DEMAND TO DRIVE FOOD PRICES HIGHER / THE FINANCIAL TIMES COMMODITIES ( HIGHLY RECOMMENDED READING )

Demand to drive food prices higher

By Javier Blas

Published: February 2 2011 10:49

The worst effects of the current spike in food inflation are still to be felt, both in terms of rising prices and their potential to cause civil unrest.


This is the main message I take home from two days of discussion in Geneva with traders, senior officials and analysts during the Global Commodities Forum, a conference organised for Unctad, the United Nations trade and development agency, for the second consecutive year.


The cost of commodities such as wheat, corn and soyabean is likely to surge even more as demand remains very strong, while some poor countries hoard supplies and the weather continues to be a handicap, particularly in Latin America.


Take wheat. The cost of the cereal is at a two-year high of €260 a tonne in Paris. But some traders believe that a spike to €300 a tonne, close to the levels seen during the 2007-08 food crisis, is very likely. Politics is going to play a key role. The consensus among traders representing the biggest participants in the industry is that Russia will maintain some form of export restrictions beyond June 2011, when the current ban expires. Some believe Moscow will extend the export ban for another six to 12 months, while others think it will be replaced by a system of export quotas.


The cost of wheat, together with rice, is critical for global food security because it is a staple for poor countries. So if prices move higher, expect to see more food riots.


As prices rise and countries fear further increases, some are hoarding. Cargill, the world’s largest agricultural commodities trader, confirms what many in the market are speculating.


“We have seen in some countries additional buying going on from [the Middle East and North Africa],” says Roger Janson, head of the group’s European grain and oilseeds trading in Geneva. He says the main reason for the spike in buying appears related to the “geopolitical” situation.


Mr Janson, who participated in one of the conference panels, is among the few speaking publicly about soaring agricultural prices. But his views are largely echoed by other senior traders in private. He points to very tight stocks for corn and soyabean, and soaring demand from China and other emerging markets.


Many commodities and trade officials share that view. Pascal Lamy, the veteran French diplomat who heads the World Trade Organisation, told the conference that as global economic growth accelerates in 2011, demand for commodities will push prices higher still.


Some talked about speculation too, but the overall message from two days of talks is that the main factor behind the rally remains supply and demand.
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Copyright The Financial Times Limited 2011.