World food prices remained virtually unchanged between July and August 2011 according to the FAO Food Price Index.

The Index averaged 231 points last month compared to 232 points in July. It was 26 percent higher than in August 2010 but seven points below its all-time high of 238 points in February 2011.

Within the index, cereals prices rose, reflecting the fact that although cereal production is expected to increase, it will not do so by enough to offset the additional demand, so that stocks continue to be low and prices continue to be high and volatile.

The FAO Cereal Price Index averaged 253 points in August, up 2.2 percent, or 5 points, from July and 36 percent higher than in August 2010. However, the firmer cereal prices were largely offset by declines in international prices of most other commodities included in the Food Price Index, oils and dairy products in particular.

Production rebound

Cereal price rises stem from a supply and demand balance that remains tight despite the anticipated increase in production. World cereal production in 2011 is now forecast to reach 2 307 million tonnes, 3 percent higher than in 2010. But this latest forecast is nearly 6 million tonnes lower than the previous forecast published in July.

Among the major cereals, the maize supply situation is a cause for concern following downward revisions to maize crop prospects in the United States, the world's largest maize producer, because of continued hot weather in July and August.

Average wheat prices were also up 9 percent in August given the strong demand for feed wheat and shrinking supplies of high quality wheat. Nonetheless, world wheat production is forecast to increase by 4.3 percent (or 28 million tonnes), only 4 million tonnes below the 2009 record.

World coarse grain production is still heading for a record level of 1 147.5 million tonnes, up 2.4 percent (or 27 million tonnes) from 2010, in spite of lowered maize production prospects in the United States, the world's largest maize producer.

Rice price gains

Rice prices also gained with the benchmark Thai rice price up 5 percent from July, driven by a policy change in Thailand, the world's largest rice exporter, where paddy rice will be purchased from farmers at above market prices.

Global rice production prospects remain favourable, however, with output set to reach a new high of 479 million tonnes, up 2.5 percent from 2010.

Low inventories

Total cereal utilization in 2011/12 is forecast to increase by 1.4 percent, almost matching anticipated 2011 production. As a result, global cereal inventories by the close of seasons in 2012 are likely to remain close to their already low opening levels. Only rice stocks are expected to increase significantly, supported by record production.

Wheat inventories are likely to decline to their lowest level since 2009 and world stocks of coarse grains are also forecast to plunge, with maize inventories falling to 124 million tonnes, their lowest level since 2007. Given the tight global supply and demand balance for coarse grains, its stocks-to-use ratio is forecast to fall to a historical low of 13.4 percent.

The FAO Oils/Fats Price Index averaged 244 points in August, following a declining trend since March but still remaining high in historical terms.

The FAO Dairy Price Index averaged 221 points in August, significantly down from 228 points in July and 232 points in June, but still 14 percent higher than the same period last year.

The FAO Meat Price Index averaged 181 points in August, up 1 percent from July.

The FAO Sugar Price Index averaged 394 points in August, down 2 percent from July, but still 50 percent higher than in August 2010.

Release date: 08/09/2011

width=228FAO Food Price Index remains high and above last year's level» The FAO Food Price Index (FFPI) averaged 231 points in August 2011, nearly unchanged from July and 26 percent higher than in August 2010. The FFPI hit its all time high of 238 points in February.  Firmer cereal prices in August were largely offset by declines in international prices of most other commodities included in the Index, the oils and dairy in particular.

» The FAO Cereal Price Index averaged 253 points in August, up 2.2 percent, or 5 points, from July and 36 percent higher than in August 2010. The rise in international prices of rice and maize was the main reason for the August rise in the Cereal Price Index. The rice index gained 4 percent while coarse grains rose by 2.9 percent in August.  A policy change in Thailand, the world's largest rice exporter, which is set to increase the purchasing price from farmers to above market levels, served to further support this increase. Maize prices also rose sharply in August, reflecting further deterioration in this year's crop prospects in the United States.

» The FAO Oils/Fats Price Index averaged 244 points in August, following a declining trend since March but still remaining high in historical terms. The contraction in the index was driven primarily by the recent increase in the global production and export supplies of both palm and sunflower oil. With regard to soyoil, although unfavourable weather has affected the US soy crop prospect, larger than expected soybean stocks held by major exporters prevented prices from rising sharply.

» The FAO Dairy Price Index averaged 221 points in August, significantly down from 228 points in July and 232 points in June but still 14 percent higher than the same period last year. Downward movements in milk powder and casein prices, both of which dropped by 6 percent between July and August, were the main drivers behind this decline , which was largely triggered by the strength of the New Zealand Dollar. Butter and cheese values also fell, by 4 and 1 percent respectively.

» The FAO Meat Price Index averaged 181 points in August, up 1 percent from July. Bovine prices have risen since June, reaching new highs in August, while poultry meat prices fell sharply in August, reflecting a 7 percent contraction of Brazilian chicken meat export prices. Average international pig meat prices remained stable, albeit at high levels.

» The FAO Sugar Price Index averaged 394 points in August, down 2 percent from July, but still 50 percent higher than in August 2010. Positive production prospects for Europe, India, and Thailand contributed to the easing in prices. However, indications of lower production in Brazil, the world's largest sugar producer, which is forecast to fall below last year's level, continued to put some upward pressure on prices.

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Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services. www.livetradingnews.com