By Kim Hyun-cheol
Staff Reporter
Worries over inflation caused by spiking in the prices of agricultural commodities, so-called agflation, are emerging, even though they have not yet reached a serious level.
The Food and Agriculture Organization (FAO) reported Thursday that food prices have been rising worldwide.
A number of possible causes, such as the low level of cereal stocks, crop failures among major exporters and increased oil prices, can lead to a sudden hike in food prices, it said.
The FAO food price index, consisting of the export prices of 55 food products, jumped 16 percent to 168 in the first 11 months of this year.
Recent market signs are much bleaker. Global food costs jumped 7 percent in November, the most since February 2008, according to the organization.
A lot of food commodities will be under upward pressure next year. Bloomberg reported that grade-B Thai white rice, a benchmark in the market, may rise 63 percent to $1,038 per metric ton from $638 mainly due to a rice crop shortfall in India.
Stockpiles of corn and rice will drop before the 2010 harvest for the first time in three years, according to the U.S. Department of Agriculture. It also forecasts sugar inventories will drop to the lowest level since 1995.
The prospect of food price inflation cannot be ruled out next year since many of the factors that contributed to higher prices in 2007 and 2008 are still lingering, Barclays Capital said.
But there are some positive views.
World cereal stocks today are more stable than two years ago, with the stock-to-use ratio reaching almost 23 percent, 4 percent higher than the 2007 to 2008 period. The balance of world supply and demand is not even across all commodities, with some markets facing tighter conditions than others, the FAO said.
Agflation from 2007 to 2008 was mostly attributable to fast-growing demand from emerging markets and the production of bio-diesel fuels. A reduction in crops from major food-producing countries due to abnormal climate changes and the actions of speculators fueled the price surge.
"Structural factors mostly caused the hike, and that means food prices could jump any time while the economy is reviving," said Cho Hye-sun, an analyst at Taurus Investment & Securities.
"Inflation is manageable with various countermeasures including an exit strategy amid a reviving economy. But it gets much harder when it includes more structural factors."
Some say food price inflation appears to be plausible, considering that the market is still small with a limited number of participants.
"With the U.S. dollar remaining weak and the global economy improving, it is possible for governments and investors to rush to the commodities market to averse worsening inflation," Samsung Economic Research Institute research fellow Kim Hwa-nyeon said.
"Price changes of food and oil go hand in hand. But since oil prices have already risen substantially, the hike in food materials could be steeper than that of oil in the first half of next year," he said.