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Food, oil prices set to rise as demand outstrips supply

November 17, 2010

Increasing wealth, bigger populations, higher farm costs and increased demand led food inflation in Brazil, India and China is boosting demand and prices for grains, dairy, meat and cooking oils. As pressure grows to support a population of 2.5 billion, governments in India and China are desperately trying to import more, export less and distribute stockpiles more efficiently to control stocks and prices.

As demand rises, spot and future prices as well as inflation take its toll on governments. India emerged as the world’s largest palm oil importer earlier this year, purchases reached 9.24 million metric tons, valued at 380 billion rupees (US$8.4 billion), in the year ended Oct. 31, from 8.66 million tons a year earlier, according to the Solvent Extractors’ Association of India. Similarly, per-capita use of vegetable oils in China has more than doubled in a decade.

In order to control runaway inflation in China where the government is keen to promote development and social equity for all, premier Wen Jiabao, said the Cabinet is “drafting measures to suppress sharp rises of commodity prices, which concerns people’s immediate interests”. While few details are out, China Securities News, further cited unidentified officials as saying authorities were considering price caps, subsidies and stricter punishments for hoarding or speculation in corn, cotton and other products.

As the social gap between those whose incomes sustain rising prices and those whose doesn’t increases and the weather plays havoc with crops, analysts fear the situation will get much worse. The Standard & Poor’s GSCI Agriculture Index of eight futures climbed 30 percent this year, led by corn, wheat, coffee and cotton, as floods in Canada, Pakistan and China and drought in Russia and across Europe killed crops.

Water scarcity, increasing global temperatures and the potential for dry weather may threaten farm production, said Nomura Holdings Inc. economists and strategists including Robert Subbaraman in a report dated Sept. 8. About 1.8 billion people will live in countries or regions with absolute water scarcity by 2025, according to the UN Food & Agriculture Organization.

The CRB/Reuters U.S. Spot Raw Industrials index, a gauge of 22 commodities including butter and soybean oil, rose to an all- time high on Oct. 25. Meat prices advanced to a two-decade high in August, according to a UN index.

Besides food, China’s  economy also faces strains from diesel shortages triggered by government conservation efforts. Authorities have imposed rolling blackouts on factories to meet energy-saving goals, prompting thousands to buy their own diesel-powered generators, which boosted demand at a time when industry analysts say China’s major state-owned oil companies are withholding supplies in anticipation of a rise in the government-set price. That has led to rationing and long lines at filling stations, disrupting cargo shipments.

Inflation is the biggest threat to a stable government in India and China as poor families which make up a majority of the vote base spend more than half their incomes on food.

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