From the FT

Concerns mount over fresh rise in food costs

By Javier Blas in London

Published: June 10 2009 03:00 | Last updated: June 10 2009 03:00

After a year worrying about the piggy bank, the world economy is turning its attention to the cupboard.

Almost unnoticed, agricultural commodities prices have returned to levels last seen at the start of the 2007-2008 food crisis, prompting concerns about a fresh rise in food costs.

The increase in soyabean, corn and wheat prices - to their highest level in eight to nine months and up more than 50 per cent from their December lows - comes on the back of strong Chinese demand, a forecast of lower supply due to reduced planting, and the impact of a drought in Latin America.

Argentina's crops have been devastated.

"Agricultural markets are fairly nervous," says Sudakshina Unnikrishnan, an agricultural commodities analyst at Barclays Capital in London.

"We are not in the comfortable food surplus environment of the 1980s and 1990s."

The price of soyameal - critical for fattening livestock such as chickens and hogs - has moved above $405 a tonne, a level only seen for a brief period in 1973 and during four weeks at the peak of last year's crisis.

The rise has pushed the price of ready-to-cook chicken in the US to the highest in a decade.

Traders say hedge funds and other big institutional investors, including sovereign wealth funds from the Middle East, have poured money into the agricultural market, helping to drive commodities prices higher as the US dollar weakens.

A repetition of last year's food crisis, when sharply rising prices sparked rioting in some countries, seems unlikely, however.

Even after their surge, soya, wheat and corn prices are well below last year's peaks.

Rice is trading about $550 a tonne, well below its peak last year of more than $1,000 a tonne.

Beef, pork and milk prices remain depressed, further capping the potential for a rise in overall food costs,.

The United Nations' Food and Agriculture Organisation is relatively optimistic, saying that "barring major crop setbacks . . . the food economy looks less vulnerable" to a price spike.

"In spite of strong gains in recent weeks, international prices of most agricultural commodities have fallen in 2009 from their 2008 heights, an indication that many markets are slowly returning into balance," it says.

But private sector analysts and industry executives are less relaxed.

In rare public comments, Christopher Mahoney, a director at Glencore Grain, the secretive trading house based in Rotterdam, warned last week that supplies of some agricultural commodities such as corn and soya were "pretty tight".

Lewis Hagedorn, an agricultural commodities analysts at JPMorgan in New York, describes the situation as one of anxiety but not yet alarm.

"We are approaching a level of concern with respect to inventories in some areas, although we are not presently in a crisis mode. We are not well prepared from a supply and demand balance sheet perspective to absorb any weather-related surprise."

Food companies are taking precautionary measures, building positions in the commodities futures market to hedge against further price rises, says Luke Chandler, director of agricultural commodity markets research at Rabobank in London.

"There is a lot more attention among food companies, particularly after the pain experienced last season," Mr Chandler says.

The immediate concern is soya, both because of its use as food but even more as livestock feed.

Strong Chinese consumption, as the country's diet moves from vegetables to meat, and the crop failure in Argentina, the world's third largest exporter, have created extraordinary pressure on US supplies, sending inventories down to the lowest level in 40 years.

Soyabean prices yesterday hit $12.45½ a bushel, a fresh nine-month high. Soya is trading at the level of April 2008, after rising almost 60 per cent from its December's low.

Soya is, nonetheless, still below last year's record of $16.5 a bushel.

Looking at the 2009-10 season, analysts fear a drop in cereals production, in corn and, to a lesser extent, in wheat, as farmers cut their planted acreage in response to low prices last autumn, higher cost for inputs such as fertiliser and pesticides, and difficulties securing finance in some countries.

Production in countries such as Ukraine and Brazil is down because farmers did not have access to credit.

The International Grain Council, an inter-governmental organisation, forecast that global grains supplies would fall in the 2009-10 season, which starts at the end of the month, to 1,721m tonnes, down 3.4 per cent from 1,782m tonnes in 2008-09.

"World grains production is expected to fall short of use in 2009-10, eroding some of the gains in stocks achieved after the bumper 2008 harvests," the IGC said in its latest monthly report, forecasting a drop in stocks to 328m tonnes, down 4.3 per cent from 2008-09's level of 343m tonnes.

Global grains demand will rise to 1,736m tonnes in 2009-10, up 0.8 per cent from 2008-09 season, the IGC says.

With the US the world's largest corn exporter and wet weather disrupting planting in areas such as Illinois, Mr Mahoney of Glencore, says: "It is essential that we have a good US growing season this year."

The combination of worries is propelling cereal prices.

Corn is trading at the level of January 2008 at the start of the food crisis - about $4.5 a bushel, but still well below last year's record of $7.5 a bushel.

Wheat is lagging behind, trading at the level of October 2007 - at about $6.25 a bushel, still far below the 2008 peak of $13 a bushel.

Even if supply is set to drop this year, a large carry-over from last season will cap any price rally.

"The wheat supplydemand picture is considerably less tight," Mr Mahoney says.

The surge in prices is a reminder of how the world's food security has deteriorated, after years of comfortable surpluses, analysts and executives say.

Mike Mack, chief executive of Syngenta, one of the largest manufacturers of chemicals for agriculture, echoes a widely held view when he says that although the "headlines from the past year on the food crisis have been replaced by those on the economic crisis", the "long-term challenge to produce enough food" has not disappeared.

www.ft.com/foodprices

Copyright The Financial Times Limited 2009