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The Wall Street Journal
April 9, 2007

Page One

Crop Prices Soar, Pushing Up Cost Of Food Globally

New Demand for Biofuels Feeds Inflation Pressure;
China, India Feel Pinch


Soaring prices for farm goods, driven in part by demand for
crop-based fuels, are pushing up the price of food world-wide
and unleashing a new source of inflationary pressure.

The rise in food prices is already causing distress among
consumers in some parts of the world -- especially relatively
poor nations like India and China. If the trend gathers
momentum, it could contribute to slower global growth by forcing
consumers to spend less on other items or spurring central banks
to fight inflation by raising interest rates.

Politicians in markets where food costs are a particularly
sensitive matter are moving to counter rising prices before they
take a bigger economic toll or fuel unrest. But it remains
unclear whether those policies will be enough to contain the
current pressures, or whether a longer-term bout of food-price
inflation -- similar in ways to the recent climb in prices for
oil and other commodities -- is in the offing.

One of the chief causes of food-price inflation is new demand
for ethanol and biodiesel, which can be made from corn, palm
oil, sugar and other crops. That demand has driven up the price
of those commodities, leading to higher costs for producers of
everything from beef to eggs to soft drinks. In some cases,
producers are passing the costs along to consumers. Several
years of global economic growth -- led by China and India -- is
also raising food consumption, further fanning the inflationary

Food-price inflation has been climbing -- in some cases sharply
-- in India, China, Europe, and even smaller economies like
Turkey, South Africa and Poland. In Hungary, it is running at
more than 13% a year, compared with less than 3% in 2005. In
China, food prices are climbing at a 6% pace, more than three
times the speed of a year ago. Prices are also up in Germany,
Italy and the United Kingdom. They may even be picking up in
Japan, the world's second-largest national economy, though the
signs are tentative since overall prices there are only just
starting to rise after a prolonged economic downturn.

The U.S., too, is seeing some stirrings, with food costs rising
3.1% in February from the year before -- a rate one percentage
point higher than in mid-2005. Economists say U.S. food prices
are expected to rise faster than the general rate of inflation
this year. Wholesale prices of meat, poultry and eggs have
already increased.

If the trend continues, U.S. consumers are likely to see higher
prices at the supermarket for everything from milk to cereal to
soda pop, since corn is used to feed livestock and make
high-fructose corn syrup, a key ingredient in many soft drinks.
A spokesman for the National Chicken Council, a poultry-industry
group, recently testified to a congressional subcommittee that
Americans should expect higher chicken prices because of what
the group described as "the ethanol crisis."

Doomsday predictions of a major food shortage in China and
elsewhere have circulated for years but haven't materialized.
And some economists believe the recent increase in crop demand
probably can be met without severely straining the global
economy. They think prices could come back down over time,
especially if some countries that have more land that could be
put under cultivation -- particularly Brazil -- can greatly
increase production. Technological advances, such as better seed
varieties, could also help boost production to keep up with

In the meantime, higher farm prices aren't bad for everyone.
They could help boost incomes for the rural poor in developing
nations, who have been bypassed by gains in the manufacturing
and service sectors. In some cases, the rising demand for food
also reflects the growing wealth of once-destitute populations
around the globe.

So far, higher prices haven't sparked a major rise in overall
global inflation, which remains relatively low and stable by
historical standards. Moreover, food prices are notoriously
volatile, and some of the increases are due to short-term or
local factors that could reverse in time.

But many economists believe the forces causing the current bout
of food inflation will persist, or recur in years ahead. Many
countries are facing shortages of land and water that didn't
exist during past food-price spikes, so they can't easily plant
more to ease the strain.

Researchers at Swiss bank UBS AG note that average food prices
in China have grown faster in the past five years than in the
previous five, as more agricultural land is taken up for
factories or high-rise condominiums. Changes in diets are also
exacerbating the problem, as rising incomes allow the Chinese
and consumers in many other places to eat more.

Some economists contend that China and India appear to be
reaching a point at which nothing short of a bumper crop of key
commodities will be enough to meet local needs and prevent
further surges in food prices. In fact, China and India have
achieved historically high production of some crops in recent
years, only to see prices continue to climb.

