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For 2011 February, another new peak for world food prices, FAO index rises higher

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The UN Food and Agriculture Organization (FAO) has said that global food prices increased for the eighth consecutive month in February, with prices of all commodity groups monitored rising again, except for sugar.

FAO said it expects a tightening of the global cereal supply and demand balance in 2010-11. In the face of a growing demand and a decline in world cereal production in 2010, global cereal stocks this year are expected to fall sharply because of a decline in inventories of wheat and coarse grains. International cereal prices have increased sharply with export prices of major grains up at least 70% from February last year.

“Unexpected oil price spikes could further exacerbate an already precarious situation in food markets,” said David Hallam, Director of FAO’s Trade and Market Division. “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,” he added.

Food Price Index – The FAO Food Price Index averaged 236 points in February, up 2.2% from January, the highest record in real and nominal terms, since FAO started monitoring prices in 1990. The Cereal Price Index, which includes prices of main food staples such as wheat, rice and maize, rose by 3.7% in February (254 points), the highest level since July 2008.

The FAO Dairy Price Index averaged 230 points in February, up 4% from January, but well below its peak in November 2007. The FAO Oils/Fats Price Index rose marginally to 279 points in February, a level just below the peak recorded in June 2008. The FAO Meat Price Index averaged 169 points in February, up 2% from January. By contrast, the FAO Sugar Price Index averaged 418 points in February, slightly below the previous month but still 16% higher than February 2010.

Cereal supply and demand – FAO expects winter crops in the northern hemisphere to be generally favourable and forecasts global wheat production to increase by around 3% in 2011.This assumes a recovery in wheat production in major producing countries of the Commonwealth of Independent States. So far, conditions of winter crops in those countries are generally favourable.

The latest estimate for the world cereal production in 2010 is 8 million tonnes more than was anticipated in December but still slightly below 2009. This month’s upward revision reflects mostly higher estimates for production in Argentina, China and Ethiopia.

The forecast for world cereal utilisation in 2010-11 has been revised up by 18 million tonnes since December. The bulk of the revision reflects adjustments to the feed and industrial utilization of coarse grains. Larger use of maize for ethanol production in the USA and statistical adjustments to China’s historical (since 2006-07) supply and demand balance for maize are the main reasons for the revision.

The hammer blow of the triple crisis, food in February 2011

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FAO-food-price-index-201102The FAO Food Price Index (FFPI) rose for the seventh consecutive month, averaging 231 points in January 2011, up 3.4% from December 2010 and the highest (in both real and nominal terms) since the index has been backtracked in 1990.

Prices of all the commodity groups monitored registered strong gains in January compared to December, except for meat, which remained unchanged. Changes in the composition of  the meat price index (read more) have resulted in adjustments to the historical values of the FFPI. One implication of this revision is that the December value of the FFPI, which previously was the highest on record, is now the highest since July 2008.

The Cereal Price Index averaged 245 points in January, up 3% from December and the highest since July 2008, but still 11% below its peak in April 2008. The increase in January mostly reflected continuing increases in international prices of wheat and maize, amid tightening supplies, while rice prices fell slightly, as the timing coincides with the harvesting of main crops in major exporting countries. The Oils/Fats Price Index rose by 5.6% to 278 points, nearing the June 2008 record level, reflecting an increasingly tight supply and demand balance across the oilseeds complex.

FAO-food-price-index-deflated-201102

FAO food price index deflated, 2011 February

See earlier posts on food, grain and prices:

Food production and grain trade / FAO food price index tops the 2008 peak / Food inflation crippled India’s households in 2010 / Early price indicator for 2011 foodgrain / Only 16 points under the 2008 peak, FAO’s food price index / Bringing nutrition back into climate change talks / Grain market outlook, end October 2010 / How the World Bank is leveraging the new food crisis.

The Dairy Price Index averaged 221 points in January, up 6.2% from December, but still 17% below its peak in November 2007. A firm global demand for dairy products, against the backdrop of a (normal) seasonal decline of production in the southern hemisphere, continued to underpin dairy prices. The Sugar Price Index averaged 420 points in January, up 5.4% from December. International sugar prices remain high, driven by tight global supplies. By contrast, the Meat Price Index were steady at around 166 points, as falling prices in Europe, caused by a fall in consumer confidence following a feed contamination, was compensated by a slight increase in export prices from Brazil and the USA.

FAO-food-commodity-price-index-201102The Index averaged 231 points in January and was up 3.4% from December 2010. This is the highest level (both in real and nominal terms) since FAO started measuring food prices in 1990. Prices of all monitored commodity groups registered strong gains in January, except for meat, which remained unchanged. “The new figures clearly show that the upward pressure on world food prices is not abating,” said FAO economist and grains expert Abdolreza Abbassian. “These high prices are likely to persist in the months to come. High food prices are of major concern especially for low-income food deficit countries that may face problems in financing food imports and for poor households which spend a large share of their income on food.”

