The causes of the sharp growth in world prices of cereals

Global agricultural and food commodity markets have seen a sharp upswing in prices this year. This trend is due to several key factors.

The first was adverse weather in most European countries, Australia and North America in the second half of 2006, reflected most of all in decreased wheat production this year (due to bad winter wheat planting and for other reasons). In particular, the fall in cereal production in Australia, caused by an extreme drought, can be considered extraordinary. The decrease in this world exporter’s production has reduced its exports by around one-third this year. As a result, global wheat production is expected to drop by around 5.4% this year, while production of other cereals (rice and maize) will fall by around 1%. However, the adverse weather led not only to a smaller harvest, but also to a significant decline in the proportion of high-quality food and fodder cereals, further strengthening the upward pressure on their prices.

The fall in global production of cereals, including rice, in 2006 and 2007 is taking place in a situation where the long-term growth trend in global consumption of cereals for food, fodder and biofuel production is expected to continue. The increased demand for these crop commodities is closely linked with the rapid economic growth in China, India, Brazil and other fast growing economies, which have a total population of around 3 billion.

For the aforementioned reasons, crop product stocks are falling sharply and prices are rising as a result. This trend is being observed in all major world markets, particularly in the case of cereals. The high demand for crop products on global markets is indirectly leading to rising prices of these commodities in the Czech Republic. The impact of this effect on domestic prices is apparent both in year-on-year comparison and in absolute terms (koruna prices of some commodities have reached their highest levels since 1990).

The current high growth in prices of major crop commodities in the Czech Republic (in particular cereals) is exclusively due to external factors, as this year’s domestic harvest was average or slightly higher than in previous years according to the latest August CZSO estimates.