Families to suffer as global food crunch sends prices soaring

The cost of basic foods will continue to rise in the Middle East as demand from emerging markets drives a global agricultural commodity crunch, Merrill Lynch said on Tuesday.

The investment bank said in a report that rapid economic development in countries such as China and India was driving demand for food up sharply, adding pressure to the supply chain and sending prices skyrocketing.

It said economic development, combined with pollution and a lack of water for irrigation, were putting serious constraints on the amount of arable land available.

“Global constraints on food production are shifting production patterns and pressuring prices,” the bank said.

Merrill said agricultural inflation, or agflation, was beginning to have a substantial impact on inflation in emerging markets.

"China’s inflation rate may be heading to a 10-year high due in large part to agflation," it said.

Prices for basic foods such as bread and eggs have risen sharply in the Middle East in recent months, with governments employing measures from price caps to subsidies to offset the impact on struggling low- and middle-income families.

Merrill said Egypt’s consumer price index (CPI) for food and non-alcoholic beverages peaked above 17% for 2007, while Saudi Arabia's foodstuff and beverages CPI soared past 9%.

According to the Saudi Trade Ministry, prices of food products, which account for the largest chunk of a family's spending, may rise by up to 30% in 2008 due largely to a drop in global supplies.

In the UAE, costs of basic foods such as eggs and bread rose by as much as 30% in 2007, contributing to record inflation in the Emirates.

According to some reports from Kuwait, the price of basic foods has risen drastically, with dairy products up 25% over the past six months, canned food up 10%, and imported meat up by almost double.

Merrill said in its report that farm product prices in the US, a major producer of the world’s basic food products, had not risen as rapidly as they have recently since the mid-1970s.

“Those higher input costs are being passed along in the form of higher prices for processed foods as well,” the bank said.

Policies in the US mandating a shift towards biofuels have also had a “tremendous” impact on crop allocation and contributed towards a rise in prices for some basic foods, it added.

“In the corn market the passage of the Energy Bill mandating use of corn-based ethanol pushed corn prices up, approaching the $4 level once again,” Merrill said. “Wheat prices continued to set new all-time highs going into 2008.”

Although a short-term contraction in agricultural prices due to a possible US-led recession is likely, Merrill said the long-term outlook suggested higher costs in the future.