5 Jan 2011

World food prices hit all-time high

Washington Correspondent

World food prices have hit record levels according to the UN. As Business Correspondent Siobhan Kennedy explains the rise will fuel fears of a repetition of the food crisis three years ago.

World food prices rose to a record high in December, the United Nations has confirmed, surpassing levels last seen in 2008 when soaring prices sparked riots in many countries.

And the UN’s Food and Agricultural Organisation – the FAO – has warned that prices could rise further still. The FAO said its monthly food index climbed to 214.7 points, above the all-time high of 213.5 set in June 2008, driven largely by increases in the price of meat and sugar, as demand grew in Asia.

The rise will fuel fears of a repetition of the food crisis of 2007/2008 when there were riots in poor countries like Haiti and Bangladesh as prices for agricultural commodities like wheat and rice soared.

But so far, it’s other foods, like sugar, oilseeds and meat that are driving the increase, the FAO said, downplaying the chances of fresh riots. Although the price of wheat is steadily rising – driven by poor harvests and ban on exports by Russia last year after severe draughts.

The worry is that rising commodities prices will push up global inflation, which in turn could cause central banks to raise interest rates to counter it.

The worry is that rising commodities prices will push up global inflation, which in turn could cause central banks to raise interest rates to counter it. And that would have a severe impact on global growth, though it is too early to say how or when central bankers might react.

In the meantime, consumers will likely see increases in food prices across the board, although in the UK, many supermarket chains have opted to absorb rising commodity costs as a way to stay competitive. Though there may be a limit as to how long they can hold out. That, and the effect of the increase in VAT to 20 per cent earlier this week, could mean consumers are in for a much tougher ride.

The surge in food prices is compounded by the rise in oil prices, which have been steadily moving up since November. Although they fell on Tuesday and today, the International Energy Association has warned that high prices threaten to derail the economic recovery among developed countries this year.
Fatih Birol, the IEAs chief economist, said oil prices were entering a dangerous zone.

He told the Financial Times newspaper: The oil import bills are becoming a threat to the economic recovery. This is a wake-up call to the oil consuming countries and to the oil producers.