Report sees another decade of food price inflation
Futures moves reflect link between grains, crude oil

By Matt Andrejczak & Laura Mandaro, MarketWatch

SAN FRANCISCO (MarketWatch) -- While global prices for food crops and agricultural commodities should ease from recent peaks, prices over the next decade will hover well above the prior 10-year average, a report released Thursday said.

The outlook, issued by the Organization for Economic Co-operation and Development and the Food and Agriculture Organization of the United Nations, said global prices through 2017 will surge the most for vegetable oils due to demand for biofuels and food.

Prices for vegetable oil could rise as much as 80% in inflation-adjusted terms, easily outflanking a projected 20% increase for meat prices and 40% - 60% higher grain prices.

Biofuel demand "is the largest source of new demand in decades and a strong factor underpinning the upward shift in agricultural commodity prices," read the report.

Crude oil hits 'petrograins'
Thursday's actions in the futures pits underscored the link between fuel and agricultural prices.
Corn, soybean and soybean oil prices all dropped sharply, weighed down by a reversal in crude oil prices and dragging other soft commodities lower.

"Crude oil has set the tone for a lot of commodities," said Don Roose, president of U.S. Commodities, Inc. in West Des Moines, Iowa. These two commodities can be classified as "petrograins," he noted, because they are both used for food and to make petroleum substitutes ethanol and biodiesel.

"We had some bullish and bearish news but crude oil overshadowed it," he said.

Crude oil for July delivery fell $4.41, or 3.4%, to close at $126.62 a barrel, its lowest closing level since May 16. See Futures Movers.

The July corn contract lost 10 cents, or 1.8%, to settle at $5.82 a bushel. July soybeans lost 50 cents, or 3.6%, to close at $13.23 a bushel. Soybean oil for July delivery retreated 3.8% to settle at 60.30 cents per pound. Wheat lost 16 cents, or 2%, to close at $7.43 per bushel.
Beef to butter, prices on rise

Increased demand for biofuels isn't the only culprit, the OECD said. Echoing the U.S. Agricultural Department, the group of 30 industrialized nations said low stock supplies of key grains, droughts in Australia, and rising middle-class economies in China and India have also led to the recent surge in food prices around the world.

Compared to averages for 1998 through 2007, the report forecast that prices, adjusted for inflation, are projected to be:

· 20% higher for beef and pork;

· 30% higher for raw and white sugar;

· 40-60% higher for wheat, maize and skim milk powder;

· 60% higher for butter and oilseeds;

· 80% higher for vegetable oils (driven by food and bio-fuels demands).

The OECD plans to use its report to stir government officials worldwide to improve food-purchasing power in low-income countries, which have been hit the hardest by rising food prices. In emerging economies, higher prices for rice, wheat, corn and soybeans have reportedly sparked food riots and led some countries to restrict exports certain grains.

The OECD, which will present its findings at separate meetings with world leaders in Paris and Rome next week, said consumption and production is growing faster in developing countries for all agricultural commodities, except wheat.

_Matt Andrejczak is a reporter for MarketWatch in San Francisco._Laura Mandaro is a reporter for MarketWatch in San Francisco.