UN calms fears of new food price spike
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Emerging Markets

UN calms fears of new food price spike

Food prices are set to end the year lower than they began because of weaker demand and greater supply, experts say

Food prices look set to decline this year because of a combination of a weak economic outlook and an increase in supply, calming recent concerns of a repeat of the devastating price spike of 2007 and 2008.

The Food and Agriculture Organization (FAO), the United Nations’ food security agency, said that pressure from supply and demand pointed to prices easing over the coming year.

The upbeat outlook follows two successive monthly rises in the FAO’s own food price index that had fuelled concerns that food costs were on the rise.

Food prices rose by an average of 1% in the month of February after a 2% monthly rise in January, the index showed.

FAO grain analyst Abdolreza Abbassian told Emerging Markets that the rises had followed a sharp fall in December and were due to factors such as the fall in the dollar, the rebound in equity markets and news of poor harvests in Latin America.

“We see that the supply situation in 2012 - and that feeds through to 2013 - is better than in 2011,” he said. “We would expect prices to be lower but that does not explain what happened in January and February.”

Abbassian stressed that the FAO’s outlook assumed normal weather conditions. He pointed out that unexpected droughts were a key contributor to the 2007-08 price spike. “The weather is beyond anyone’s prediction,” he said.

His comments echoed remarks by FAO Director General Jose Graziano da Silva who told a conference in Hanoi on Thursday that rising unemployment in rich countries would put a brake on demand. “We have started to see a decline in food prices,” he said.

Abbassian said weaker demand was a major factor. “The economic situation has not picked up and developing countries are cutting growth forecasts which would argue against sharp price rises.”

According to analysts at Standard Chartered bank wheat stocks are at “elevated” levels while global rice prices are likely to face downside pressure owing to rising supply

While the Latin American region as a whole is a net food exporter, food price inflation still has a detrimental impact on the income, nutrition, and health of poor consumers.

Food exports from Latin American and Caribbean countries made up 16.3% of total overseas sales in 2010, according to the most recent data from the World Bank.

While a decline in food prices will hit Latin American companies in the short-term, a survey of more than 100 senior executives in the food and agribusiness sector around the world showed that the region is seen as the premier growth area.

Latin America, Russia and the CIS are seen as the regions that offered the most opportunities for sourcing and supply over the next two to five years, they told global law firm Norton Rose.

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