bio-fuel demand – UN

Cereal prices, particularly for wheat and maize, have surged to their highest levels in a decade, driven by poor harvests in key producing countries, fast-growing demand for bio-fuel production and supply constraints on the rice economy, according to the United Nations latest Food Outlook report released today.

The UN Food and Agriculture Organization (FAO) anticipates that many countries will reduce purchases, not always in response to improved domestic supplies but rather due to 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, the report said.

Global expenditures on imported foodstuffs in 2006 could reach a historic high of $374 billion, over 2 per cent more than 2005. Import bills for developing countries are anticipated to rise by almost 5 per cent, mainly due to price increases rather than growth in imports.

FAO’s forecast of world wheat output in 2006 stands at 592 million tonnes, almost 33 million tonnes, or 5.3 percent, down from 2005, but a turnaround is likely with increased winter plantings and good growing conditions raising expectations for a strong rebound in 2007.

World production of coarse grains in 2006 stands at 981 million tonnes, down 2.1 percent 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, 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 is also negative.

The strength of grain markets also has ripple effects on the meat and dairy sectors, with expectations of high feed costs threatening to postpone a recovery in livestock and meat production, and a tightening dairy market anticipated. But dairy growth in developing countries is robust at over 4 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 with a forecast increase to 155.5 million tonnes in 2006/07. World sugar prices have largely retreated from the 25-year highs reached in February but the market remains particularly susceptible to large demand swings and price volatility.