Chicago, Nov. 7 - From Russia to China to the United States, consumers will be feeling the pinch of higher food prices in 2008, with cooking oil now joining corn, wheat, and milk on the growing list of food inflation culprits.
Rising food prices will hurt more in developing nations, where a larger share of incomes are spent on food, and analysts have warned of likely food shortages and political upheaval in impoverished areas.
Consumers were already paying more for cooking oils. But prices of processed and fried foods and those made from edible oils such as salad dressings and condiments will also be rising in the months ahead, economists said.
"Consumers have seen a small part of the wholesale price increases. I think it's just the beginning," said Len Steiner, principal at food industry consultant Steiner Consulting Group.
Soybean oil prices were near 33-year highs while palm oil prices set all-time highs on Wednesday amid tightening global supplies and rising demand. Prices of other cooking oils have also followed soy and palm oils higher.
Soaring energy costs, with crude oil approaching the $100 a barrel mark, have helped fuel the rise by lifting demand for alternative fuels, which are made from cheaper vegetable oils.
Volatile markets have also drawn speculators to palm and soyoil markets which, like crude oil, are viewed as a solid hedge against inflation and a historically weak U.S. dollar.
Global food prices have been rising for months, boosted by 10-year highs in corn prices early this year and all-time highs milk and wheat prices more recently.
U.S. food prices were up more than 4 percent year-on-year, compared with the normal 2.5 percent rate of food inflation, the biggest annual jump in 16 years, economists said.
Higher wheat and cooking oil costs have yet to make their way from producer to consumer so food inflation should rise even higher, they said.
The elevated rate of food price inflation may last for years as global food and feed production struggles to keep up with rapidly expanding demand growth from markets like China, where rising incomes are increasing consumption.
DEMAND STILL RISING
Demand for cooking oil continued to rise despite the highest prices in a generation, although the recent rate of demand growth has slowed somewhat.
Russia was planning to cut import tariffs on some vegetable oils to combat rising consumer prices while market watchers expected China to follow suit soon.
"We are not going to see a reduction in consumption but a reduction in the rate of growth of per capita consumption," said Thomas Mielke, CEO of Hamburg-based oilseeds analysts Oil World.
"In some countries, especially in developing parts of the world, it is possible we will not see the same high rate of per capita growth that we have experienced in the past," he said.
Major industrial consumers have recently been buying hand-to-mouth, hoping vegetable oil prices would fall. But a substantial number appear to have given up and were again purchasing for deferred delivery to escape the heavy price premiums for nearby vegetable oil positions, Mielke said.
Some importers have also stepped up purchases for deferred delivery, taking advantage of the weak U.S. dollar.
PRODUCTION EDGING HIGHER
High prices will encourage more production, but farmland is limited in many areas and competition from other high priced crops like corn and wheat will be fierce, economists said.
U.S. farmers were expected to plant far more soybeans next spring to capture high prices and to rotate away from the large number of acres devoted to corn in 2007.
Oil palm cultivation in Malaysia was expected to increase only marginally in 2007 due to land constraints while in rival producer Indonesia cultivation should rise slightly.
More abundant farmland in South American producing nations will help ease the supply crunch somewhat, analysts said.
A weak U.S. dollar, high crude oil prices, and stiff competition for narrowing supplies should keep a floor under vegetable oil prices well into 2008, several economists said.
"Clearly there's an inverted market (in crude oil) and that's sure to take some of the steam out of it for soyoil. But unless you see oil under $60, I think you have to be bullish on the soybean oil," Steiner said.