Food prices could rise again in 2013 as US drought continues

Global food prices eased slightly in the second half of 2012. Good harvests in the southern hemisphere, particularly soy and corn in Brazil, together with a drawdown of stocks, partly offset the impact of lower than expected supply from the drought-stricken US.

However, prices remain high and could increase further in 2013, according to analysis by QNB Group. Existing concerns include record temperatures in Australia this month, signs that the US drought may persist for another year and low levels of food stocks. If climatic problems develop in any other key producing areas then prices could reach new record levels.

Global food prices have been both high and extremely volatile in recent years. The situation is particularly serious in regards to grains--such as corn, wheat and rice--which provide the majority of global food calories. Last summer wheat prices, for example, shot up by over 50 per cent in the space of six weeks when the extent of the US drought became apparent. The grains' component of the Global Food Price Index, produced by the UN Food and Agriculture Organisation (FAO), remains close to record levels. Meat prices are also close to historic highs, in part because of the cost of grains for animal feed.

Although the FAO's overall food index in 2012 was on average 7.0 per cent below the 2011 level, it was still 5.9 per cent above the previous record set in 2008. The easing compared with 2011 was largely due to falls in some items such as sugar, which was down by 17.1 per cent on average over the year, and dairy, down 14.5 per cent. However, grains were only down 2.4 per cent, because of a period of weaker prices first half of the year. In the second half of the year, by contrast, grain prices were 8.8 per cent higher than the same period in 2011 and only just below the record average for a six-month period, set in mid-2008.

Food prices are of particular concern to the poorest third of the global population who spend over half of their income on food, and to countries that are highly dependent on food imports, including many Middle East states.

The drought in the US, the most widespread since the devastating Dust Bowl period in the 1930s, began widening and intensifying in June 2012. The proportion of the country (excluding Alaska) that was experiencing drought nearly doubled in the space of a few months, peaking in September.

The area experiencing drought has only fallen slightly to 57.6 per cent of the country in late January, compared with an average of 31.3 per cent during the 2000s. Moreover, the amount of land undergoing the most exceptional category of drought only peaked a few weeks ago, at 6.8 per cent of the land area (nearly seven times the average in the 2000s). This is because winter rains have been more limited than usual in many places. As a result, the winter wheat crop appears to be growing poorly and there are signs that the drought could persist into the spring and summer, damaging other crops.

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