Global grain prices, already near two-year highs in many cases, are likely to rise further next year following a large draw-down in inventories, continuing weather-related issues and competition among major crops for limited acreage.
This could complicate choices for policy-makers, particularly in fast-growing emerging markets, as they struggle to rein in spiralling inflation without hurting a fledgling global economic recovery.
The United Nations' Food and Agriculture Organization Wednesday said its Food Price Index rose 3.7% to 205.44 points in November - the fifth straight monthly increase - taking the index to a 28-month high that is just 8 points below the all-time peak in June 2008.
"A significant new development is that unlike previous spikes, when prices peaked in 1-2 months and then came down significantly, now they are staying around the higher levels for a much longer period of time," said Abdolreza Abbassian, secretary for the Intergovernmental Group on Foodgrains at the United Nations' Food and Agriculture Organization.
Grains prices will stay high through September 2011 because of low stock levels, Abbassian said.
Russia, a major global supplier of wheat in the fist half of 2010, will not only be absent from the export market until at least July 2011, but may also import feed grain from neighboring countries. Russia's winter wheat plantings have been sharply lower this year.
Analysts point out that there were large global inventories to tap into when weather failed this year, but that may not be the case in the event of another crop failure in 2011.
There is significant concern about critically low levels of stocks in all three commodities - wheat, corn and soybeans - this year, said Jay O'Neil, Senior Agricultural Economist at Kansas State University.
According to FAO, 2010 may end with a global wheat stock level of 181 million tons, a 10% drop from last year.
The ongoing La Nina weather phenomenon associated with heavier-than-usual rainfall in Eastern Australia, has led a downgrading of the crop there to feed grade, further limiting supply of food-grade wheat. Dry weather has adversely affected plantings of winter wheat in the U.S. and may affect the corn and soybean crops in Argentina, a major exporter.
Corn stocks in the U.S - world's largest exporter - may fall more than 50% to just 21 million tons by end-December as adverse weather reduced output this year.
The ongoing dry weather in Argentina since mid-October is more severe than in 2008 when a drought caused a heavy drop in soybean and corn production, said Mike Tannura who heads T-Storm, a U.S.-based crop-weather forecasting service.
Grain prices have come off the highs in recent weeks but analysts attribute the correction to speculative liquidation and expect the weakness to be short-lived.
Prices will probably find a floor very soon and may gradually move higher again, O'Neil said.
"The market is still susceptible to more price shocks, especially in corn and soybeans," said Paul Deane, Sydney-based Senior Agricultural Economist with the ANZ Banking Group.
Deane said corn may average $5.5/bushel in the first quarter of 2011 but there will be occasional spikes above $6.0/bushel that can push up wheat to around $7.5/bushel again.
Nearby wheat futures on the Chicago Board of Trade are currently around $6.5/bushel while corn is trading around $5.4/bushel.
CBOT January soybean futures ended 0.6% higher Tuesday at $12.43/bushel.
ANZ forecasts soybean will stay well above $12/bushel in the first half of 2011, while some traders are expecting corn to go past $13/bushel again on strong demand in China and worries about shrinking acreage in the U.S.
If corn rallies to $6-$7/bushel, growers will move away from soybeans, reducing output and pushing up soybean prices, Morgan Stanley's head of commodities research, Hussein Allidina, said in a recent research note.
There will be a lot of nervousness about the need to grow bigger crops next year, said O'Neil.
