Reuters Edge

Grains, food inflation give markets a jolt

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.

A man inspects grain at his windmill August 23, 2007. 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. REUTERS/Darren Staples

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.


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.

“There is going to be continued upward pressure on prices. One of my concerns is that this will lead to social unrest and growing political instability in the low- and middle-income countries that import a large share of their grain supply.”

The Food and Agriculture Organization in Rome on December 17 said 37 countries are facing food crises and called for aid.

“High international cereal prices have already sparked food riots in several countries,” the FAO said.

Grain is the core of the world food system, both for carbohydrates and protein (through feed for meat animals and dairy). But grains as an inflation factor have stayed benign for decades. High prices have quickly spurred more plantings.

The rise of India, China and biofuel has changed all that.

“Income growth and population growth in China and India -- they are westernizing their diets,” said Rabobank’s Boal.

Moving up the food chain to meat has a built-in accelerator for draining grain supplies since it takes many pounds of feed to produce one pound of beef or pork, for example.


But even more of a glutton for grain is the new darling of farmers, politicians and agribusiness: biofuels.

About 24 percent of a record U.S. corn crop in 2007 will be diverted to ethanol, a percentage that could shoot well past 30 percent within two years after President George W. Bush signed the new U.S. energy bill into law on December 19, analysts said.

“If we convert our entire grain harvest into fuel for cars, it may satisfy 16 percent of our total automotive fuel needs. So it’s not really a solution,” Brown said.

At a time when more than 800 million people go to bed hungry every night, history will judge the U.S. energy bill as “one of the great tragedies,” he added.

Can grain supply catch up with soaring demand?

Over decades, crop hybrids and recently genetic engineering have improved plant yields and vigor. But despite growing acceptance of gene-altered crops, production will continue to bump up against availability of arable land and stressed water resources for irrigation, analysts said.

So near-term, importer and biofuels demand look set to continue to shrink world grain stocks, even without major weather or climate shocks. It all adds up, Lapp said, to rising U.S. food price inflation with knock-on effects for the world.

“During the next five years, food inflation is forecast to increase by an average of 7.5 percent, well above the 2.3 percent average of the past 10 years,” Lapp said. “The price of commodities such as corn, wheat, soyoil and milk have already begun to permanently move to a new plateau.”

Reporting by Christine Stebbins and Peter Bohan, editing by Matthew Lewis