Grains, food inflation give markets a jolt

By Christine Stebbins and Peter Bohan - Analysis

CHICAGO (Reuters) - Soaring world grain prices will keep driving food price inflation in 2008 as China and India carve out a bigger place at the table and a new dinner guest -- biofuels -- threatens to become the biggest glutton of all.

Throw in a wild card or two for grain supplies -- climate-tied crop losses, for example, or water shortages -- and the food-inflation fears now jolting many countries are easy to understand. Food security is national security.

Bill Lapp, former economist for food giant Conagra Foods Inc (CAG.N), said food prices are moving to a new plateau similar to what happened around 1914, and again after World War Two and then in the 1970s.

Lapp, president of consultancy Advanced Economic Solutions, tied the higher commodity prices to world economic growth, a weak dollar, and use of corn to produce ethanol.

"Those have combined to drive us into a period of time where we're going to sustain higher commodity prices just as we did three times during the 20th century."

In 2007, Chicago Board of Trade prices -- world benchmarks for wheat, corn, rice and soybeans -- soared despite big U.S. harvests. Wheat prices rose 90 percent, soybeans 80 percent, corn 20 percent. U.S. prices are key because America is still the world's breadbasket, the single biggest grain exporter.

"The fact we're having higher commodity prices here will have an impact around the world on food prices," Lapp said.

Lapp said the U.S. producer prices for food for the first 11 months of 2007 rose at an annualized rate of 7.5 percent, the highest since 1980, with the exception of the year 2003.

"We've only started to see the impact of higher costs translate into higher consumer prices," Lapp said.

One indicator that markets are watching more closely than even U.S. prices is world grain stocks. U.S. wheat stocks in 2008 will hit a 60-year low and world barley stocks a 42-year low. Global oilseed stocks are projected down 22 percent in one year.

FEARS OF CLIMATE CHANGE

Also, droughts in traditionally temperate crop areas and persistent drought in some countries, like Australia, have fed concerns about climate change affecting long-term food production.

"That scares the market," said Fiona Boal, head of Food and Agribusiness Research at Rabobank. "With commodity markets a major weather event can pretty quickly run through stocks."

"What happens to our grain supply affects everyone," said Lester Brown, president of the Earth Policy Institute and author of the 1995 book, "Who Will Feed China?"

"Things are really getting tight now and the importing countries are getting worried and some of them may even be panicking a bit because they need to import grain and are not sure if there will be enough," Brown said, noting that world grain stocks have fallen in seven of the last eight years.