What it means
The FAO was founded in 1945 and is headquartered in Rome. Its member countries cooperate on food security, rural development and agricultural policy, and the organisation provides technical advice and statistics.
Its role is more about information, standards and policy advice than about trading or lending, which sets it apart from development banks. For finance and business readers, the FAO is best known for the FAO Food Price Index.
This tracks the international prices of a basket of commonly traded food commodities and is published monthly. The groups covered are cereals, vegetable oils, dairy, meat and sugar.
The index is built from price series for each commodity group, which are weighted by each group's share of world export trade. The result is compared against a fixed base period set to 100, so a reading above 100 means prices are higher than in the base period.
Because it follows international prices, it does not tell you exactly what shoppers pay in a particular supermarket. Food prices influence inflation, wages, central bank decisions and the profits of companies from bakeries to packaged food makers.
A sharp rise in cereals or vegetable oils can raise costs for manufacturers, restaurants and retailers within months, and governments also use the data to spot signs of food stress in poorer countries. Finance teams in food-related businesses, including producers, importers, retailers and caterers, use the index as an early warning.
If the index rises steadily, they may review pricing, negotiate longer supply contracts or hedge their commodity exposure. A falling index may offer a chance to lock in lower costs.
A nuance is that the index covers world prices in US dollars, so currency movements affect what a local business actually pays. The headline number can also hide big differences between commodities, with sugar rising while dairy falls, and each business should check the sub-indices that apply to its own supply chain.
In practice
Real-world examples.
Example
A biscuit manufacturer sees the cereals and sugar sub-indices climbing for three months. Its finance director brings forward purchases, begins talks on a fixed-price supply contract and warns the sales team that a price rise may be needed.
Example
A central bank economist uses the FAO Food Price Index as one input when judging whether rising food costs are likely to push up consumer inflation, alongside local retail prices, wages and energy costs.
Example
A restaurant chain's procurement team watches the vegetable oil index before renegotiating its fryer-oil contract. A fall in the index gives them evidence to ask the supplier for a lower price, and a rise tells them to lock in volumes early.
Formula
Calculation
Price index = (Current price of basket / Base period price of basket) x 100
Suppose a simplified food basket cost $1,000 in the base period and costs $1,150 today. The index = (1,150 / 1,000) x 100 = 115, meaning prices are 15% higher than in the base period. If next month the basket costs $1,092.50, the index = (1,092.50 / 1,000) x 100 = 109.25, a fall of 5% from the 115 reading (1,092.50 / 1,150 = 0.95).Case study
Seen in the real world.
Sunfield Snacks is an illustrative, fictional company that sells packaged biscuits and crisps in several countries. After a year of unexpected cost rises, its CFO set up a monthly dashboard that tracked the FAO Food Price Index alongside its own ingredient costs.
The dashboard showed that the company's palm oil and wheat costs followed the relevant sub-indices with a lag of about two months. The team used this to set the timing of price increases and to agree some forward contracts before costs rose.
In the following year, ingredient inflation was partly absorbed through earlier purchasing and well-timed price rises, and margins fell far less than in the previous cycle. The illustrative point is that public data can turn a surprise into a forecast.
Watch out
Common mistakes.
- Treating the index as a measure of local shop prices, when it tracks international commodity prices.
- Reading a single month's move as a trend, when monthly figures can be volatile and are often revised as more price data become available.
- Using the overall index when only one commodity group matters to the business.
Questions
People also ask.
What does the FAO do?
It is a United Nations agency that works on food security, agriculture and rural development, and publishes global food data that governments, researchers and businesses use in their planning.
How often is the Food Price Index published?
It is published monthly, with the sub-indices for each commodity group, so a business can follow only the groups that matter to its own costs.
Does the index predict inflation?
It is a useful early signal for food costs, but retail prices also depend on wages, energy, transport and exchange rates.
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