Despite stronger production and falling prices for many food staples in the second half of 2008, the risk of food supply shortages remains acute in world markets.

These supply shortage risks stem from reduced producer incentives – and ability - to boost food production, according to a Commodity Online report.

Reduced access to trade credit, rising costs, bio-fuel competition, and infrastructure shortages are among key factors that continue to weigh on trend growth in world agriculture supply. Inventory levels are also low relative to their long run averages, highlighting the underlying tightness in food markets at present.

Tightening and more expensive credit is limiting the ability of producers to borrow to finance seasonal inputs – notably seed and fertilizer. The costs of these inputs has increased dramatically over the past few years, with the USDA estimating that US total inflation-adjusted farm costs have increased 28.5 per cent since 2002 (a 52 per cent increase in nominal terms).

Although the cost of these inputs may moderate slightly in the wake of slowing global growth – for example fertilizer costs on falling energy prices - input prices tend to adjust more slowly with farmers typically price takers in both input and output markets.

Faced with high costs and constrained finance, the FAO expects world cereal producers could cut back production in the 2009/10 season with reduced crop plantings. Yields may also be reduced over the coming year as fertilizer use is scaled back.

Bio-fuels demand growth is expected to continue, absorbing some production of cereal products and partially offsetting a cyclical slowing in discretionary food demand. Bio-energy absorbed 100 million tonnes of global cereals production in the 2007/08 season based on FAO data, equivalent to 13% of world cereal consumption for food.

And production of transport biofuels is set to rise almost 200 per cent between 2005 and 2015 according to the International Energy Association (IEA). National energy security and greenhouse gas emission reduction objectives by governments worldwide are spearheading government support for further development of the world biofuels industry.

Emerging markets also face shortages in infrastructure, training and technologies to adequately boost food production. These supply shortages were highlighted by the recent supply response to the 2007-2008 surge in food prices, with cereal supply responding in developing markets by just 0.9 per cent vs. an 11 per cent rise in developed economies.

Given the fact that global food demand growth will be driven by population and income growth in emerging market countries, and that over half of the world’s cereal production is sourced from these countries, increasing this emerging market supply response in the future will be critical to avoiding global food shortages in the medium term.

Recent export restrictions by grain producers in the Ukraine, India, Pakistan and Argentina serve as a timely reminder of the underlying tightness in the food supply situation in emerging markets. Recent stock numbers paint a similar picture, with global inventories of corn wheat and soybeans at their second lowest level since 1974.

Overall, food markets continue to operate in a high and rising cost environment. Credit tightening has reduced the ability of farmers (and countries) to borrow to cover these regular upfront operating costs at the start of each season.

Furthermore trend biofuel demand growth has increased the relative price incentive for non-food agriculture production. These impacts are amplified in emerging markets by shortages in supporting infrastructure for food production.

And historically low inventory buffers of food products leave the market vulnerable to adverse supply shocks on a seasonal basis. The combination of these factors suggest that agricultur