Futures & Commodities

World food prices tumble near 7-year low

World food prices slip to near 7-year low

World food prices fell to almost a seven-year low at the start of the year on the back of sharp declines in commodities, particularly sugar, according to the latest data from the United Nations (UN).

The Food Price Index, published by the UN's Food and Agriculture Organization (FAO), averaged 150.4 points in January, down 16 percent from a year earlier and registering its lowest level since April 2009.

The trade-weighted index tracks international market prices for five key commodity groups -- major cereals, vegetable oils, dairy, meat and sugar – on a monthly basis.

In January, the Sugar Price Index showed the largest declines having fallen 4.1 percent from December, its first drop in four months. The FAO said the drop was down to improved crop conditions in Brazil, the world's leading sugar producer and exporter.

The second largest declines were seen in the FAO's Dairy Price Index which dropped by 3.0 percent in the same time period "on the back of large supplies, in both the EU and New Zealand, and torpid world import demand," the FAO noted.

The Cereals and Vegetable Oils indices both saw declines of 1.7 percent in January from the previous month and the Meat Price Index fell 1.1 percent.

The main factors underlying the lingering decline in basic food commodity prices are "the generally ample agricultural supply conditions, a slowing global economy, and the strengthening of the U.S. dollar," the FAO noted. Food commodities are not the only ones suffering from demand failing to keep up with a glut in supply with oil prices suffering a similar fate with a steady decline since mid-2014.

Signaling no let-up in production, the food agency raised its forecasts for worldwide cereal crops in 2016. "As a result of the upgraded production and downgraded consumption forecasts, world cereal stocks are set to end the 2016 seasons at 642 million tons, higher than they began," the agency noted.

Mixed harvests

Looking ahead to commodity prices in 2016, the FAO said that there were mixed early prospects for 2016 harvests with potential disruption from erratic weather systems.

In particular, the weather pattern known as El Niño was "sending mixed signals about the early prospects for cereal crops in 2016, especially in the Southern Hemisphere."

2016 crop prospects have been "severely weakened" in Southern Africa, and a 25 percent cut in wheat production in South Africa now appears likely, the FAO said.

Conditions for the crop are generally favorable in the Russian Federation and the European Union, but winter plantings declined in the United States and Ukraine. The area under wheat is also expected to be cut in India, following a poor monsoon and below average rains since October.

The 2016 outlook for rice along and south of the Equator is "dim" due, at times, to insufficient water and, at others, to excessive rains, the FAO noted, showing how hard it will be for farmers to get a perfect balance.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt. Follow CNBC Internationalon Twitter and Facebook.