Food prices dropping due to bumper crop yields

A UN agency says world food prices dropped sharply in May, reaching their lowest level in eight months due to favourable supplies and currency fluctuations.
Crop prices have come down sharply from their peak but they remain high, the UN said Thursday. (Adrian Wyld/Canadian Press)

World food prices dropped sharply in May, reaching their lowest level in eight months due to strong supplies.

The UN Food and Agriculture Organization said in its monthly report Friday that global prices of a basket of 55 food items such as grains, dairy, vegetables and meat fell by four per cent overall in May. That's the largest drop in percentage terms since March 2010.

FAO's grain analyst Abdolreza Abbassian said crop prices have come down sharply from their peak "but they remain still high and vulnerable due to risks related to weather conditions."

Dairy prices dropped 12 per cent, sugar prices came down by nine per cent and oils and fats were seven per cent lower during the month.

The world is expected to produce 2.419 billion tonnes of grains this year, up 48.5 million tonnes or 3.2 per cent from last year's record level. The increase is mainly because of an expected bumper corn crop in the United States.

For wheat, the agency is expecting a slight contraction of three per cent in 2012 to 680 million tonnes but still well above the average of the past five years.

Bulk food prices are also coming down because of relatively low freight rates at the moment.

In addition, most agricultural commodities are priced in U.S. dollars, and the greenback strengthened in May because of the European debt crisis. So the improving bang for the U.S. buck was also a factor driving prices lower, the FAO said.

The Rome-based agency keeps a close watch on prices because rises in the prices of staple food have led to violence in some countries in recent years.

Although lower prices are a welcome respite to some, Ryerson University professor Mustafa Koc says it's important to remember prices are still at very high levels. The UN index was at 204 in May, down from 213 in April, but still well above the 150 to 160 level that most observers say is a return to more normal conditions.

"I would be cautious about any undue optimism," he said in an interview. "The index is still above the crisis period."

That all commodities are moving lower in unison indicates to him that the lower prices are simply an example of speculators exiting the market, not some fundamental altering of supply and demand.

"Everything is coming down, and it's hard to believe there's a surplus in everything," he said. "This may be seen as a parallel to oil prices — they are all very much connected."

Even if the trend holds, Koc doubts that Canadian consumers will see any real reduction in prices at the checkout any time soon, since many food commodities like dairy work on a supply management system that keep retail prices within a fixed range.

"Consumers always end up on the losing end anyway," he jokes.

With files from The Associated Press