Disruptions to Food Supply to ‘Ratchet Up Prices,’ Olam’s Verghese Says

Global food costs will remain elevated because a potential slowdown in economic growth is unlikely to hurt demand and weather-related disruptions to supply could “ratchet up prices,” Olam International Ltd. (OLAM) said.

Combined global inventories of wheat,corn and rice will drop 2.5 percent to a four-year low as farmers fail to keep pace with demand, U.S. Department of Agriculture data shows.

“The food complex is relatively recession-resistant,” said Sunny Verghese, chief executive officer of Olam, one of the world’s three biggest rice suppliers. “Because of the growing imbalance in the demand and supply of food, and because the stocks-to-consumption ratios are low, if there’s any weather- related disruption, it can ratchet up prices.”

Rice, the staple for half the world, jumped 53 percent in the past year in Chicago, while corn surged 73 percent and wheat advanced 12 percent, as flooding, hot temperatures and dry weather in the U.S. and parts of Europe hurt crops. Rising grain prices helped send the United Nations Food Price Index up 10 times in the 12 months to June and reached a record in February.

Global corn stockpiles were forecast by the USDA to plunge in the 2011-2012 season to 114.5 million metric tons. That would be the lowest level in five years as hot weather in the U.S., the world’s largest grower and exporter, curbs yields and demand climbs for the grain used in livestock feeds and ethanol production.

Corn Deficit

Supply may be even smaller than the USDA estimated as the harvest in the U.S. shrinks faster than forecast by the government, Rabobank International analysts led by Luke Chandler wrote in a report Aug. 26.

The corn market may have an 18.7 million-ton deficit in the 2011-2012 season, more than three times the 6 million ton forecast by the USDA, according to the Rabobank analysts, who correctly predicted that yield concerns in the U.S. could push soybean prices above $14 a bushel.

“We are more friendly to corn than wheat because of weather-related issues in the U.S.,” Verghese said in an interview on Bloomberg Television with Susan Li today. “This could have a fairly significant impact and the continuing growth of demand from ethanol and the biofuel complex add” to supply pressures, he said.

The U.S. corn-crop condition deteriorated in the past week after hot weather hurt crops. About 54 percent of the crop was in good to excellent conditions as of Aug. 28, down from 57 percent a week earlier and 70 percent a year earlier, the USDA said in a report yesterday.

Iowa, Illinois

Iowa and Illinois, the biggest U.S. corn- and soybean- growing states, had their hottest July since 1955, according to state climatology departments. Parts of Iowa, Illinois, Minnesota and Indiana received a quarter of normal rainfall this month, according to the National Weather Service.

Rice prices will remain firm as the government of Thailand, the world’s largest shipper, buys the grain at above market prices, locking up some of the nation’s exportable surplus in state warehouses, Verghese said.

“Thailand is an important exporter,” Verghese said. “The Thai government policies will have some impact on prices. We don’t expect it to explode.”

The export price of 100 percent grade-B Thai rice, the regional benchmark, may rally to $750 per ton by Dec. 31, according to the median estimate in a Bloomberg News survey of seven exporters, traders and millers conducted last week. That forecast is $50 higher than the median estimate in a separate Bloomberg survey undertaken in the first half of this month.

The grain surged to a record $1,038 a ton on May 21, 2008, a month after the Chicago rice futures advanced to an all-time high, as exporters including India restricted shipments.

Thailand’s buying policy will encourage farmers to boost rice planting, adding to global output and forcing Prime Minister Yingluck Shinawatra to sell the excess supply after six months, Verghese said.

Source: Bloomberg.com

To contact the reporter on this story: Luzi Ann Javier in Singapore at ljavier@bloomberg.net

To contact the editor responsible for this story: Richard Dobson at rdobson4@bloomberg.net