A Global Scare in Food Prices

World food prices are back at levels last seen during the 2008 food crisis, when riots spurred bans on food exports in the most afflicted countries. The question now is whether the price surge of late 2010 will spill into 2011.

The U.N. Food and Agriculture Organization's index of world food prices rose 32 percent in the second half of 2010, topping the peak of June 2008. Low rainfall in Russia, Kazakhstan, Europe, and South America parched crops, while floods in Canada inundated them. China's growth spurred record demand for sugar and soybeans. Excessive rain in India has damaged the onion crop, driving the wholesale price of this staple up 40 percent in the 12 months ended Dec. 18. Developed countries' grain stocks—the reserves that keep consumption steady when harvests disappoint—will probably decline 25 percent in the 2010-11 crop year, according to the FAO.

And 2011? "We are coming out of a two-year period of relatively low food price inflation due to the recession," says Ephraim Leibtag, U.S. Agriculture Dept. food price forecaster. "Increased global trade coming out of the recession, some increased consumer demand, and higher energy and commodity costs for food production" will boost prices. The USDA expects a rise in oil prices to lift demand for ethanol by 5.1 percent in the U.S., which will affect corn prices. The agency foresees U.S. food inflation of 2 percent to 3 percent, the highest since 2008.

The rest of the world may feel pressure, too. Drought in Argentina and Brazil, the next biggest corn and soybean exporters after the U.S., and developing-world growth may push prices up further this year, says Gary Blumenthal, president and chief executive officer of World Perspectives, a Washington (D.C.) agricultural consultant. "Imperfect weather has collided with perfect food demand," he says.

The FAO does not see demand falling. "Consumers may have little choice but to pay higher prices," it says in its November price outlook. "With the pressure on world prices of most commodities not abating, the international community must remain vigilant against further supply shocks in 2011."

One good sign: "Many food-importing countries have improved their output," says Abdolreza Abbassian, senior economist for the FAO. Record crops were harvested in most countries of Eastern, Western, and Central Africa in 2010. Yet at the same time, the FAO identifies 20 African countries in crisis that still need outside food assistance.

The bottom line: Food prices, especially for wheat and other grains, have surged back to 2008 levels. The coming year may see prices rise further.

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