June 15 (Bloomberg) -- Asian governments should scrap food subsidies because they are causing price increases and heightening a global supply crisis, said Nestle SA, the world's biggest food company.

``Food subsidies have been the most important distorting aspect there is,'' Peter Brabeck-Letmathe, chairman of Nestle, said today at the World Economic Forum on East Asia in Kuala Lumpur. ``It distorts the free market and therefore it has a negative impact on the availability of food. I am absolutely against food subsidies.''

Governments need to set aside more land for food production and give direct assistance to the poor, Brabeck told reporters. Subsidies normally help the rich more than the poor, he said at the start of the two-day forum in Malaysia.

Brabeck's calls follow yesterday's warning by finance ministers from the Group of Eight nations that spiraling food and fuel costs present a ``serious'' threat to the global economy. Prices of corn, wheat, rice and palm oil have soared, putting millions in Asia at risk, according to the Asian Development Bank.

World Economic Forum Chairman Klaus Schwab and co-leaders of the forum said today that the prices of food and energy, as well as a possible shortage of water, were among the top risks facing the world.

``The issue of energy and natural resource constraints is the risk that may be the most profound in its impact on Asia's economic and social future,'' said Ralph Peterson, one of the co-chairs of the World Economic Forum on East Asia and chief executive officer of CH2M Hill Cos.

Postpone Rebound

U.S. Treasury Secretary Henry Paulson said June 14 that surging oil costs may postpone a rebound in the American economy, which still faces ``challenges'' from the housing slump and credit crunch.

The price of oil reached an unprecedented $139.12 a barrel on June 6 and food costs from corn to rice to soybeans have set record highs this year, triggering protests, hurting expansion and fanning inflation around the world. Central banks are already shifting toward tighter monetary policy and some governments are contemplating lower taxes to compensate.

With the price of oil more than doubling in the past year, the G-8 ministers urged producing nations to increase output and enhance their refinery capacity and pushed markets to promote transparency. The International Monetary Fund and International Energy Agency were told to analyze the surge in crude prices and study its economic impact.

Malaysian Protest

Asian nations, many of them reliant on the U.S. for exports, are grappling with record crude prices that have raised the cost of subsidies and caused losses for refineries. Malaysia, Indonesia, India and Taiwan have already raised fuel costs and South Korean truckers went on strike on June 13, following similar protests stretching from Thailand to Spain.

At least 2,000 protesters on June 13 marched through Kuala Lumpur, where the World Economic Forum is being held, to protest this month's 41 percent surge in fuel prices. Malaysia's government caps the price of a range of food products from cooking oil to flour.

Price controls on basic commodities such as food and fuel have long been policy tools in nations with large populations living in poverty, including India and Indonesia. Governments have also relied on such measures and subsidies to keep inflation contained.

Balanced Budget Delay

Philippine President Gloria Arroyo's government last month said it would delay its plan to balance the budget to 2010 as it boosts rice subsidies and investment to spur growth. Arroyo also reduced power, toll and mobile phone rates while creating subsidies for public transport and programs to help the poor buy rice and pay electricity bills.

Still, as prices increase, other governments are forced to reduce subsidies to reduce the impact on their budgets. In Indonesia, the government said it may stop subsidizing makers of soybean-based food products next year and discontinue a policy that helps poor families to buy cooking oil.

The inflationary outbreak is grabbing the attention of central banks after 10 months in which they focused on insulating growth from the credit squeeze. The Federal Reserve is set to this month leave its key interest rate at 2 percent after seven cuts since September. The European Central Bank may raise its main rate to 4.25 percent in July.

To contact the reporters on this story: Angus Whitley in Kuala Lumpur at awhitley1@bloomberg.netShamim Adam in Kuala Lumpur at sadam2@bloomberg.net

Last Updated: June 15, 2008 00:22 EDT