Global food inflation to return after brief respite

CHICAGO,  (Reuters) – Red-hot food inflation that  has vexed policy makers around the world seemed to take a  breather last month, when corn and wheat prices tumbled on  reports that crop shortages were easing.

The sell-off was also driven by global economic worries  that prompted funds to exit grains in droves.

But prices are climbing again, and have already made up  half of June’s losses. The sell-off masked an unnerving  reality: The world remains just one Midwest heat wave or global  crop disaster away from another damaging price run-up that  could revive concerns over food security.

With grain supplies still tight and worldwide demand  growing quickly, food price inflation looks set to remain high  and even worsen in the years ahead.

It will likely take years of near-perfect crops to  replenish global stockpiles of corn and wheat, the staples of  the world food system, and minimize the risk of price spikes.

“The bottom line remains that on a worldwide basis, the  interest for these commodities, grains in particular, has  evolved over the last five to seven years such that we need big  crops all the time,” said Bruce Scherr, chief executive of  Informa Economics.

Stockpiles of corn in the United States, the No. 1  producer, are forecast to drop to 16-year lows — 870 million  bushels — by summer 2012. As a percentage of use, that would  be the second-tightest since the Dust Bowl devastated crops in  the 1930s.

This time around, crops are historically large, but demand  is also surging due to Chinese consumers and U.S. ethanol  producers.

As for wheat, the USDA projects world inventories will  improve by June 2012 to reach 182 million tonnes, up from their  26-year low of roughly 126 million in 2007/2008 during the last  run-up in prices. But growing demand, notably from the  livestock sector, will keep prices high, as will a scarcity of  high-protein, high-quality milling wheat.

It all adds up to pressures ahead. The United Nations’ Food  and Agriculture Organization said this month that in 2011/12,  improving crops should push world food prices down from a year  ago — but not dramatically.

“The upward pressure on some of these food prices has maybe  been tempered for the minute,” said Bill Lapp, president of  Advanced Economic Solutions, a commodity analytical firm based  in Omaha, Nebraska. “But I don’t think it has gone away.”

STRONG CORN FUNDAMENTALS

U.S. corn futures at the Chicago Board of Trade set a  record high near $8 a bushel on June 10, then plunged 23  percent in the next three weeks. CBOT corn fell 15.8 percent  during June, its biggest monthly drop in two years.

Most of the sell-off came the last day of the month after  the U.S. Department of Agriculture stunned the trade by  reporting much larger U.S. corn plantings and old-crop stocks  than analysts had expected.

But over the past week and a half, prices have recouped  half those losses on forecasts for hot weather that threaten to  crimp the crop, which already faced widespread planting delays  due to heavy spring flooding.

“We do have more breathing room for corn and soybeans and  wheat than we had, relative to expectations,” Scherr said.

“But we’ve got a whole long summer in front of us. We need  solid yields on these larger acreages to make sure we have  ample crops, because ample need crops are needed to meet these  growing demands,” Scherr said.

Patrick Westhoff, director of the Food and Agricultural  Policy Research Institute at the University of Missouri,  concurred, recalling how late-summer heat trimmed U.S. corn  yields in 2010, dashing hopes for a bumper harvest.

“Last year at this time, we had not seen the big run-up in  corn prices yet. We were still expecting a near-record crop.  and that is not where we ended up,” Westhoff said.

“It’s just a reminder that things can always surprise you,”  Westhoff said.

CHINA A WILD CARD

On the demand side, China remains a wild card for the corn  market. In 2010 China became a net importer of corn for the  first time in several years, and the country is expected to  import up to 5 million tonnes of corn in 2011, the U.S. Grains  Council said last month.

“Unlike in 2008, (Chinese) corn stocks have been drawn down  appreciably. On any kind of a break in the market, they are  going to be buyers to restock those reserves,” said Rich  Feltes, vice president for research with R.J. O’Brien.

“I would say a late-2008 plummet in commodity prices is not  likely for that reason,” Feltes said.

China bought as much as 1.6 million tonnes of new-crop U.S.  corn in recent deals as CBOT prices slumped. Talk that more  business could be in the works helped lift futures off the  late-June lows.
“We don’t expect Chicago corn or soy prices to fall further  by a big margin. Even with a good weather later, U.S. soy  supply could have the tightest stocks in years,” said Shi Yan,  chief analyst with Xinhu Futures.

Federal mandates that require growing use of ethanol in  U.S. fuel will also underpin demand. USDA this month projected  that for the first time, ethanol plants in 2010/11 would  consumer more corn than cattle, hogs and poultry.

WHEAT

CBOT wheat staged an even bigger slide than corn, falling  37 percent in nearly five months after hitting a 2-1/2-year  high in February. Its 25 percent fall in June was the biggest  monthly loss since 1974. But it too has rebounded abruptly.

Wheat suffered a similar investor exodus as corn and other  commodities in the second quarter of 2011, when the  Reuters-Jefferies CRB commodity index staged its biggest drop  since the collapse of Lehman Brothers triggered a global market  meltdown.

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