Rabobank Sees Record Food Prices as Grain Costs Spur Meat Exits

World food prices will exceed the all-time high set last year as droughts in the U.S., South America and Russia push up animal feed costs, spurring meat and dairy farmers to cut herds, Rabobank International said.

Food prices tracked by the United Nations may climb 15 percent by June 2013, surpassing the record set in February 2011, Nick Higgins, an analyst at the bank, said in a report today. Grain and oilseed prices should “remain at elevated levels” for at least the next 12 months to ration demand and encourage crop farmers to boost planting, he said.

The worst U.S. drought in half a century followed dry weather in South America in the past season, sending corn prices to a record $8.49 a bushel on Aug. 10 on the Chicago Board of Trade and soybeans to an all-time high of $17.89 a bushel on Sept. 4. Gains in livestock have trailed rising feed costs because slaughtering animals creates a temporary glut in meat supplies, before output ultimately turns lower, Higgins said.

“The impact of higher grain and oilseed prices will be significant for the animal protein and dairy sectors as they are likely to be squeezed by higher feed costs,” Higgins said. “The full effect of this commodity price rally and the subsequent lower meat and milk output will be a multi-year rebuilding of herds, which will sustain high price levels.”

Hog Prices

Spot-market hog prices may rally 31 percent by the end of June, while slaughter-ready cattle prices increase 6 percent, Rabobank said. Grain prices may rise 3 percent by the end of June while soybeans drop almost 16 percent as production rebounds in South America, according to the report.

Higher food costs may be “less severe” on consumers than the food crisis in 2008 because global shortages have affected corn and soybean supplies more than “core food staples” including wheat and rice, Rabobank said. The U.S. State Department estimates that surging food costs triggered more than 60 riots worldwide from 2007 to 2009. Food prices also contributed to unrest that toppled governments in Egypt and Tunisia last year.

Food costs climbed to a record in February 2011, when the UN’s Food & Agriculture Organization food-price index peaked at 237.9 points on higher prices for dairy, grains and edible oils. The index rose 6.2 percent in July, the biggest gain since November 2009, and was little changed last month.

“Higher prices will stall the long-term trend towards higher animal protein diets in developing economies,” Higgins wrote. “Rabobank expects the developing world, with its high demand elasticity, especially to meat, to ration import demand of grains, oilseeds and meat most heavily, leading consumption growth to slow and even recede for a period as prices rise.”

Russia Outlook

Countries in East Asia or the Middle East may introduce “interventionist measures” including stockpiling or bans on exports as supplies tighten, while Russia probably won’t restrict shipments, Higgins said. Russia, which also is suffering from drought, may increase imports of grain from Kazakhstan to offset its “rapid pace” of exports this quarter, according to the report.

Corn prices may average $8 a bushel in the fourth quarter in Chicago, before rising to $8.10 in the first quarter of 2013 and $8.20 in the second quarter, Rabobank estimates. Soybeans may average $16.85 in the fourth quarter, $16 in the first quarter and $14.50 in the second quarter. Wheat may be $8.80 in the fourth quarter, $9 in the first quarter and $9.20 in the second quarter, according to the report.

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