Food and Oil prices Set to Rise to Record Highs

UN Food and Agriculture Organisation (FAO) has warned that there are alarming signs that food prices that hit an all-time high last month are likely to climb even higher due to poor global weather activity.

There are also signs that the basic needs of the world's population are reaching a critical point with a decline in arable land. This may mean that the high prices will continue due to increasing demand.

Oil prices are in a danger zone which is again threatening the global economic recovery.

Prices of foods including dairy, cereals, meat and sugar are higher than they were in 2008, when a food crisis sparked riots in Cameroon, Egypt and Haiti.

The UN warned while in the last crisis in 2008, prices rose quickly and fell quickly, the basic situation has changed because the supply and demand relationship as have changed fundamentally. As stocks decline and demand increases, most analysts predict prices will continue to rise this year and have widespread impact.

Food riots, global inflation, geopolitical tensions and increasing hunger among the planet's poorest people are the likely effects of a new surge in world food prices. The UN's index of food prices – an international basket comprising wheat, dairy produce, corn, meat and sugar – stands at its highest level since the index started in 1990, going above the peaks seen during the 2008 food crisis. Global food prices have risen continuously for the last sixth months. Wheat has almost doubled since June, pork is up by a quarter since the beginning of 2010, sugar is at a 30-year high.

The trends have already affected the UK where the jump in food prices in November was the highest since 1976. Meat and poultry were up 1 per cent and fruit by 7.5 per cent in one month. Food producers have been told to expect the wheat price to jump again this month, hitting bakers and the makers of everything from biscuits to pasta. This will add to pressure on the Bank of England to raise interest rates to control rising prices. Higher mortgage bills by the end of the year, increases in electricity prices will add to the unpleasantness facing the English population from a year of tax hikes and below-inflation pay rises.

However, the biggest impact of the food price shock will be felt in countries in the developing world where staple items command a much larger share of household incomes.

In addition, long-term trends associated with growth in population and climate change may mean higher food costs become a permanent feature of economic life. The unpredictability of weather activity, which many experts link to climate change is part of the problem.

One concern, especially in Ukraine and Russia, is that the cold winter, following disastrous droughts and summer fires, will have damaged the seeds for next year's crops, leading to an even more acute crisis than seen last year. Government policies, especially the export bans imposed by nervous Indian and Russian governments, have exacerbated such problems in world markets.

Meanwhile, the growing consumption in the booming economies of east Asia and the pressure exerted by the demand for crops for biofuels rather than food, especially in the US, is adding to the unprecedented pressure on world food supplies.

The latest surge in crude oil prices adds to the risk of turmoil. Many experts say oil prices show few signs of abating, and the price of a barrel is set to breach the $100 barrier again soon. Opec officials yesterday said they were happy with such a level. Oil peaked at just under $150 a barrel in 2008; any sign of renewed tension in Iran would see the price exceed that. Higher oil prices add to food price inflation by increasing transportation costs.

The interplay of rising fuel prices, the growing use of biofuels, bad weather and soaring futures markets drove up the price of food dramatically in 2008, prompting violent protests in Mexico, Indonesia, Egypt, Cameroon and Haiti. Last year's spike was provoked mainly by the freakish weather conditions in Russia and Ukraine, but one of the underlying trends is the growing and changing appetites of east Asia.

As more Chinese enter the middle classes they tend to consume more meat and poultry, just as Westerners did at a similar stage in their economic progress. However, poultry and meat husbandry required at least two to three times the resources that grains do, while the drift towards the cities in China is reducing the yields of its farms. Similar trends are visible in the other fast-growing, populous nations such as India, Brazil, and Indonesia.

Countries that are poor and produce relatively little of their own food are most vulnerable to the food price shock – for example Morocco, Bangladesh and Nigeria, which are most at risk. Economists have also warned that the growing shortages of water and climate change are critical factors holding back any substantial growth in agricultural productivity to meet the growing demand.

Experts blame unfavourable weather conditions around the world for the fall in production. Many have attributed this to the effects of climate change.

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