Food costs at records, UN warns of volatile era

MILAN/WASHINGTON (Reuters) - Global food prices tracked by a U.N. agency hit their highest level on record in January, a problem set to worsen after a massive snowstorm in the United States and floods in Australia.

The United Nations said on Thursday its Food and Agriculture Organisation Food Price Index rose for the seventh month in a row to reach 231 in January, topping the peak of 224.1 last seen in June 2008. It is the highest level the index has reached since records began in 1990.

"These high prices are likely to persist in the months to come," FAO economist and grains expert Abdolreza Abbassian said in a statement.

Wheat underscored the problem affecting commodity prices around the world, settling on Thursday slightly lower after hitting a 2-½ year high earlier in the day. Corn and soybeans, which also have been hovering near long-term highs, also declined.

Global food inflation is a mounting worry for world leaders. It has contributed to political unrest in countries with high poverty rates and unemployment, as evidenced in the toppling of Tunisia's president in January. That unrest has spilled into Egypt, Yemen and Jordan.

In response, some countries are increasing food imports and have built stockpiles to meet their domestic needs. Among them is Algeria, wary after food riots in early January. It has made huge wheat purchases to avoid shortages, and on Thursday it announced plans to lift a 19-year-old state of emergency in a bid to avert spreading protests.

In Central America, Honduras have frozen prices on many basic foodstuffs despite complaints from farmers. El Salvador is increasing anti-poverty programmes by 30 percent, and Guatemala is considering slashing import tariffs on wheat and is handing out food and cash vouchers to landless peasants. World Bank President Robert Zoellick in a Reuters interview urged world leaders to "wake up" to the dangers of rising food inflation, a problem said he sees no relief from.

"We are going to be facing a broader trend of increasing commodity prices, including food commodity prices," he said.

Supply the key

Catastrophic storms and droughts have slammed the world's leading agriculture countries in recent months, including flooding and a massive cyclone in Australia and a powerful winter storm that swept across the United States.

Dubbed "Stormageddon," one of the biggest snowstorms in decades dumped up to 20 inches (51 cm) of snow in some parts of the U.S. grain belt this week, paralysing the shipment of grain and livestock.

A deep-freeze forecast for the Midwest, the bread basket of the United States, threatens the region's winter wheat because it may lack sufficient insulating moisture to withstand the cold.

Sugar prices also have surged to three-decade highs on fears of damage Cyclone Yasi would bring to the Australian cane crop. Prices for Malaysian palm oil, a cooking staple in the developing world, hit 3-year highs on flooding.

Big companies have had to adjust to higher raw material costs. Kellogg Co (K.N), the world's largest breakfast cereal company, said on Thursday it has boosted prices on many of its products to offset rising costs for ingredients such as grains and sugar.

"Today's announcement by the Food and Agriculture Organisation should ring alarm bells in capitals around the world," said Gawain Kripke, a policy and research director for Oxfam America, an international development group.

"Governments must avoid repeating the mistakes of the past when countries reacted to spiralling prices by banning exports and hoarding food. This will only make the situation worse and it is the world's poorest people who will pay the price," he said.

Janis Huebner, economist at Germany's DekaBank said inflation partly fuelled by increasing food prices could in turn trigger interest rate rises in several countries this year.

"This could mean a slowing down of growth in the countries which raise their interest rates," he said. "This could involve Asian countries and other regions, this would somewhat brake growth but I do not expect a hard landing."

Stock building

Some countries, particularly where food prices loom large in household budgets, have been building up food stocks to contain prices — and to limit the political and social fallout.

During the last food price crisis, the World Bank estimated that some 870 million people in developing countries were hungry or malnourished. The FAO estimates that number has increased to 925 million.

"2008 should have been a wake-up call, but I'm not yet sure all the countries in the world that we need to support this have woken up to it," the World Bank's Zoellick said.

Indonesia, Southeast Asia's biggest economy, last week bought 820,000 tonnes of rice, lifting rice prices, while suspending import duties on rice, soybeans and wheat.

Algeria last week bought almost 1 million tonnes of wheat, bringing its purchases to at least 1.75 million since the start of January, and ordered a speeding up of grain imports.

On a day of bloody confrontation in Egypt, where protesters are demanding an end to the 30-year rule of Hosni Mubarak, the U.N. World Food Programme's Executive Director Josette Sheeran said the world was now in an era where it had to be very serious about food supply.

"If people don't have enough to eat they only have three options: they can revolt, they can migrate or they can die. We need a better action plan," she said.