Food inflation in focus amid lofty crop price outlook

CHICAGO (Reuters): Grain prices will likely remain at elevated levels at the end of this year, a Reuters Poll showed, providing little relief to food prices while continuing to challenge policymakers battling to tamp down inflation.

Many analysts contend that the era of cheap food may well be over as rising crop production struggles to keep pace with soaring global demand, particularly from the mushrooming middle class populations of developing nations like China and India.

But experts do not expect a repeat of the late-year grain market rallies of 2010 which ignited record food inflation that stirred popular unrest in the Middle East and North Africa which toppled regimes in Egypt and Tunisia.

The UN Food and Agriculture Organization’s index of food prices hit a record peak in February, stirring fears of a repeat of the 2007/08 global food crisis which stirred food riots and forced millions into hunger.

Governments have progressively taken steps to rein in soaring costs for staples that disproportionately impact the world’s poor, including the systemic releases of state grain stocks in China or the construction of grain silos in India.

Much will hinge on weather in the U.S. Farm Belt this summer as near-perfect crop conditions are needed in the world’s top grain exporter to soothe markets on edge over shrinking stockpiles of corn and soybeans and rapidly rising demand for food.

Debt problems in Europe and the United States will also play a role, which if left unresolved could tip the world into another recession such as the one that eroded grain prices beginning in late 2008.

Corn seen rising

Prices of corn – a cornerstone of the food chain that impacts the cost of meat, milk, and eggs – are forecast to end 2011 at $6.89 per bushel, about 10 percent higher than a year earlier but short of June’s all-time high of nearly $8. Strong demand from the livestock and ethanol producers and concern over crop yields in the United States, the world’s largest producer and exporter, would lead to the third consecutive annual increase in corn prices.

“I generally look for relatively high prices come year’s end with no major harvest correction,” said PFG Best analyst Tim Hannagan, referring to corn.

“All end-users of grain such as ethanol producers, feeders, food processors and exporters will be aggressive buyers at harvest time to insure they have their share of inventory as insurance for expected tight stocks and strong demand in 2012,” Hannagan said.

Soybeans

Soybeans, which are crushed to produce soy meal, also a livestock feed, and soy oil used for cooking and to make biodiesel fuel, were seen at $13.92 a bushel at the end of the year, near 2010’s lofty close of $13.94.

Soy oil prices themselves were seen rising about 3 percent year-on-year at 59.73 cents per lb, according to the average analyst forecast.

The wild card for corn and soy prices may be China, the world’s top soybean importer and an emerging importer of corn, as policy makers there walk the line between red-hot economic growth and soaring inflation.

“Both corn and soybeans have potential to go substantially higher if Chinese growth stays on track to provide firm demand.

However, it may take time for that demand to develop, especially because China has shown the ability to be patient and buy only at lower price levels,” said Bryce Knorr, senior editor of Farm Futures Magazine.

Wheat

Wheat, a food staple grown in nearly every nation around the world, was forecast to ease to $7.53 a bushel, down about 5 percent from the prior year as global stocks rebound following a severe drought last year in key exporter Russia and neighboring countries.

But experts warned that wheat’s downside may be limited as cattle, hog and poultry producers around the world increasingly use wheat as an alternative feed grain instead of costly corn.