World food prices dropped in May for a second month in a row, hit by steep falls in dairy products, sugar and other commodities, and are likely to fall further in the coming months, the UN Food and Agriculture Organisation (FAO) said on Thursday.

Food prices grabbed attention of the world leaders after their spike to record highs in February 2011 helped fuel the protests known as the Arab Spring in the Middle East and North Africa. Food prices have fallen since.

Improvement in the security of food supplies amid the economic downturn was high on the agenda of a summit of leaders of the G8 industrial powers last month.

The FAO Food Price Index, which measures monthly price changes for a food basket of cereals, oilseeds, dairy, meat and sugar, averaged 204 points in May, down from 213 points in April, the FAO said in its monthly index update.

"We were expecting a decline in May, the surprise is the extent of it, which showed that markets for oils and fats, dairy products and sugar all had to make sharp downward adjustments," Abdolreza Abbassian, FAO's senior economist and grain analyst, told Reuters.     
In May, an improved outlook for crops in some major producing countries, a strengthening US dollar, which hits competitiveness of dollar-denominated commodities, and growing concerns about Europe's debt crisis pushed prices down.

"We're in a situation where supplies have improved and we've had quite a big spillover from other markets which were all down," Abbassian said.

The steep price drop in May meant that even if further declines were seen in June, they would probably be less marked, he added.

The index was driven down by a 12 percent fall in dairy prices, a 9 percent drop in sugar and a 7 percent decline in  oils and fats. The cereals price index was down just one percent, while meat was broadly stable.

The FAO raised its 2012 world cereals output forecast to 2.419 billion tonnes from a previous estimate of 2.371 billion due to improved expectations for US corn production.

Closely watched grain stocks at the end of the 2012/13 season are expected to rise to 548 million tonnes against a previous forecast of 524 million, the agency said.

Abbassian said the improved stocks meant that during the upcoming harvesting period "any weather problem would have to be significant to make any difference".  - Reuters