Upward pressure on food prices stayed in focus on Thursday as a global cereal body sliced its estimate for the new U.S. corn harvest by 50 million tonnes, undercutting official domestic forecasts, and citing the worst drought in over half a century.
Benchmark prices of corn, a key ingredient in animal feed and a common cooking oil, have seen a fierce rally — jumping more than 50 percent in a month — as heat wilted crops.
The cereal price surge is fanning out to food importers and manufacturers, who now face major rises in costs, with dry weather also cutting crop prospects for key grain exporters in Eastern Europe's Black Sea region.
A record breaking U.S. corn crop had been anticipated after American farmers planted the most acreage in 75 years, but that expectation has withered due to the worst dry spell since 1956.
The International Grains Council (IGC) forecast the U.S. corn crop would total 300 million tonnes, significantly short of a previous projection of 350 million and now even worse than last year's 314 million. The IGC sees global stocks at the end of the season falling to a six year low of 115 million tonnes.
It undercut a forecast issued by the U.S. Department of Agriculture earlier this month of 329 million tonnes, which many analysts now see as too optimistic.
"The 2012-2013 outlook for maize (corn) production has generally worsened, especially in the U.S. where high temperatures and severe drought have reduced prospects," the IGC said in a monthly update.
The most extensive drought in five decades intensified this week across the U.S. Midwest and Plains states that produce most of the county's corn, soybeans and livestock, a report from climate experts showed on Thursday.
The rally has revived memories of the 2007/08 food price crisis when a potent mix of high oil prices and soaring grain futures markets pushed up prices of food, sparking violent protests in countries including Egypt, Cameroon and Haiti.
"Global food price inflation will pick up as a result of the recent surge in some agricultural commodity prices, particularly wheat, maize and soybeans," Caroline Bain, commodities analyst with the Economist Intelligence Unit said.
"However, it is unlikely to be on the scale witnessed in 2007/08...Perhaps the most important difference is that energy and freight prices have not risen in tandem with the prices of food commodities," she added.
While nowhere near severe as the U.S. drought, dry weather has also taken its toll on major grain exporters in the Black Sea region and on Thursday the International Grains Council cut its forecast for wheat crops in both Russia and Kazakhstan.
EXPORT BAN FEARED
French farm data supplier Geosys said in the lowest forecast to date that Russia's wheat harvest is likely to be less than 47 million tonnes this year.
Traders have expressed fears that Russia may impose restrictions on exports to avert shortages and help keep a lid on domestic prices.
"Everyone is afraid of some restrictions and is trying to prepare, but still there is no plan," a trader told Reuters on Thursday.
The head of Russia's Grain Union Arkady Zlochevsky said he had heard these fears expressed, but saw no ground for them.
"I think there is no need to impose any limits. The market will regulate itself," Zlochevsky told Reuters.
A newly formed commission on food security chaired by Russian Deputy Prime Minister Arkady Dvorkovich will meet on August 8 to discuss the grain market, Zlochevsky said.
Russia banned grain exports in August 2010 in response to a fierce drought. Dvorkovich said last week he saw no reason to cap exports this year, though speculation was persistent.
Some major importers, including top wheat buyer Egypt, have stepped back from the market as prices soared but are now likely to face a much steeper bill for the grain they need.
Iraq this week bought 150,000 tonnes of Russian wheat with traders reporting on Thursday that the lowest price in the purchase was $384.79 per tonne, around $50 higher than it paid in mid-June.
The dramatic surge in global grain prices in the last four weeks is likely to cause price rises in Germany for flour and possibly for bread, the head of Germany's flour mills association VDM said on Thursday.
Meanwhile, British sweetener and starches maker Tate & Lyle Plc said it was not clear how corn price volatility would impact demand and pricing for the rest of the year, but said it would stick to its strategy of maintaining full corn silos in the U.S. to secure supply — an increasingly expensive endeavor.
"Overall, we continue to expect to make progress this financial year while recognising the current level of uncertainty surrounding the wider economy and volatile corn markets," chairman Peter Gershon said in a statement.
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