London, May 9 - The French may soon be paying more for their baguettes, the Italians for pasta and British for their beef as biofuel demand for crops cuts the land available to stock Europe's larder, analysts said on Wednesday.
European grain prices have risen sharply this season on fears that demand could outstrip supply. Recent jitters over drought hitting this summer's grain harvest have again rattled markets that are already tight.
Wheat is trading in Paris at around 150 euros a tonne, up from around 120 euros at the same time last year, affecting everything from bread to livestock costs.
"We've already seen higher grain prices feeding through. They strike at the heart of food costs," analyst Charlie Mills at Credit Suisse said.
While a rise in raw commodity prices does not always translate into a similar increase in prices on the shop shelf.
Wheat for example makes up just 10-20 percent of the cost of a loaf or baguette. Producers too have been able to absorb some cost increases, particularly when faced with the huge buying power of the supermarkets in countries like Britain.
However, consumer goods giant Unilever said last week that rising commodity costs for vegetable oils and grains may force the group to push through further price rises.
Against this tight supply/demand balance any worsening of the drought conditions in Europe will mean consumers must brace for further prices rises in the autumn.
"Major parts of Europe have just enjoyed the sunniest and driest April since 1800. Unsurprisingly, there may be a price to pay for the unexpected early summer," Bank of America said.
"Farmers are complaining about damage to key crops. A bad harvest could drive up seasonal food prices later this year."
LOW STOCKS
And Europe's supply/demand balance is tight going into the new season, which starts in July and low stocks mean there is no room for manoeuvre in the event of a harvest failure.
A global stocks are low and the European Union has been deliberately running down its grain stockpiles this season.
The bloc's costly Common Agricultural Policy, much maligned in the 1980s and 1990s for running up huge grain surpluses, has been steadily reformed over the last 15 years.
The post-war justification of securing Europe's food supplies became outdated in a globalised trading environment.
The European Commission has ended fixed internal prices and changed the way subsidies are paid, gradually abolishing many of the supply and demand levers it could use to control markets.
Its stated aim has been to open up farmers to more competition, to make them more responsive to market conditions and to stop the practice of growing crops purely for subsidies.
As a result, there is little left in EU grain stores.
"We can expect arable crop prices to remain firm due to ethanol and increasing protein demand in Asia. It looks as though extremely cheap food is over for the moment," said David Lang at Investec Securities.
Analysts say rising world demand for grain, driven up by increasing wealth levels in China, where more meat is being consumed has combined with the extra biofuel needs to create a shift in the outlook for agricultural markets.
"A combination of food, feed and fuel demand for crops has created an upward shift in the trend demand growth for agricultural products. Going forward, yields alone will not be able to accommodate this rise," Goldman Sachs said in a report.
It argues this means more farmland will have to be brought into cultivation, but that this is not top quality land and is more expensive to grow crops, pushing up prices.
So even with extra supply, the balance is still tight.
"The best cure for high prices is usually high prices but as there's not much in the way of inventories around, these markets are a potential tinderbox," Investec's Lang added.