FAO sees record food prices heading even higher globally

(Reuters) - Food prices hit a record high last month, outstripping levels that prompted riots in 2008, and key grains could climb even further as weather patterns give cause for concern, the UN’s food agency said on Wednesday.

Its measure of global monthly price changes for a food basket of cereals, oilseeds, dairy, meat and sugar reached its highest since records began in 1990, topping levels in 2008 when a food crisis sparked riots in some countries.

A mix of high oil and fuel prices, growing use of biofuels, bad weather and soaring futures markets pushed up prices of food in 2007/08, sparking violent protests in countries including Egypt, Cameroon and Haiti.

UN Food and Agriculture Organisation economist Abdolreza Abbassian told Reuters the FAO was worried by the unpredictability of current weather activity, given the already high price levels and low supply of some grains.

“There is still room for prices to go up much higher, if for example the dry conditions in Argentina tend to become a drought, and if we start having problems with winterkill in the northern hemisphere for the wheat crops,” he said.

Winterkill occurs when cold attacks plants seeded, generally in the autumn, for harvesting the following year.

Abbassian added that despite high prices, many factors that triggered the sometimes deadly food riots in 2008, such as weak output in poor countries and a sudden surge in crude oil prices, were not currently present, reducing the risk of more turmoil.

Last September 13 people were killed in Mozambique in riots which followed a 30 percent bread price rise sparked by the leap in global wheat prices.

Prices of grains surged in 2010, with wheat buoyed by a series of weather events including drought in Russia and its Black Sea neighbours. European wheat prices doubled, U.S. corn rose more than 50 percent while U.S. soybeans jumped 34 percent.

Low stocks of grains such as corn mean that more weather-related damage to crops could be critical for markets. China in particular has a huge appetite for corn and is keen to secure adequate stocks of the grain.

“The fundamentals of the corn market are clearly the tightest ones,” said Societe Generale analyst Emmanuel Jayet.

“It’s the grain where stocks are already very low and where there are questions about a further drop to historically low levels,” he said, adding that he also expected soybeans and wheat prices could rise on a fall in supplies.

Pinpointing soybeans, Jeffrey Currie, Global Head of Commodities for Goldman Sachs said the protein-rich beans were a more attractive investment than wheat due to greater potential demand growth and limited supply.

Crude oil prices have also crept higher on a resurgence in global demand, which has raised concern of a double burden of high food and energy prices particularly for developing countries with import needs, Abbassian said.

“That’s when people have problems because of inflation. Fast-growth developing countries are more vulnerable,” he said, mentioning India and China. But he did not see the oil price buoying grains and oilseeds markets to the extent it did in 2007/08, because it had not seen such a drastic and sudden surge and because the biofuels industry is no longer growing as rapidly.

Abbassian also expected higher food prices would stimulate higher production. That would ease supply tightness, as seen in 2008 when grain prices collapsed soon after their peaks due to massive production increases.

But Geneva-based Agrinews analyst James Dunsterville noted that as opposed to 2008, the situation looked to be tight again next year with sowings threatened in some key producing regions.

The FAO’s food price index put in its sixth straight rise, averaging 215 points last month, up from 206 points in November and topping the high of 213.5 reached in June 2008.

Its indexes for sugar and meat reached new record highs, while its Cereals Price Index, which includes prices of main food staples such as wheat, rice and corn, rose to its highest level since August 2008.