FAO forecasts cereal output to fall 2.8 per cent

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Tighter supplies will lead to rises in prices for maize and coffee,
while the cost for rice, wheat, milk, oilcrops and milk will remain
stable or fall, according to the latest forecasts from the UN's
Food and Agriculture Organisation (FAO).

In the cereals market prices remain below their levels of a year earlier. However increasing demand and a restriction in supply could turn the trend around the FAO stated in its latest report onglobal food production.

In the wheat market a downward pressure prices is forecast to continue into the new season. International wheat prices remained below the previous year's levels for the seventh consecutive monthto March, due to large worldwide supplies. The upcoming harvests in the northern hemisphere will begin to influence prices in the coming weeks.

"However, in view of a generally weaker world demand outlook and a remaining large carryover stocks, wheat prices are likely to remain under downward pressure also during the new marketing season,"​ the FAO stated.

Meanwhile maize and sorghum prices have increased since the second half of May mainly due to weather concerns. A faster pace in import purchases in recent weeks, especially from Argentina and the UShas pushed the prices up. In South Africa, white and yellow maize prices increased in recent weeks on strong demand from nearby countries.

Over the coming months world production of maize is forecast to decline from last year's record level and feed wheat supplies are expected to be lower than in the current season, possibly leading to prices increases for those categories, the FAO stated.

Growing supplies of rice have led to some fall in international prices since March, the FAO stated. Global rice production is expected to increase further in 2005, by 2.7 per cent to 415m tonnes. However, the main seasons are just starting in some major production countries so the forecast could change the FAO warned. International trade in rice is expected to fall for the third consecutive year to 25.5m tonnes, 2.7 per cent less than the record volume in 2004.

Meanwhile a rise in global milk output by 2.8 per cent in 2005 will be fuelled by exporters in Asia and South America. The strength in international milk prices for the past two years has beenmoderated so far in 2005, with the FAO international dairy product price index dropping slightly in the past few months after reaching a 15 year peak in January.

Export prices for butter from the Oceania region are up 26 per cent from a year ago, while milk powder prices are up 19 per cent. Cheese prices have risen by 11 per cent. The EU responded to the price rises by cutting its high export refunds further in recent months. Current EU export subsidies are close to the World Trade Organisation limit, may be reduced further over the next few months, the FAO predicts.

The international demand for dairy products continues to grow, particularly in Asia, North Africa, the Near East, Central America and the Russian Federation. Income growth is a key factor in the growth. Whole and skimmed milk powders now account for about half of total dairy trade, and are almost exclusively imported by the developing and transition countries. The highest growth in milk powder imports in recent years has been registered in South East Asia.

"Although still subject to much uncertainty, international dairy prices may regain momentum in the short term, especially if the lower export supplies from Oceania and the EU are not fullycompensated by increasing supplies from the US and South American exporters,"​ the FAO stated.

Coffee production continues to fall, supporting a continuing upward price trend for the rest of the year, the FAO states. Coffee prices started rising in late 2004, surged in the first quarter of2005 and by late May were about 60 per cent higher than a year ago.

International prices for bananas weakened slightly in March and April, as production recovered in several Latin American countries after a period of reduced supply. Demand has remained stable in the main banana markets, the FAO stated.

A record 2004/05 oilcrop harvest is limiting the potential for increases in prices for oilseeds and meals, while prices for oils and fats are expected to remain firm due to strong demand and below average stock levels.

The 2005 global cereal crop is expected to reach 1,996m tonnes, about 2.8 per cent below the record 2004 crop. Pulse production is also expected to decline slightly in 2005 to 61m tonnes. Most of the decline in global cereal output is occurring in the major producing and exporting developed countries. The bulk of the decrease is expected in coarse grains production in the US and Europe, where yields are expected to return closer to average after last year's record levels.

However, even with the above-average crop, output is not expected to meet rising demand for cereals. The FAO expects the rising demand will be met by drawing down from global stocks of cereals.

However, the aggregate inventories of the major exporting, developed countries, which provide the main buffer against unexpected shocks in cereal supply or demand, are forecast to increase for the second consecutive year.

The aggregate world coarse grain crop, mainly maize and sorghum, is forecast at 969m tonnes, 5.2 per cent down from 2004. Wheat output is also expected to drop by 2.5 per cent to 612m tonnes, mainly due to lower wheat import demand. Reduced output in Europe, after last year's record crops, will account for a large proportion of the reduction.

In a forecast released last week, the Organisation for Economic Co-operation and Development (OECD) forecast stiffer competition between exporters of wheat, oilseeds, sugar and livestock would intensify over the next ten years, bringing down prices over the next ten years and benefiting buyers.

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