FAO sees energy, biofuel keeping world food costly

Enlarge Photo Sacks of different varieties of corn grain are seen at the "La Terminal" market in...

Thu, May 15 11:31 PM

By Randall Palmer

OTTAWA (Reuters) - World food prices should stay high because of rising energy costs and the use of biofuels, but they may ease after stocks are replenished, the Food and Agriculture Organization (FAO) said on Thursday.

Senior officials from the U.N. agency, testifying by video link to a Canadian Senate committee, cautioned lawmakers to consider the effects on world markets of any attempt to require a minimum content of biofuels in gasoline and diesel.

"Our message is, 'Please be aware'," said the chief of the FAO's trade and markets division, Ali Gurkan. "The actions that you take might have spillover effects outside your borders."

FAO commodities economist Abdolreza Abbassian said price rises for major grains in the past year have had less to do with food being diverted to biofuels than with below-average yields and drought.

But for the current growing season, he said corn prices will likely be supported by 20 million tonnes in new demand for ethanol, combined with lower U.S. plantings. Barring big weather problems, production should fall by 30-35 million tonnes from last year's record output in the United States, he said.

U.S. corn exports could fall by 10 million tonnes but that still would put downward pressure on corn stocks.

Dwindling stock levels since the mid-1990s have been a key reason for recent price volatility, Gurkan said.

"When you don't have enough to buffer any unusual weather events that can occur, (that) can lead to extremely sharp increases in prices," he said.

"So we would expect over the next couple or three seasons for the stocks to recover to their...optimum level given the conditions that we are actually experiencing now."

The need to replenish will keep prices high for the next few growing seasons, he said, adding that crude oil price levels will also be an important determinant.

Abbassian dismissed concern, raised by one senator, about there being a general food price bubble.

"Prices are coming down...They're coming down gradually, at times volatile, they come down and they make a little bit of a correction," he said. "So it doesn't have the characteristics of a burst."

He noted that wheat had "very quietly" lost about 50 percent, corn seemed to be starting that sort of a decline, and soybeans, sugar and dairy were more or less in the same boat.

"Rice is an exception. Perhaps one could qualify it as a sort of a bubble. It's a thin market. We have five exporters. Three of them don't want to sell anything. Obviously prices go through the roof. But the moment one of them decides to open up the border, perhaps it collapses," Abbassian said.

Rice prices have risen by as much as 500 percent in some local markets due to physical hoarding, even in countries where rice supplies were assured.

International financial market speculators have added to food-price volatility, particularly in the volumes they deal with, but were essentially following market fundamentals rather than leading the market, he said.

Gurkan said financial market speculation was unlikely to dissipate soon.

The officials' comments on Canada's biofuel plans related to government legislation that would provide for a minimum 5 percent ethanol content in gasoline and 2 percent renewable fuel in diesel. The two main parties back it, though support from the main opposition Liberal Party is softening.

Abbassian said the country should consider whether it will have less canola, wheat and barley for export and whether it might even have to import corn if the mandate goes through.

Canadian Agriculture Minister Gerry Ritz has said only a small fraction of Canadian land is being used for ethanol.

RECOMMEND THIS STORY