Cereal prices set to stay high, says FAO

By Charlotte Eyre

- Last updated on GMT

Related tags: Cost, Cereal, Agriculture

Production problems and low world stocks will keep global cereal
prices high this year, according to a new report, suggesting that
the food industry's struggle to maintain margins will not end any
time soon.

The UN's Food and Agriculture Organisation has confirmed what many in the food industry have been fearing; that high cereal prices will fuel inflation and lead to both manufacturers and consumers paying more for food. The cost of importing cereals is expected to soar faster than 2006 levels, FAO said, even though many countries will be importing fewer crops. "Supplies are much tighter than in recent years while demand is rising for food as well as feed and industrial use,"​ the Food Outlook report says. "Stocks, which were already low at the start of the season, are likely to remain equally low because global cereal production may only be sufficient to meet expected world utilization." ​Environmental concerns are also having a negative effect on food prices, the FAO warned, as high petrol prices are inciting governments into reserving land for biofuel crops. The effect of high prices will ripple through the food chain, the FAO said, making other commodities, such as bread, pasta, meat and milk, also more expensive. "Among all agricultural commodities, dairy products have witnessed the largest gains compared with last year, ranging from 80 per cent to more than 200 per cent,"​ the report said. Meat and poultry prices have also gone up by ten per cent, with higher feed costs compounding pressures from a growing demand for meat and more liberal trade barriers. Looking forward, the FAO suggests that the only solution is a simple one - plant more crops, as "a strong expansion in wheat production is bound to bring down wheat prices."​According to the Confederation of European Food and Drink Industries (CIAA), wheat prices in the EU have risen by 35 per cent this year, dairy products by 50 per cent, and sunflower oil by 25 per cent. The regions's reserve stocks are also running low, having shrunk to 2.5 million tonnes from 14 million tonnes, mainly composer of maize held in Hungary. Many food manufacturers have recently posted a drop in profits, with every one laying the finger of blame on the rising cost of grains, milk and meat. Sara Lee today reported a 40 per cent drop its quarterly profits compared to the same period last year, blamed on "historically high"​ commodity prices, while Kraft said operating profit for the fourth quarter 2007 fell 20 per cent. Some global food companies have managed to keep the books balanced, but Associated British Foods, Unilever, Arla, SAB Miller and PepsiCo have all had to restructure operations, increase marketing spend and raise consumer prices in order to offset higher costs. Passing on costs to consumers is a risky strategy, however, as many regulators and retailers are opposed to the idea. Earlier this month, German retailer metro pulled all Kellogg products of its shelves, saying that the cereal manufacturer's price hikes were "absolutely not acceptable." ​On a legislative level, the FAO has expressed concern that high prices could cause widespread hunger problems in third world nations, while the European Parliament last week promised to investigate the issue, hoping to protect farmers and consumers from unfair cost burdens.

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