Record High World Food Prices Spark Fears of Looming Global Crisis

World food prices hit a record high in December, jumping above the 2008 food crisis levels and developing into an "alarming" situation, according to a report released yesterday (Wednesday) by the United Nations' Food and Agriculture Organization (FAO).

"We are entering a danger territory," said Abdolreza Abbassian, an economist with the FAO. "It will be foolish to assume this is the peak."

The FAO's Food Price Index, which tracks the prices of 55 food commodities, climbed for the sixth consecutive month to hit 214.7 points in December, its highest reading since the measure was first calculated in 1990. This beat the previous June 2008 record of 213.5 and is a 25% increase from December 2009.

Soaring prices for sugar, corn, grain, meat and oilseeds pushed the index to its new peak. Sugar recently hit a 30-year high, U.S. corn prices surged 52% last year, European wheat prices doubled and U.S. soybean prices rose 30%.

Poor harvests resulting from a heat wave in Russia also caused wheat prices to increase last year when top exporters like Russia and the Ukraine imposed export bans, and importers hoarded supplies.

Now concerns over floods in Australia, dry conditions in Argentina and cold weather in the northern hemisphere are sparking fears that food prices won't fall any time soon. Cane growers in Australia have already warned of sugar production problems being affected for up to three years, and wheat supplies could suffer as the country is the fourth largest exporter of the good.

The FAO said food prices would continue to rise unless the global grain crop increases
"significantly" in 2011.

"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," Abbassian said.

The record high prices are reminiscent of the 2008 global food crisis that led to fatal riots in poorer countries like Haiti, Bangladesh and Cameroon. A surge in the price of cereals coupled with a dramatic spike in oil prices drove the crisis, which prompted the United Nations and the World Bank to set up a task force to stop countries from restricting food exports. Prices had risen 83% in three years and the Food Price Index soared 57% in just 52 weeks.

Factors pushing the index higher in recent months are similar to those in 2008, like fuel prices, weather issues, growing demand from China and increasing corn use for ethanol fuel. A weak U.S. dollar has also contributed to higher food prices since most agricultural commodities are denominated in that currency.

The FAO's Abbassian said significant changes in these factors would also affect the path prices take in 2011.

"In 2008 we had rapid increases in petroleum prices, fertilizer prices and other inputs," said Abbbassian. "So far, those increases have been rather constrained. It doesn't really reduce the fear about what could be in store in the coming weeks or months."

One comforting statistic compared to 2008's situation is that rice and other cereals are still below their record levels. Rice is a staple for 3 billion people in Asia and Africa, and a sharp up-tick in its price would rapidly escalate a global crisis. Rice's price doubled when India banned its export in 2007.

The newest food crisis fears come at a time when global food production will have to increase by 70% by 2050 to keep up with the world's population, which will grow to 9.1 billion people from 2010's 6.8 billion. This means food import costs will also rise. The FAO reported in November that 2010's food import costs would hit $1.026 trillion – 15% more than 2009 and close to the record $1.031 trillion set in 2008.

The outlook for 2011 makes it likely food import costs will beat that high.

"The real uncertainty and problem is the 2011-2012 market," said Abbassian. "We are at a very high level. If it's further up than this, then you really begin to be concerned."

The rising food costs are also putting economists on global inflation watch, which could push up interest rates that remain at historic lows.

"The upward pressure on inflation this year from the recent surge in the cost of agricultural commodities will be much greater than that from the pick-up in oil prices," Julian Jessop, chief international economist at Capital Economics, told The Guardian.

Jessop attributed rising oil prices to rebounding industrial activity, unlike the supply issues in food prices.

"In contrast, the surge in agricultural food prices is largely a consequence of supply shocks, such as droughts in major wheat producing countries," he said. "These have been compounded by speculative pressures."

Rising oil prices in 2011 could also boost food prices as transport costs increase and more corn is used for biofuel. Many analysts expect to see triple digits early this year for oil, which is trading around $90 a barrel on the New York Mercantile Exchange.

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