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USDA long term forecast tempers price fears

By Clarisse Douaud , 05-May-2008

Commodity food prices are not going down anytime soon according to the United States Department of Agriculture (USDA), though it expects them to plateau as preventative measures are implemented and markets stabilize.

Last week, the department's chief economist, Joseph Glauber reported to the US Congress' Joint Economic Committee and attributed the recent dramatic spike in food prices to factors including economic growth in the US and abroad, weather conditions, energy prices, export restrictions, as well as new markets for alternative fuels.



Domestically, commodity price increases are not expected to affect processed food manufacturers and subsequent prices as much as consumers might imagine, because these goods draw from a variety of ingredients, of which agricultural products make up only certain share.



"Higher commodity prices are contributing to the increase in food price inflation, even though, on average, the farm value accounts for only about 20 cents of each dollar spent on food," Glauber told Congress last week.



"For highly processed foods, such as cereal and bakery products, the farm component of the retail value is less as processing costs account for a higher portion of the retail value."



However, the impact on prices at the checkout has been much larger for foods such as eggs, fruit and vegetables, he said.



In 2007, the Consumer Price Index (CPI) for US food rose by four percent.



"This was the largest annual increase in retail food prices since 1990. In 2008, the Department of Agriculture's Economic Research Service (ERS) projects retail food prices will increase by four to five percent," said Glauber.



Based on higher prices for wheat, rice, corn and higher marketing costs, the CPI for cereal and bakery products increased by 4.4 percent in 2007 and is forecast to rise 7.5 to 8.5 percent in 2008.



According to Glauber's statement, across this period US food uses for domestic rice, wheat and corn production will account for approximately two-thirds, half and 10 percent of demand respectively, while other uses drawing on this production include animal feed, seed, biofuels and exports.



Global economic growth is a major factor in the demand for US agricultural exports. In 2007, these exports were worth $81.9bn, and for 2008 this is expected to rise to a record $101bn, according to USDA.



"Higher incomes are increasing the demand for processed foods and meat in rapidly growing developing countries, such as India and China," said Glauber. "These shifts in diets are leading to major changes in international trade."



Glauber cited the example of China's corn exports, which are projected to fall from 5.3 million metric tons between 2006 and 2007 to 0.5 million metric tons for 2007 to 2008, as more corn is needed domestically for animal feed.



The least predictable factor contributing to increased commodity prices is climate. Weather events impacting agricultural commodities have included a large scale drought in Australia, as well as drought in Canada, Ukraine, the EU and US.



The current price situation has led some countries to place export restrictions on their commodities. For instance, Argentina, China, India, Russia, Ukraine, Kazakhstan and Vietnam have added extra taxes to these goods.



"By reducing supplies available for world commerce, these actions only exacerbate the surge in global commodity prices," said Glauber. "Export restrictions are ultimately self-defeating, reducing the incentives for producers to increase production."



The economist also listed other costs associated with retail food prices, such as higher costs for food marketing, transportation, and processing, and record prices for diesel fuel, gasoline, and natural gas.



A domestic push for biofuels and energy self-sufficiency has diverted large amounts of corn into ethanol production.



Nonetheless, USDA forecasts that food markets will accommodate for these various factors, which will eventually stabilize retail food prices.



"The Department's current long-term projections indicate that retail food price inflation will gradually moderate over the next several years," said Glauber.



However, time is needed to respond the increased demand and the subsequent impact on food prices.



"Yield growth and supply response both in the US and abroad will help moderate crop prices in the long run, but for the near term, tight supplies will keep markets volatile with much attention paid to growing conditions worldwide."


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