Recent developments in world agricultural markets for basic food commodities have raised concern about a possible return to another round of high prices. In general, however, the difficulties facing markets today are different from those experienced during the 2007/08 food price surge. The FAO Food Price Index, a measure of the monthly change in international prices of a food basket composed of cereals, oilseeds, dairy, meat and sugar, has risen uninterruptedly since August 2009, a trend shared by nearly all its components. In November the index averaged 168 points, the highest since September 2008, although still 21 percent below its peak in June 2008. Prior to the price spike of 2007/08, the index never exceeded 120 points and, for most of the time, was below 100 points.
The unexpected rise in international prices of commodities, such as that witnessed in 2007/08, elicited considerable attention and debate about the nature and relevance of the factors underlying the price surge. Determining such factors and their relative weights, which is critical for understanding how markets will evolve, not only in the coming months (the time horizon of the Food Outlook publication) but also in the coming years, remains a challenge. At the onset of the price surge in 2007, FAO identified a number of possible causes contributing to the price rise: low levels of world cereal stocks; crop failures in major exporting countries; rapidly growing demand for agricultural commodities for biofuels; and rising oil prices. As the price strengthening accelerated, several other factors emerged to reinforce the upheaval; most importantly, government export restrictions, a weakening US Dollar and a growing appetite by speculators and index funds for wider commodity portfolio investment on the back of enormous global excess liquidity. What made the 2007/08 price spike exceptional was the concurrence of so many factors culminating in an unprecedented price rally and the fuelling of volatility.
The agricultural market situation today is different from that of 2007/08. World cereal stocks are at far more comfortable levels than they were two years ago, with the stockto- use ratio at almost 23 percent, 4 percentage points more than at the time. Evidently, the balance of world supply and demand is not even across all commodities, with some markets facing tighter conditions than others. But, in general, supplies held by exporters are far more adequate to respond to rising demand than they were during the price surge period. For example, the wheat stocks-to-use ratio in major exporting countries has risen from 12 percent in 2007/08 to 20 percent this season. On the demand side, biofuels remain a leading driver, but the year-on-year growth has slowed down compared with the past few years. In the United States, the largest user of grains for biofuel production, the use of maize for ethanol has grown by 14 percent this season, down from 40 percent in the run-up of the high price period.
On the other hand, macro-economic factors, exchange rates, volatile oil prices and, once again, rising liquidity stemming from exceptionally low interest rates continue to generate uncertainty, which food markets have to live with. There is a strong argument that the importance of these factors, in terms of their impacts on agricultural commodity prices, has increased significantly in recent times. Although supply and demand fundamentals will continue to shape commodity markets, the now entrenched susceptibility of the global food system to external non-food economy events requires continuous vigilance.