THE FAO PRICE INDICES

 

In this edition of Food Outlook, a new food price index is introduced: 'The Global Food Consumption Price Index'. The index tracks changes in the cost of the global food basket as portrayed by the latest FAO world food balance sheet (see http://faostat.fao.org/). Representative international prices for each of the commodities or commodity groups are weighted by their contribution to total calorie intake in the food basket. This departs from the methodology used to draw the benchmark FAO Food Price Index, where the different food components are weighted by their shares in the value of global food trade. On comparing the two, we may ask: why did the calorie-based price index peak more sharply? and why does it today stand significantly higher than the traditional, trade based, index? The answer lies in the different weights applied, as the trade-based index tends to overstate the influence of high-value products, such as meat or dairy, and to underplay that of lower priced staples, such as cereals. While the total value of livestock product trade is typically almost twice that of cereals, there are few consumers in the world whose average intake of meat and dairy is double that of rice, bread, pasta, noodles, etc. put together. Therefore, last year's surge in international cereal prices relative to the modest rise in livestock product quotations yields a much higher index value when it is weighted by consumption, than a trade based index.

The FAO Food Price Index (FFPI) averaged 152 points in May 2009, up 6 percent from April. At this level, the FFPI stands at its highest level since October 2008 but still down almost 30 percent from its peak in June 2008. The increase in May reflected the renewed surge in international prices of several major agricultural commodities composing the FFPI, with the exception of rice and meat. After falling to nearly two-year low of 139 points in February 2009, the FFPI moved up slowly before jumping in May; the largest one-month increase in 15 months.

The FAO Cereal Price Index averaged 188 points in May 2009, up 4 percent from April but down 32 percent from April 2008, when the index peaked to its all time high of 274 points. Record 2008 cereal crop and the subsequent recovery in stocks and export supplies helped international cereal prices to ease considerably during the 2008/09 season. International grain prices rose sharply in recent weeks, on the back of drought-reduced supplies in South America, prolonged wet weather conditions causing planting delays in the United States, a sliding dollar and spillovers from surging crude oil and soybean markets.

The FAO Oils/Fats Price Index climbed to 168 points in May 2009, up 14 percent from April, but still nearly 40 percent below the peak registered in May 2008. The renewed price strength reflects concerns about the unforeseen tightening of global oilseed supplies in 2008/09 and the possibility of a slowdown in 2009 palm oil production, which would coincide with sustained demand growth for vegetable oils for both food and non-food purposes.

The FAO Meat Price Index averaged 115 points in May 2009, nearly unchanged from April but 19 percent below its peak in September 2008. The decline was most pronounced for bovine, ovine and poultry meat, while pig meat prices remained relatively stable. The lower prices reflect weak demand, as a worsening global economic environment and the recurrence of animal diseases are dampening consumption growth, especially in the developed countries.

The FAO Dairy Price Index, which had fallen to a 20 month low in November 2008, continued to slide in the first quarter of 2009, reaching 117 points in April. The index rose to 124 in May, supported by fall in the US Dollar. Dairy product prices are about half their levels of one year ago.

The FAO Sugar Price Index reached a 3 year high of 228 points in May 2009, up 18 percent from April. For the first five months (January-May) of 2009, international sugar prices averaged 195 points, 8.7 percent higher than the corresponding period in 2008. The strength in prices was prompted by the prospects of a much reduced crop in India, the world’s second largest sugar producer, which is likely to turn the country from a net exporter to a net importer.