UPDATE 1-Food prices could reach 2008 level - USDA
* US food prices to rise 3.5 pct in 2011 - USDA
* Higher commodity, energy prices drive the increase
* Food prices could challenge 2008's 5.5 pct rise (Adds USDA economist quotes, increases compared to January)
By Christopher Doering
WASHINGTON, Feb 24 (Reuters) - U.S. consumers could see food costs spiking to levels seen during the food crisis of 2008 as higher commodity and energy prices force companies to raise prices on products lining grocery store shelves, the Agriculture Department said on Thursday.
Food prices are forecast to rise a sharp 3.5 percent this year -- nearly double the overall inflation rate. The lion's share of the increase is expected in the second half of 2011 when the recent uptick for commodities, such as corn and soybeans, makes its way through the food system. Just last month, USDA forecast an increase of 2.5 percent in 2011.
Food prices soared to 4 percent in 2007 and rose to 5.5 percent a year later -- the biggest increase since 1990 -- as stockpiles ran low around the world.
Graphic of food inflation: r.reuters.com/xeb38r
Take a Look on USDA crop forecasts [ID:nN2498002]
Volatile agriculture and energy prices could help food prices challenge those levels in 2011, said USDA economist Ephraim Leibtag at the department's annual Outlook Forum.
"Given that it's still earlier in the year, I'm prone to be conservative on the side of the forecast," said Leibtag. "It's a possibility. I wouldn't be shocked but I'm not predicting it now."
FOOD INFLATION COULD LEAD TO RIOTS
Global food inflation, the result of growing demand for food and tight commodity supplies following catastrophic storms and droughts in leading agriculture producers such as Russia and Australia, is a growing worry for world leaders.
World Bank chief Robert Zoellick said last week global food prices have reached "dangerous levels," and warned they could complicate fragile political and social conditions in the Middle East and Central Asia.
It would be a stark similarity to 2008 when soaring food prices sparked food riots and led to political instability in some parts of the world, including Haiti and Egypt.
Agriculture Secretary Tom Vilsack said the United States and other global producers are "better prepared to respond" to rising food prices after the run-up in 2007 and 2008. "We're keeping an eye on this," he said.
In its new forecast, USDA said food will rise party due to higher costs for meats, poultry and fish, which make up 12.5 percent of total food spending. Overall, costs for these items are forecast to rise 4 percent compared with 3 percent forecast last month.
Prices for fruits and vegetables, which account for 8.4 percent of food spending, also will rise 3.5 percent, an increase from 3 percent forecast in January. Cereals and bakery products were increased to up 4 percent from 2.5 percent, and sugar and sweets up 3 percent from 2.5 percent.
Despite the recent pullback for some commodities such as wheat, soybeans and corn remain near a 2-1/2 year high. Oil surged to 2-1/2 year highs near $120 a barrel on Thursday as the revolt in Libya choked exports but prices later eased as Saudi Arabia assured European refiners it could fill any supply shortfalls. [O/R]
Energy is used for everything from producing, transporting and making packaging for food.
RETAILERS FACE HIGHER INPUT COSTS
Big companies have had to adjust to higher raw material costs. Kellogg Co (K.N), the world's largest breakfast cereal company, and consumer goods giant Unilever (ULVR.L) (UNc.AS) have boosted prices on many of their products to offset rising costs for ingredients such as grains and sugar.
Grocers are doing what they can to keep prices low, as they do not want to turn off shoppers already feeling pressure from higher gasoline costs and the generally bleak economy.
Leibtag said the willingness of retailers to absorb price increases and not pass all of them onto consumers is, for now, helping keep prices below their 2007 and 2008 levels.
"We do have risks of higher inflation, but retailers are facing a bigger challenge in 2011," he said. "We're coming off of a recession where everyone is more concerned about their prices, their budget, their spending."
Wal-Mart Stores Inc (WMT.N), which is the largest U.S. grocer, said on Tuesday it would work with suppliers to keep costs down as much as possible, and only pass along price increases when necessary. Wegmans Food Markets has said it will freeze prices on 40 products through 2011.
(Additional reporting by Jessica Wohl in Chicago; Editing by Lisa Shumaker)
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