UN warns of surge in food prices

ISLAMABAD: Global food prices are on the rise again, says the latest Food Outlook issued by the United Nations’ Food and Agriculture Organisation (FAO) on Wednesday.

FAO identified a number of possible causes contributing to the price rise: low levels of world cereal stocks, crop failures in major exporting countries; rapidly growing demand for agricultural commodities for bio-fuels; and rising oil prices.

As the price strengthening accelerated, several other factors emerged to reinforce the upheaval, most importantly, government export restrictions, a weakening US dollar and a growing appetite by speculators and index funds for wider commodity portfolio investment on the back of enormous global excess liquidity.

The agricultural market situation is different from that of 2007-08. World cereal stocks today are at far more ‘comfortable’ levels than they were two years ago, with the stock-to-use ratio at almost 23 per cent, 4 per centage points more than at the time. Evidently, the balance of world supply and demand is not even across all commodities, with some markets facing tighter conditions than others, says the outlook.

But, in general, supplies held by exporters are far more adequate to respond to rising demand than they were during the price surge period. On the demand side, bio-fuels remain a leading driver, but the year-on-year growth has slowed down compared with the past few years.

On the other hand, macroeconomic factors, exchange rates, volatile oil prices and, once again, rising liquidity stemming from exceptionally low interest rates continue to generate uncertainty, which food markets have to live with. There is a strong argument that the importance of these factors, in terms of their impacts on agricultural commodity prices, has increased significantly in recent times.

The FAO report says although supply and demand fundamentals will continue to shape commodity markets, the now entrenched susceptibility of the global food system to external non-food economy events requires continuous vigilance.

Wheat production in 2009 is forecast to fall slightly below last year’s record while stocks are expected to increase for the second consecutive season, given an only modest expansion envisaged for world wheat utilisation.

With world trade in 2009-10 falling sharply below the previous season’s record volume, mostly due to large harvests in importing countries in North Africa and Asia, international wheat prices fell during the first three months of the 2009-10 season, between July and September.

The most salient feature of the world rice sector in 2009 is the anticipated contraction in global rice output, the first since 2002, following an erratic pattern of the southwest Asian monsoon and other setbacks.

Although reserves will need to be drawn down somewhat in 2010 to meet the gap between global production and consumption, overall they are foreseen to remain adequate. However, rice stocks held by major exporters may fall substantially in 2010.