In Arm & Hammer Animal Nutrition’s The Peak Report, an FAO economist discusses upcoming food prices.

Abdolreza Abbassian is a senior grain economist with the United Nations’ Food and Agriculture Organization (FAO) and the FAO Secretary of the Intergovernmental Group on Grains. Abdolreza leads the short-term outlook team of FAO, which is responsible for the publication of Food Outlook, FAO’s leading bi-annual publication on market outlook for food commodities.

With food prices rising steadily in the first half of 2011, where are markets headed? What is the driver of this market?
Since August of 2010 food and grain prices have been increasing quickly and steadily for reasons such as unfavorable weather and natural disasters, which have happened in many parts of the world. When compared to other closely related markets—such as energy—grain prices have been increasing much faster and at more dramatic rates. Poor climate conditions resulted in a supply shortfall, pushing up prices.

In spite of supply problems, food crisis has been avoided during 2010/11 marketing season mostly because of a large inventory of major cereals carried over from the previous season. However, as we move into the 2011/12 season, we are witnessing a substantial reduction in the size of ending inventories, of corn in particular.

While in previous years, price hikes have been closely related not only to supply problems but also to demand factors, such as the fast expanding biofuel sector, the price surge in 2010/11 has been largely due to supply shortfalls.

What will farmers notice when it comes to their inputs? What is on the horizon for agriculture?
As farmers look to the potential input of their operations, the price uncertainty makes it next to impossible to know what prices they will receive for their products, which creates the largest area of concern—which crop do I farm—corn or soybeans? It is becoming increasingly more difficult for farmers to make choices on which crop to plant, how much of that crop to plant and what their expected yields may be—a problem without any near-term solution.

Looking at the overall prices of grains, farmers can find a strong point. The high prices we are currently experiencing are likely to stay high for quite some time. This is because nothing on the ground in terms of supply and demand fundamentals has really changed in recent years. In addition, a continuing depletion of world inventories is contributing to more supply uncertainly and hence more price volatility.

What are the key findings from the latest Food Outlook Report?

  • Dairy: World production is expected to increase by 2% to 724 million tons, an increase influenced by dairy producers in developing countries. Import demand of dairy products is projected to increase by 5% to 48.3 million tons in fluid milk equivalent. These changes should carry with them a positive outlook for international trade, though much still depends on climate conditions. Poor weather could drive feed prices higher and influence world trade.
  • Meat: Due to high feed prices, diseases and diminishing animal inventories, the expansion of global meat production will be limited to 1%, to 294 million tons in 2011. This small increase is driven mostly by poultry and pork,
  • Corn and Soybeans: Delays in spring plantings forced FAO to describe the outlook for supply and demand of corn and soybeans as more tentative than normal for this time of the year. Nonetheless, FAO expects corn production in major producing countries, as well as globally, to register a modest growth in 2011 compared to 2010.

See a video with Abdolreza Abbassian here.