The UN Food and Agriculture Organisation Food Price Index dropped for the fourth month in a row in August reaching its lowest level since June 2012, when prices appeared stable before fears over the US drought sparked grain rallies.

Prices on the index, which measures the monthly change in the international prices of a basket of food commodities, averaged 1.9 percent below their July values and 5.1 percent below those seen in August 2012.

Last month's decline was mainly driven by continued falls in the international prices of cereals and oils, FAO said. Dairy, meat and sugar prices rose slightly in August.

The FAO Cereal Price Index fell 7.2 percent from July and 19 percent on August 2012 levels. FAO analysts said "The steep decline reflects expectations for a strong growth in world cereal production this year and, especially, a sharp recovery in maize supplies."
 

Oil prices dropped 3 percent, their third consecutive monthly decline. However, dairy Prices rose 1.2 percent (currently standing 37 percent above their August 2012 levels), with prices increasing across all dairy products measured by the FAO except for butter. The Organisation said price rises are the result of "export supplies, [which] remain limited in major trading countries." 

Meat prices rose 1.3 percent month-on-month.

FAO expects bumper harvest

Together with the Food Price Index, FAO released a new forecast of world cereal production in 2013. This is expected to rise to 2,492 million tonnes. The forecast has been revised upwards by 14 million tonnes (or 0.5 percent) from the July forecast as a result of higher maize crops officially reported  in Argentina and improved prospects in the EU and Ukraine.

If the forecast is realised, global cereal production will be 179 million tonnes (7.7 percent) higher than in 2012 and a new record. The recovery is predicted to be driven by a 10.5 percent expansion in coarse grain output to 1,285 Mt as well as a 7.6 percent rise in wheat production to 710 million tonnes.

The sharp increase in global coarse grain production in 2013 is expected to be driven by the United States' maize output, which is currently forecast to rebound after weather concerns. Maize production in the US is forecast to reach 343 million tonnes this year, up 25 percent year-on-year, though production was affected by severe drought in 2012.

Based on production and consumption estimates, FAO said the forecast of world cereal stocks at the close of seasons in 2014 has been raised slightly since July, to 569 million tonnes, primarily on expectations of higher maize inventories. The revised forecast puts world cereal stocks 13 percent (65.5 million tonnes) above their low opening levels and at their highest since 2001/02

Based on the current projections of overall demand, the increase in stocks would drive up the global stock-to-use ratio to 23.3 percent, the highest since 2002/03.

"The overall supply-demand situation for cereal markets is much improved over this time last year when drought-hit production and low stock-to-use ratios, especially for maize, raised serious concerns," said David Hallam, Director of FAO's Trade and Markets Division. "Production is expected to rebound sharply and higher stock-to-use ratios should bring greater stability to world markets."