Geni Wren 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.