“The only encouraging factor so far stems from a number of countries, where – due to good harvests – domestic prices of some of the food staples remain low compared to world prices,” Abbassian added. FAO emphasized that the Food Price Index has been revised, largely reflecting adjustments to its meat price index. The revision, which is retroactive, has produced new figures for all the indices but the overall trends measured since 1990 remain unchanged.

FAO food price index tops the 2008 peak

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The UN Food and Agriculture Organization’s food price index has risen to 214.7 for December 2010, which is above its peak of 213.5 in June 2008.

This new peak, at a time when the price of crude oil is above USD 90 a barrel, is the strongest signal yet that global foodgrain supply has entered a critical phase. The FAO index has been rising steadily through the second half of 2010 – we discussed it here.

The cereal price index stands at 237.6 which is almost 40 points below the peak of 274.3 (in April 2008). The oils price index stands at 263 which is just under 20 points less than the peak of 282.6 (in June 2008). The dairy price index stands at 208.4 which is 60 points under the peak of 268.6 (in November 2007).

But the sugar and meat price indices are at all-time highs. The meat price index is now at 142.2 (in September 2008 it was 137.4 and its previous all-time high was 139.3 in September 1990). The sugar price index is now at 398.4 which is an extraordinary 180 points above its all-time high of 218 (in March 1990 – it was 207 at the maximum during 2008). The sugar price index crossed 300 in August 2008 and remained above 300 until March 2010, and again crossed 300 in September 2010.

Comparing three-month averages for the FAO food index and its main index components helps us understand how the 2010-11 food price crisis compares with its predecessor in 2007-08:

Food     Meat       Dairy     Cereals    Oils       Sugar
3-month avg
at 2008 Jun    210.4    129.5    240.8    271.7    273.9    173.9
3-month avg
at 2010 Dec    206.4    141.2    206.3    227.0    242.1    373.7

A Bloomberg report quotes FAO senior economist Abdolreza Abbassian: “One might expect prices to come down in spring, and this may be in fact the worst. But given how unexpected the weather events have been, I for one would not want to bet on anything along those lines.” The report said that concern about drought doing harm to Argentine harvests helped corn jump 52% in Chicago last year and soybeans to rise 34%. Prices also gained as China, the world’s largest soybean buyer, became a net corn importer. Wheat added 47% in 2010 as Russia, hit by its worst drought in a half-century, banned all cereal exports.

“Eyes will be on the Argentina corn crop,” Abbassian said. “There is still, unfortunately, a potential for grain prices to strengthen on the back of a lot of uncertainty. If anything goes wrong with the South American crop, there is plenty of room for them to increase further.” Potential damage to South American soybean and corn crops is of greater concern for world grain prices than harm to wheat in Australia caused by floods, according to the economist. Argentina and Brazil are the world’s second- and third-biggest corn and soybean exporters after the US. “The watch is definitely on South America for the next two weeks,” Abbassian said. “Given the very tight corn market, and demand from China for soybeans and the tight soybean market, if those commodities start to rise more, that will also lift wheat.”

Agrimoney has a report polling commodities fund managers in several financial centres worldwide for their views. What they say about the impact major forecasts, such as the World Agricultural Supply and Demand Estimates, have is worth paying close attention to. The WASDE report provides the US Department of Agriculture’s comprehensive forecasts of supply and demand for major US and global crops.

Reuters has reported that India’s food inflation rose for the fifth straight week to the highest in more than a year, reinforcing fears it has spilt over to broader prices and cementing expectations of a January interest rate hike. “But the spurt in prices of many basic foodstuffs has also raised questions over the government’s ability to control price rises through monetary policy, with poor infrastructure, hoarding and supply bottlenecks contributing to stubbornly-high food inflation.”

Unseasonal rains are officially blamed for pushing up prices of vegetables such as onions and tomatoes, but some commentators point instead to poor agricultural productivity and transport after years of few reforms and weak government investment. Onion prices, a key food staple for Indian families, rose over 23% percent over the week to December 25. The food price index rose 18.3% in the year to December 25 and the fuel price index climbed 11.6%. This compared with 14.4% and 11.6% annual rises the previous week.

The Wall Street Journal has said that food prices in India are continuing their sharp rise, increasing concerns among economists about a prolonged spell of high prices and adding pressure to the central bank to raise interest rates later this month. “The Reserve Bank of India next meets on Jan. 25 to consider an interest rate rise after pushing up rates six times in 2010 – one of the most aggressive tightenings of any central bank. But calls for a further move keep coming, most recently with the International Monetary Fund saying in a report released Thursday that rates need to be higher to curb inflation.

“The central bank will need to walk a fine line, however, since liquidity within the bank system is tight and further rate hikes could exacerbate that problem, economists said. Data from the Ministry of Commerce and Industry Thursday showed that the wholesale price index for food articles rose 2.5% in the week ended December 25 from the previous week. The year-on-year inflation rate for food surged to 18.32% from 14.44% the week before. It was the fifth straight week of rising food prices, which have been hovering at elevated levels in recent months.”