October 5, 2012

Food Prices Likely to Stay Higher

‘Short supply mode’ will occur for first time in two years, U.N. says

The effects of droughts in the U.S. and Russia that have driven food prices higher are likely to last for the next six months, according to the U.N., and the global food market will be in “short supply mode.”

Bloomberg reported Friday that U.N.-monitored food prices are expected to remain high. Hiroyuki Konuma, the regional representative for Asia and Pacific at the UN’s Food & Agriculture Organization (FAO), said in the report that the global market “will switch to a short supply mode,” something it last did two years ago. He added, “We will have to monitor it very cautiously.”

The cost of food globally, according to the FAO, hit its highest level in September in six months, as farmers paying higher prices for feed passed along their increase in cost to produce meat and dairy items to customers. Corn prices in Chicago have risen by half since mid-June on the heels of a 50-year drought that has devastated crops.

A food index made up of 55 different items reached 215.8 points in September. In August it was 212.8, and the average level of the index over the last 20 years has been 131.17.

In September, Nick Higgins, an analyst at Rabobank International, said in a report that U.N.-monitored food prices could rise 15% by June, topping the previous record that was set in February of 2011. He added that prices for grain and oilseed should “remain at elevated levels” for at least the next year to ration demand and spur farmers to increase planting.

Although the U.N. is projecting a drop in grain yields to 2.29 billion metric tons in 2012 from 2011’s 2.35 billion tons—that’s 8.8 million tons lower than it projected last month—it does not expect a food crisis. Konuma said in the report, “We do not anticipate food prices peaking” or a food crisis at present, since the costs of crude oil are lower than they were in 2008 and because rice is still in abundant supply.

In September, Consumer Reports in the U.S. issued investigation findings of arsenic in rice; after the announcement was made, South Korea suspended all imports of U.S.-produced rice. The FDA announced similar findings, as did the Illinois Attorney General’s office.

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