Thursday, July 7, 2011

Food Prices Near Record Highs

LONDON—World food prices edged up in June to near their record highs as a sharp increase in sugar prices outweighed a slump in the grains complex, the United Nation's food body said Thursday.

The Food and Agriculture Organization's food price index, which covers prices of a basket of commodities, rose 1% to 234 points last month, up 39% compared with the same time last year and just below the record 238 points hit in February.

The main driver of the increase was a rise in the FAO's sugar index, which increased by 14% on month to 359 points. Prices have surged from their May lows due to concerns that aging cane and poor weather may cut production in top producer Brazil below last year's level.

U.K. sugar merchant Czarnikow this week reduced its estimate for Brazil's harvest to 535 million metric tons of cane, down 40 million tons from its initial forecast and less than the 575 million tons harvested in the 2010-11 crop year, joining a raft of other analysts who have lowered their expectations for this year's crop.

Cereal prices, however, pulled back slightly as improving weather eased fears over the size of the harvest in Europe and the U.S. and the resumption of exports from Russia. The FAO Cereal Price Index averaged 259 points in June, down 1% from May but still 71% higher than in the same month in 2010.

Grain prices plummeted at the end of June when the U.S. Department of Agriculture released surprising figures upgrading its estimate for domestic corn supplies. Abdolreza Abbassian, secretary of the FAO's Intergovernmental Group on Grains, said the slump in prices may be felt more in the coming months.

"To see prices coming down in July would not surprise me given the trends of the previous weeks," he said. "The figures we now have for cereals are very close to our previous forecast" in May.

The FAO raised its estimate for world 2011-12 cereal production by 11 million tons to 2.31 billion tons in response, up 3.3% compared with last season. World cereal stocks at the close of the crop season in 2012 are now expected to stand six million tons above their opening levels.

Sugar prices too are expected to fall in the coming months. Forecasters still expect a large surplus this year, even with a fall in Brazil's harvest, and the advent of the Northern Hemisphere harvest in the coming months should help world supplies.

Still, Mr. Abbassian warned that any pullback in world food is likely to be only slight and prices look set to stay at historically-high—and volatile—levels well into 2012. Grain markets are also likely to remain nervous until more is known about corn yields in August, he added.

"For the foreseeable future we will be still vulnerable to weather shocks affecting prices more than we're used to because we've got no buffer," he said.

The FAO Dairy price Index averaged 232 points in June, virtually unchanged from 231 points in May. The FAO Meat Price Index averaged 180, marginally up from May as poultry meat prices rose 3% to a new record, while pig meat prices declined.

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Online.wsj.com

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