Food commodities escaped a downgrade by the International Monetary Fund to its outlook for raw material prices, with the "precarious" balance in crop supplies leaving markets open to "further price spikes".
The IMF, in a twice-yearly report, said that price risks in the broad commodities sector "seem more balanced" than both a year ago and in April, when the institution published its previous briefings.
"Downside risks to global growth have risen," the fund said, reducing to 4.0% its forecast for world economic expansion both this year and in 2012, cuts of 0.3 points and 0.5 points respectively.
However, for food prices, the "balance of risks… is still to the upside" thanks to the thin supplies of some farm commodities, notably corn.
"Given low global inventory levels for many crops, and significant adverse shocks… have the capacity to spike food prices higher," the fund said.
‘Most immediate risk’
The "most immediate risk" to hopes for lower prices was of further poor weather, with the US extremes of a wet spring and hot summer following droughts in Europe and China.
"The recent pattern of extreme weather in major crop-growing regions seems to be continuing," the report said.
Even "modest" further cuts to crop production forecasts "could trigger a large price response, cross-commodity spillovers, and higher volatility".
And, unlike in markets for some other commodities, "demand growth momentum remains strong", with consumption of major crops set to grow by 2.25% in 2011-12, "considerably above the 20-year average".
"Rapid increases in emerging market economy food consumption are showing no signs of moderating," the fund said, noting the impact of higher incomes encouraging a shift to meat.
‘Further price spikes’
The IMF said its central forecast was for food prices to "decline modestly, but remain high in real terms" through 2012, assuming a return to normal weather conditions and the absence of a rise in energy prices which would boost biofuels demand.
However, a "combination of low inventories, volatile weather, and demand uncertainties related to China and biofuels raises the prospect of further price spikes over the next 12-to-18 months".
Such an outcome was already being reflected into values of derivatives such as futures, in which, according to IMF analysis, investors were already pricing in a higher-than-average probability of a price spike over the next nine months.