Rome  - The ongoing financial crisis could threaten many countries' agricultural sectors, undoing this year's record world cereal production, a UN agency reported Thursday.

World cereal production is expected to set a new record this year thanks to high prices and favourable weather conditions, which boosted planting, said the Rome-based Food and Agriculture Organization (FAO) in the latest issue of its "Food Outlook" report.

FAO's forecast for world cereal production in 2008 now stands at 2.24 billion tons (including rice in milled terms), 5.3 per cent more than in 2007.

Among the major cereals, the most significant production expansion is forecast for wheat, up 11 per cent from last year-

Production of coarse grains is also forecast to surpass last year's record by at least 3 per cent, while rice production is anticipated to exceed the "already excellent results" achieved in 2007 by more than 2 per cent, the FAO said.

However, this year's record cereal harvest and the recent fall in food prices should not create a false sense of security, said Concepcion Calpe, one of the report's main authors.

"For example, if the current price volatility and liquidity conditions prevail in 2008/09, plantings and output could be affected to such an extent that a new price surge might take place in 2009/10, unleashing even more severe food crises than those experienced recently," Calpe said.

"The financial crisis of the last few months has amplified downward price movements, contributed to tighten credit markets, and introduced greater uncertainty about next year's prospects, so that many producers are adopting very conservative planting decisions," Calpe said.

The report stresses that most of the recovery in cereal production took place in developed countries, where farmers were in a better position to respond to high prices.

Developing countries, on the contrary, were largely limited in their capacity to respond to high prices, the FAO report said, noting that developing countries remain the most vulnerable to volatile markets.

The sharp 2007/2008 rise in food prices has increased the number of undernourished people in the world to an estimated 923 million.

Lower international commodity prices have not yet translated into lower domestic food prices in most low-income countries.

"There is a real risk that, as a consequence of the current world economic problems, people will have to reduce their food intake and the number of hungry could rise further," Calpe said.

World agriculture is facing serious long-term challenges, including land and water constraints, low investments in rural infrastructure and agricultural research, expensive agricultural inputs relative to the initial price charged by farmers, and little adaptation to climate change.

FAO estimates that to feed a projected world population of more than nine billion people by 2050 (around six billion today), global food production must nearly double. (dpa)