In spite of improved supply prospects and weakening demand, agricultural commodity market conditions remain fairly tight, which is the major factor underpinning prices.

Production forecasts for nearly all key food crops in 2011 have risen steadily since the previous report in June. For cereals, while the forecast for ending stocks in 2012 has also been revised up significantly, larger anticipated inventories reflect not only improved production prospects but also expectations of a slowing demand growth because of the unfavourable macroeconomic environment. The general picture points to prices staying relatively firm, although at reduced levels, well into 2012.

The FAO forecast 2011 cereal production at a record 2 325 million tonnes,  3.7 percent above the previous year. The overall increase comprises a 6.0 percent rise in wheat production, and increases of 2.6 percent for coarse grains and 3.4 percent for rice. Globally, annual cereal food consumption is expected to keep pace with population growth, remaining steady at about 153 kg per person.

Cereal Price Index

International cereal prices have declined in recent months, with the FAO Cereal Price Index registering an eleven month-low of 232 points in October. But nonetheless cereal prices, on average, remain 5 percent higher than last year's already high level.

Severe problems caused by flooding recently marred rice production prospects in Thailand. However, impact on the international market has been limited so far given large reserves.

Large global supplies of sugar have put downward pressure on sugar prices since June. Improved supplies also weighed on dairy markets while strong palm oil output and record sunflower seed crops have driven prices down in the oils sector in recent months.

According to Food Outlook prices generally remain "extremely volatile," moving in tandem with unstable financial and equity markets. "Fluctuations in exchange rates and uncertainties in energy markets are also contributing to sharp price swings in agricultural markets," FAO Grains Analyst Abdolreza Abbassian noted.

Import bill

High food prices are putting pressure on Least Developed countries (LDCs) who have seen their food import bill soar by almost a third from last year, the report found.  The global cost of national food imports is expected to approach $1.3 trillion this year.

World cereal inventories are forecast to increase by 3.3 percent from their reduced opening levels, to 507 million tonnes by the end of seasons in 2012. At this level, the world cereal stocks-to-use ratio for 2011/12 is expected to approach 22 percent, up only slightly from 2010/11.

Given all these uncertainties, it is difficult to predict how markets will evolve in the near-term. While there is some room for optimism that, for most commodities, prices could remain below their recent highs, the general picture still points to firm markets well into 2012.

For most food commodities, next year’s production will have to increase in order to meet the expected demand, albeit moderately. However, if this demand were to rise faster than currently envisaged, which is a possibility even assuming a slow economic recovery, then a more significant production expansion will be required.

The question therefore is: do the current market signals convey the correct information for producers to adjust their production plans for next year? More critically, will there be enough time for an adequate production response in the event of an unexpected surge in demand?

High input costs could slow production

Input costs, from fertilizers to energy, remain high, interest rates have climbed in many emerging economies, all of which could dampen production next year and, hence, draw down stocks and boost prices further.

Reducing market uncertainty may not be among the fastest remedies for lowering the number of hungry. Yet, letting international markets continue in their present state, volatile and unpredictable, will only aggravate an already grim outlook for world food security. This is the reason why world leaders have been dwelling at length on the issue of price volatility since the start of the year.

Such discussions gained momentum in recent months as attention turned towards finding ways to improve the accuracy of supply and demand forecasts for major food crops as an important first step in promoting stable and transparent food markets.

In June 2011, the Group of 20 (G-20) established a global information system under the banner of Agricultural Market Information System (AMIS).

This initiative, proposed by a number of international organizations, has been endorsed by all G-20 Members and, subsequently, by the Committee on World Food Security (CFS). This issue of Food Outlook also introduces AMIS by explaining how it came about, its structure and its aims.