November 18, 2010

 

UN warns that wheat and corn prices will remain high

 

 

Prices of world wheat will stay high and volatile, whereas corn prices may see a renewed rally due to supply shortages in numerous crops which force grains to fight for farmers' attention, according to the UN.

 

The UN's Food and Agriculture Organisation (FAO), warning that global food prices were 8% short of highs attained two years ago, said that a significant a rise in corn and wheat production were needed in the following year to avert a major tightening of supplies.

 

Wheat production needed to increase by more than 3.5% in 2011 to stop inventories of the grain from plunging to critically low levels.

 

With regard to corn, a 6% rise in output was necessary to replenish inventories. The US, which is the main exporter, is expected to approximately halve their supplies to 21 million tonnes.

 

"For grain stocks to be replaced and prices to return to more normal levels, large production expansions are needed in 2011," the FAO said.

 

However, the rise in sowings needed to sustain such additional harvests comes against increasing prices which have enhanced the appeal to growers of other farm commodities from soy to sugar and cotton.

 

"This could limit individual crop production responses to levels that would be insufficient to alleviate market tightness," the FAO said.

 

"Against this backdrop, consumers may have little choice but to pay higher prices for their food," FAO said, encouraging countries to stay alert against more supply shocks in 2011".

 

For coarse grains, the observation that prices had not decreased during the northern hemisphere's autumn harvest period, as might be expected when new supplies appear onstream, meant that there was a strong likelihood that prices may rise even further.

 

With regard to wheat, the weak autumn sowing conditions in the drought-struck former Soviet Union, and the weak start to the US winter crop, meant that prices are expected to remain high and volatile for the rest of the season.

 

In spite of the poor start to some northern hemisphere crops, additional productions in Europe, mainly on land which has been set aside, and normal weather conditions returning meant world wheat production could increase sufficiently to avoid further supply deterioration.

 

The FAO supported its fears for grain shortages partly due to demand shifts too, with corn imports  for nearly all regions to increase in 2010-11. China's imports, which are a sensitive subject for markets considering the potential for large purchases if self-sufficiency did not work, were pegged at 1.5 million tonnes.

 

"Strong feed demand and rising domestic corn prices are encouraging larger world purchases by China," FAO said.

 

Wheat consumption use had started to increase above trend-levels, supported both by world population growth and its cost competitiveness as a livestock feed, even after the appreciation in prices of the grain over the summer.

 

In Russia, feed usage could hit a 17-year high in spite of the loss of production to drought, with barley and corn supplies even tighter.