Global food prices high but inflation pressure may ease – FAO

(Reuters):  Inflationary pressure from world food prices may be lower in 2011/12 than a year ago as crops are improving, but prices will remain at high historical levels, a senior economist at the United Nations’ food agency said.

The UN’s Food and Agriculture Organisation (FAO) raised on Thursday its 2011/12 global grain output view to reflect the latest U.S. data and unexpectedly said world food prices it measures rose one percent in June on higher sugar prices.

Falls in the prices of wheat, corn and soybeans as well as a broad pullback across a wide range of commodity markets in June had been expected to drag on the index and defuse price food inflation, one of the factors which sparked unrest in Arab countries earlier in the year.

“It is possible to see a slightly less of an influence from the food price increases than you have seen in 2010/11 in 2011/12,” FAO’s senior economist and grain analyst Abdolreza Abbassian told Reuters Insider in an interview.

“However, the high price in relative terms compared to the historical level is going to be with us. Unfortunately, the volatility will not diminish, given the fact that stocks and reserves are quite tight,” Abbassian said.

The FAO Food Price Index which measures monthly price changes for a food basket of cereals, oilseeds, dairy, meat and sugar, averaged 234 points in June, up from a revised 231 points in May and 39 percent higher than in June 2010, The FAO’s index hit a record high of 238 points in February fuelled by climbing grain prices and tight supplies, raising fears of a repeat of the 2007/08 global food crisis when soaring prices triggered deadly riots in some developing countries.

The FAO raised its forecast for world cereal output in 2011/2012 to about 2.313 billion tonnes, 11 million tonnes above its last forecast released on 22 June and 3.3 percent higher than last year’s output, following two consecutive revisions to the U.S. crops and planting prospects for 2011. U.S. corn futures tumbled 10 percent in one day last week after the U.S. Department of Agriculture (USDA) indicated supplies were not as tight as many had believed, accelerating a retreat in prices of corn, wheat and many other commodity markets.

FAO’s Abbassian said downward pressure on grain prices may last for another couple of weeks, but strong demand, especially from feed and biofuels industries, would prevent prices from considerable falls and keep them at historically high levels.

“Prices are coming down but they won’t get to low levels,” Abbassian said.

The FAO has also raised its 2011/12 global wheat output forecast to 676 million tonnes from a previous forecast 671 million tonnes, mostly due to better crops expected in the Commonwealth of Independent States (CIS) and India which will offset output falls in the United States and European Union.

Russian grain crops were devastated in 2010 by a drought, prompting an export ban which was only lifted last week.

The FAO has increased its coarse grains (cereal grains other than wheat and rice) output forecast to 1.161 billion tonnes, to a level surpassing the 2008 record, from 1.155 billion tonnes expected last month.

In the United States, the world’s largest producer, total coarse grain production is likely to exceed the 2010 level by at least 6.5 percent, or 22 million tonnes, coming close to the 2007 record. Higher production is also expected in the CIS and the EU.

World paddy rice output is expected to rise 2.7 percent in 2011 to a new high, supported by gains in India, China, Pakistan and Brazil. The FAO Cereals Price Index, which includes prices of main food staples such as wheat, rice and corn, fell one percent from May to an average of 259 points in June, the FAO said. The FAO Sugar Price Index averaged 359 points in June, up 14 percent from May, driven by a “dynamic short-term demand” and expectations of smaller production in Brazil, the world’s largest sugar producer, than last year, the agency said.

But Abbassian said the recent surge in sugar prices was likely to be short-term and the market could see a correction.