Global food prices rose for the eighth straight month in February, with prices of all commodity groups monitored rising again, except for sugar, the United Nations' Food and Agriculture Organization (FAO) said on Thursday. Meanwhile IMF economists say the real cost of food is at the lowest since Great Depression.

FAO expects a tightening of the global cereal supply and demand balance in 2010/11. In the face of a growing demand and a decline in world cereal production in 2010, global cereal stocks this year are expected to fall sharply because of a decline in inventories of wheat and coarse grains. International cereal prices have increased sharply with export prices of major grains up at least 70% from February last year.

"Unexpected oil price spikes could further exacerbate an already precarious situation in food markets," said David Hallam, director of FAO's Trade and Market Division.

"This adds even more uncertainty concerning the price outlook just as plantings for crops in some of the major growing regions are about to start," he added.

Food Price Index

The FAO Food Price Index averaged 236 points in February, up 2.2% from January, the highest record in real and nominal terms, since FAO started monitoring prices in 1990.

The Cereal Price Index, which includes prices of main food staples such as wheat, rice and maize, rose by 3.7% in February (254 points), the highest level since July 2008.

The FAO Dairy Price Index averaged 230 points in February, up 4% from January, but well below its peak in November 2007.

The FAO Oils/Fats Price Index rose marginally to 279 points in February, a level just below the peak recorded in June 2008.

The FAO Meat Price Index averaged 169 points in February, up 2% from January. By contrast, the FAO Sugar Price Index averaged 418 points in February, slightly below the previous month but still 16% higher than February 2010.

Cereal supply and demand

FAO expects winter crops in the northern hemisphere to be generally favourable and forecasts global wheat productionto increase by around 3% in 2011.This assumes a recovery in wheat production in major producing countries of the Commonwealth of Independent States. So far, conditions of winter crops in those countries are generally favourable.

The latest estimate for the world cereal production in 2010 is 8m tonnes more than was anticipated in December but still slightly below 2009. This month's upward revision reflects mostly higher estimates for production in Argentina, China and Ethiopia.

The forecast for world cereal utilization in 2010/11 has been revised up by 18m tonnes since December. The bulk of the revision reflects adjustments to the feed and industrial utilization of coarse grains. Larger use of maize for ethanol production in the United States and statistical adjustments to China's historical (since 2006/07) supply and demand balance for maize are the main reasons for the revision.

IMF

Thomas Helbling and Shaun Roache, economists, both in the International Monetary Fund's Research Department, say in the current issue of the Fund's Finance & Development magazine that the world grew accustomed to relatively low international food prices in the 1980s and the 1990s, when prices adjusted for inflation were below those recorded during the Great Depression. But since the turn of the century, food prices have been rising steadily - - except for declines during the global financial crisis in late 2008 and early 2009 - - and this suggests that these increases are a trend and don’t just reflect temporary factors.

The economists say the most important explanation for the trend increase in food prices is that consumers in emerging and developing economies are becoming richer and changing their diet as a result. In particular, consumers in these economies are eating more high-protein foods such as meat, dairy products, edible oils, fruits and vegetables, and seafood. These products are more “income elastic” than staple grains. In other words, as people get richer, they demand more of these high-protein foods, whereas their consumption of grains may grow more slowly or even decline.

High oil prices and policy support have boosted demand for biofuels, which are used as supplements in transportation fuels, particularly in the advanced economies and also in some emerging economies, including Brazil.

While farmers have responded to the opportunities from rising demand, their response has only been gradual.

In other words, Helbling and Roache  say average prices have to increase to provide the incentives for increased supply. The interplay between productivity and acreage growth is key to understanding the supply response. Traditionally, rapid productivity growth in agriculture helped drive down food prices. But over the past decade, global productivity growth --  as measured by the amount of crop produced per hectare - - has fallen for rice and wheat compared with the 1980s and 1990s and has been broadly stagnant for corn and soybeans.

Less productivity growth means higher prices, everything else being equal.

With lower yield growth, production increases have had to be achieved by using more land. But increasing the amount of land devoted to producing more of a crop comes at a cost, which is reflected in higher prices.