Published last week, FAO's latest Crop Prospects and Food Situation report places world cereal production in 2007 at 2,101m tones, a 4.6 percent increase from last year.
The figure represents a slight downward revision from the UN agency's November forecast, but still indicates a "record" level of production, said FAO.
Most of the increase this year has been in coarse grains, especially maize in the US, a crop which is now also extensively sourced for fuel as well as for food.
Yet despite the high production levels, a sustained strong demand for cereals, especially from the biofuel industry, has kept prices "high and volatile", said the agency.
Other contributing factors to the soaring prices have been historically low stocks, and insufficient increases in production - particularly of wheat - in exporting countries.
The high prices resulting from this supply-demand squeeze have started sifting through to consumers worldwide, as manufacturers realize they cannot fully absorb the higher costs.
However, the most significant hikes are expected to surface in 2008 when the results of current negotiations materialize.
Oil prices are now reaching around $100 per barrel causing the price of raw materials to rise, and leaving few businesses unaffected.
The higher cost of raw materials affects every process in the food industry, with the increased price of feed getting transferred from farmers onto ingredients' producers, then onto manufacturers and retailers. Meanwhile, poor weather this year has destroyed stock and affected production.
According to FAO's new report, soaring prices have prompted farmers to plant more wheat for the 2008 season.
Additionally, the European Union, the world's largest producer of wheat, has removed the compulsory land set aside for 2008, which had previously required that farmers leave 10 percent of their land fallow.
Early prospects for the 2008 wheat crop are favorable, according to the report, with winter wheat planting virtually complete in the northern hemisphere.
In July this year, FAO together with The Organization for Economic Co-operation and Development (OECD) said in their world Agriculture Outlook for 2007 to 2016 that global cereal trade is projected to grow at close to 1.5 per cent annually up to 2016, despite the current high prices and low yields.
The outlook estimated current world wheat prices would be at $204 (€150) per tone for 2006/2007, which will decrease to $183.2 (€134) per tone by 2016. However, this is still higher than the $152 (€110) per tone price average from 2001/2002 to 2005/2006.
The report also estimated world wheat production to reach 672.6m tones by the end of the next 10 years, however consumption will be 674m tones. Production is currently estimated at 596m tones, with a consumption of 621.4m tones.
The average for the past five years has been 594.5m tones produced with a consumption of 608.8m tones, highlighting the rise in demand now and then over the next 10 years.
However, the overall conclusion seemed to be that the demand for biofuels and the general increase in demand for cereals are going to affect the market. Prices will drop over time, however, they are likely to still remain higher than in previous years.
For more information on FAO's latest Prospects and Food Situation report, click here .