World Food Prices Rise in March on Dairy Surge

Global food prices rose 1% in March, the United Nations' food agency said on Thursday, pointing to a surge in dairy costs, while cereals prices were little changed and seen facing downward pressure in coming months.

Food prices spiked over the summer of 2012 fuelled by a historic drought in the United States and dry weather in other major producers. Prices eased slightly towards the end of last year but have been nudging higher again for the past two months.

The Food and Agriculture Organisation's (FAO) price index, which measures monthly price changes for a basket of cereals, oilseeds, dairy, meat and sugar, averaged 212.4 points in March, up 1% from 210.7 in February and its highest since October 2012.

"All the dynamic this month comes from the dairy," said FAO senior economist Concepcion Calpe. "In general the situation is relatively calm."

FAO's dairy price sub-index jumped 22 points in March to 225.3, one of its largest changes ever recorded.

The rise was fuelled mainly by prolonged hot, dry weather in Oceania which has hit pastures and led to milk production falling off steeply and a subsequent decrease in processing of dairy products, which include butter, cheese and milk powder.

FAO's dairy products index is based on prices in the world's largest dairy exporter New Zealand, which have climbed as buyers bid against each other to meet commitments.

A usual spring surge in milk production in Europe has also been slowed down by unfavourable weather limiting pasture growth, FAO said.

When pastures are hit by dry weather, cows produce less milk or need supplementary feedstuffs, which push up costs.

Cereals prices on the other hand were little changed, and Calpe said they could see declines in coming months due to the prospect of a strong recovery in output.

"We are optimistic for the coming crops. The previous year was particularly bad so barring something dramatic the direction should be upwards for production," she said. "If this is what happens we could see prices trending downwards."

Grain prices, which touched record highs late last summer, have been under pressure recently as acreage dedicated to crops has increased, reserves look fatter than previously thought, and livestock producers have cut herd sizes due to high feed costs.