Oil Price Rise Will Hit Cereal Markets: UN

Food Price Index set second straight record in February

The United Nations warned Thursday that with global food prices at a record high, more increases in the cost of oil and a drive by importers to stockpile food would cause problems on the cereal markets.

According to Reuters, the Food Price Index tracked by the U.N. Food and Agriculture Organization (FAO) set a second straight record in February, thanks to tight supply and higher costs for grains. It further warned that prices were likely to surpass the levels in 2008 that ignited food riots in many countries.

Abdolreza Abbassian, FAO economist, said in the report that prices are unlikely to drop at least until it is seen how the newest crops are faring. He added that further increases in the price of oil could hit grain markets hard. Those markets are already reeling under a 60% increase in U.S. benchmark wheat prices so far this year.

Abbassian said in the report, "Until we know about new crops, that means waiting at least until April, our view is don't expect any major corrections in these high prices; expect even more volatility now that oil has joined the crowd."

Oil hits the food market on both ends; farmers need oil to run their agricultural equipment, and shippers are big oil consumers in conveying goods to market.

Abbassian also warned about the hazards of stockpiling. Importers putting aside stores of grain "beyond countries' normal needs" has, rather than warding off unrest, contributed to the uncertainty in the marketplace. Abbassian said in the report, "Political instability in the regions and countries affects the markets by adding uncertainty: will a country buy or not buy, why it had bought so much now ... those things are disruptive to the normal trade."

A further complication in the markets is the use of corn and soybeans for biofuels. As a result, those two grains tend to track the rise and fall of oil. If oil continues to surge, Abbassian warned that biofuels could once again drive the cost of food upward, as it did in 2008.

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