United Nations Warns of Food Price Hikes, Painting a Picture Similar to 2008's "Silent Tsunami"

The United Nations' Food and Agricultural Organization (FAO) yesterday (Wednesday) warned that food prices could rise through 2011 unless production of major crops rises significantly, outlining a situation reminiscent of 2008's "silent tsunami" food crisis.  

The FAO announced in its twice-yearly Food Outlook report that global food import costs will jump 15% in 2010 to $1.026 trillion – dangerously close to the 2008 crisis level of $1.031 trillion. The world food import outlook was revised up from a June estimate of $921 billion.

Increasing global demand is boosting the food bill, and price climbs in grain and sugar – which recently passed its 30-year peak – have signaled even higher prices ahead. 

"It is unlikely that the effects of higher prices will be contained in their respective sectors, as many of these commodities constitute major feedstock ingredients for the livestock or biofuels sector," the FAO wrote in its report. "With price increases largely reflecting scarcity in export supply, global competition for securing foodstuffs is set to intensify." 

The FAO's world Food Price Index rose 5% from September to October to 197.1, the highest level since July 2008. The numbers are similar to the months preceding the global food crisis in 2008, when the United Nations' World Food Programme declared a "silent tsunami" of hunger was sweeping the globe, leading to starvation and riots in poor countries.

The United Nations and the World Bank had to set up a task force in 2008 to stop companies from restricting food exports, as prices had risen 83% in three years and the FAO's Food Price Index soared 57% in just 52 weeks.

The FAO warned that current conditions warrant global caution in preparing for future food supplies and prices.

"With the pressure on world prices of most commodities not abating, the international community must remain vigilant against further supply shocks in 2011 and be prepared," wrote the FAO.

Many production numbers have been revised lower from earlier predictions. World cereal production is expected to fall 2.1% in the 2010-2011 season, changing the June outlook of a 1.2% rise. Grain stocks could fall 7.2% instead of the initially forecast 0.9% climb. World wheat production is predicted to slump 5.1% – its lowest level in three years – based on small harvests from Russia and other European countries.

The FAO said that if inventories are not replenished, barley stocks would tumble 35%, corn 12% and wheat 10%.

Experts blame unfavorable weather conditions for the contracting supply. The winter planting season for wheat so far has been lower than expected due to drought conditions in Russia. A Russian export ban earlier this year also boosted prices.

The food price hike likely will lead farmers to increase planting, but a price rise in other commodities like cotton has made them more attractive to grow and will cut into supplies of corn and wheat.

"This could limit individual crop production responses to levels that would be insufficient to alleviate market tightness. Against this backdrop, consumers may have little choice but to pay higher prices for their food," wrote the FAO.

While the FAO said reserves are higher now than they were in 2008's crisis, the downward revisions of production levels have caused global food prices to rise "alarmingly and at a much faster pace than in 2007-2008."

China took action Wednesday announcing it would take measures to stabilize commodity prices. China's consumer price index estimates food costs represent one third of a family's expenses. The country saw a 4.4% consumer price increase in October from a year earlier.

U.S. Consumers Feel Food Price Pain

Prices are not yet climbing at the 5.5% rate that was hit in the 2008 crisis, but analysts are seeing a steep increase from the 1.8% rate of 2009.

Producers and grocers are wary of passing along costs too soon and pushing shoppers to other brands, but some are finding it hard to cover all the increased expenses, despite the desire to retain their extremely price-conscious customer base.

"There is a much stronger sensitivity to price than we've ever experienced, but there are some areas you can't afford not to pass on those costs," Kevin Srigley, senior vice president at grocer Giant Eagle Inc., told The Wall Street Journal.

Grocery store chains like Safeway Inc. (NYSE: SWY) and The Kroger Co. (NYSE: KR) have said they will have to pass on supply cost increases to customers, while packaged food companies like General Mills Inc. (NYSE: GIS) have said consumers will see price hikes on certain items. Kraft Foods Inc. (NYSE: KFT) has already instituted higher prices on about 40% of its North American product line, according to The Seattle Times.

"The big challenge will be, how much can we swallow and how much can we pass along?" Jack Brown, Chief Executive Officer of California-based grocer Stater Bros. Markets, told The Journal.

Stater Bros. has passed half of the 5% increase in cereal prices on to customers, while trying other cost-cutting measures to make up the difference.

And the biggest impact won't hit until next year when the food inflation rate could more than double 2010's 1% - 1.5% rise.

News and Related Story Links:

• United Nations' Food and Agricultural Organization:
  Food Outlook
  
• Bloomberg:
  World Food Import Bill in 2010 Will Top $1 Trillion, FAO Says
  
• Money Morning:
  Surging Corn Prices Making Hay for Commodities Producers
  
• The New York Times:
  China Acts to Slow Rise in Food Prices
  
• The Wall Street Journal:
  Food Sellers Grit Teeth, Raise Prices
  
• The Seattle Times:
  Expect higher food prices to take a bit out of your budget
  
• Money Morning:
  Six Ways to Protect Yourself – and Profit – From a Global Food Crisis That's Here to Stay
  
• Money Morning:
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