Cereals shock, an early indicator using FAO data and outlook
To what extent do cereals prices pull up (or depress, if at all they do) the FAO food price index? This chart shows the relationship between the main index and the cereals sub-index. As we can see from the shaded areas (which correspond roughly to the 200 mark), the steady steep rise in the cereals index, from around 2007 August onwards, pulled first the cereals sub-index and then the FAO food price index over 200, and kept them above for about nine months. The same phenomenon took place from 2010 July onwards, as a soaring cereals sub-index shot above the main index and pulled it up above 200 in 2010 October, and has kept both above 200 ever since.
Now FAO has said (in its global information and early warning system on food and agriculture, GIEWS) that the export prices of grains has risen sharply in 2012 July with maize prices at record levels. Export prices of maize increased by 20% in the first three weeks of July compared to their June level. The benchmark US maize price averaged USD 322 per tonne reaching a new record high. “Prices were underpinned by continuous concerns about the impact of hot and dry weather conditions on yield potential of the 2012 maize crop in parts of the United States,” said FAO. And now has come the downward revision of the US official 2012 maize production forecast.
The question for us is: how will the the FAO Food Price Index, which in June fell for the third consecutive month, respond? The FAO Food Price Index (FFPI) averaged 201 points in June 2012, down 4 points (1.8%) from a May value of 205 points. After the third consecutive month of decline, the June value of the index was 15.4% below the peak reached in February 2011. “Continued economic uncertainties and generally adequate supply prospects kept international prices of most commodities under downward pressure, although growing concerns over adverse weather sustained prices of some crops toward the end of the month,” said the FAO.
In 2012 June, the FAO Cereal Price Index averaged 221 points, unchanged from May and down 45 points (16.8%) from its peak of 265 points in April 2011. Grain prices were very volatile in June, with weather as the main driver. “After a generally subdued situation during the first half of the month, markets moved up in the second half amid deteriorating crop prospects, most notably for maize in the United States,” said the FAO.
Finally, FAO’s cereal supply and demand brief for 2012 July lowered the forecast for world cereal production from last month, which is likely to result in a smaller build-up of world inventories by the end of seasons in 2013 than previously anticipated. “While the bulk of the increase in cereal production from last year is still expected to originate from a significant expansion in maize production in the United States, the deteriorating crop conditions due to the continuing dryness and above-average temperatures in much of the major growing regions of the country have dampened this outlook,” said the brief.
Moreover, world wheat production is heading toward a contraction of about 3.2%, to 678 million tonnes, or 2 million tonnes less than reported in June, as downward adjustments in Australia, China and the Russian Federation more than offset upward revisions in the EU and Morocco. Where rice production in 2012 is concrened, the FAO estimate is it will grow by 1.6% to 489.1 million tonnes (in milled equivalent), which compares with a previous forecast of 490.5 million tonnes. The small reduction mainly reflects some deterioration of prospects in a few major producing countries, especially India.