Food inflation seen back on the table as prices rise

MILAN Wed Apr 4, 2012 6:08pm EDT

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MILAN (Reuters) - World food prices are likely to rise for a third successive month in March, and could gain further beyond that, with expensive oil and chronically low stocks of some key grains putting food inflation firmly back on the economic agenda.

Food prices grabbed world policy makers' attention after hitting record highs in February 2011 and stoking protests connected to the Arab Spring wave of civil unrest in some north Africa and middle eastern countries.

Prices later receded, but an upturn which began in January, initially seen as a pause in the overall downtrend, has persisted.

The United Nations Food and Agriculture Organisation (FAO) will update its monthly Food Price Index on Thursday and the organisation says prices could rise more in the short and medium term as grain supply tightens and energy prices stay high.

"You can see prices in the near term rising even further," FAO's senior economist and grain analyst Abdolreza Abbassian told Reuters ahead of the index update.

High crude oil prices have fuelled the upward pressure on inflation since the start of this year. Consumer prices in the 17 nations sharing the euro were up 2.6 percent in March from a year ago, despite stumbling economy.

"The food price index has an extremely high correlation to oil prices and with oil prices up it's going to be difficult for food prices not to follow suit," said Nick Higgins, commodity analyst at Rabobank International.

Energy prices affect the production of fertilizers as well as costs related to food distribution and farm machinery use.

"We really saw the (food index) declines in Q4 2011 as being anomalous and related more to sell offs from the threats posed by the European macroeconomic situation rather than agricultural fundamentals," he added.

The FAO index - which measures price changes for a basket of cereals, oilseeds, dairy products, meat and sugar - rose in February and January.

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For graphics on agricultural food prices:

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A U.S. government report last Friday with its lower than expected estimates of grain stocks and falls in soybean and wheat plantings, added to concerns about global grain supplies and fuelled a rally in U.S. and European grain futures.

Corn and soybeans are set to be the major drivers on world grain markets until new crops are harvested with strong price swings prompted by weather changes in major producing countries, Abbassian said.

More price volatility could come if U.S. farmers decide to plant more soybeans lured by high prices, he added.

U.S. soybean futures rose about 7 percent in March and gained about 17 percent in the first quarter of this year spurred by concerns about tight supplies as drought hit South America and smaller U.S. plantings were expected.

On the physical markets, whose prices FAO uses to calculate its food index, the average monthly price of U.S. soybeans jumped to $519.43 a tonne in March from $487.31 a tonne in February, the FAO's database showed.

But FAO's Abbassian said prices could still fall in the second half of this year with new crops easing market tension and driving full-year average prices below record levels of 2011.

The FAO is also expected to update its world crops view on Thursday.

(Additional reporting by Veronica Brown in London; editing by Keiron Henderson)

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