Global grain stocks are at their lowest level in 30 years, after
several years of strong global economic growth, and could become
even tighter if farmers divert more crops to make ethanol or
other fuels. By some estimates, about 30% of the U.S. grain
harvest is likely to be devoted to ethanol production by 2008,
up from 16% in 2006.

All of this puts the world's central banks in a bind. Although
they have confronted spurts in energy prices, many of them
haven't had to cope with prolonged increases in food prices
since the 1970s. Since then, food-price inflation has remained
relatively benign, even as incomes world-wide have climbed,
allowing consumers to beef up their diets.

In more recent years, central banks have tried to ignore surges
in food prices as long as they didn't get too out of hand,
mostly because they tended to be short-lived. A change in
weather, for example, could quickly turn a food shortage into a
glut, sending prices tumbling.

But a more sustained bout of food-price inflation, if it
emerges, could force banks to keep interest rates higher than
they would otherwise be. India, for one, has increased interest
rates several times over the past year in part to combat
food-price inflation.

"In 1972, the last time grain stocks were this low, the story
didn't end well in terms of inflation," says Carl Weinberg,
chief economist at High Frequency Economics in Valhalla, N.Y. In
those days, inflation soared not just because of higher oil
costs but also because of a global jump in food costs, all of
which helped trigger a major U.S. recession and a global
slowdown. "Food prices were an important part of what started
[inflation] rolling" in the 1970s, Mr. Weinberg says.

But since the 1970s, the Federal Reserve and some other central
banks have come to believe that they can avoid raising interest
rates in the face of transitory increases in food and energy
prices if they have established enough credibility as inflation
fighters to keep such price increases from spilling over to the
rest of the economy.

Today, the inflation risks may be greatest in developing
economies. In the Philippines, food accounts for 50% of the
basket of goods included in the consumer-price index, an
inflation benchmark. In Thailand, it's about 35%, according to
data from Macquarie Bank Ltd. In the U.S., food makes up only
about 15% of the CPI.

In one bustling open-air market in downtown Shanghai, shoppers
say they are paying as much as two times the price they paid
last year for green vegetables, and the cost of meat and
vegetable oils have also soared.

Such blows to the pocketbook "give us more pressure for daily
life," says Xu Wen, a 53-year-old retiree who was purchasing
some rolled noodles in a small shop last week. Already, she
says, she and her husband are spending almost half their monthly
income on food -- a percentage that continues to increase over
time. "We ordinary people have no way out," she says. "This is
something the government needs to be concerned about."

Government officials are taking pains to show they are
addressing the problem. In December, Chinese Premier Wen Jiabao
toured a Beijing supermarket to check up on prices, and China
has begun limiting the construction of corn-based ethanol plants
to ensure there is enough corn for humans and livestock. Chinese
officials have even banned new golf courses on farm land and
have been unwinding subsidies they once paid to grain
distributors to sell excess corn overseas.

Still, analysts estimate Chinese stockpiles of surplus corn now
stand at only about 30 million metric tons, down from more than
100 million tons at the end of the past decade, as demand picks
up. (The Chinese government doesn't provide official estimates
of its stockpiles).

That would imply that China only has two to three months of
surplus supply based on current consumption trends, making the
country highly vulnerable if it has a bad crop. Although China
remains a net exporter of corn now, analysts believe it will
become a net importer sometime in the next few years.

Some economists say China will have to take more aggressive
steps to prevent future food problems. These changes could
include allowing the proliferation of large -- but more
efficient -- corporate farms similar to the ones that drove many
small growers out of business in the U.S. in recent decades.
Such a push would be extremely difficult for China because it
needs to preserve jobs for the tens of millions of people who
live in rural areas.

Pressures are also building in India. Monika Katyal, a
32-year-old homemaker, complains that she has had to cut back on
purchases of many luxuries, such as cosmetics, as her family's
monthly bill for groceries has climbed as much as 50% in recent

"I came here to do some shopping for myself, but now it doesn't
look like I will be able to do that," she said recently, as she
studied the price on a bottle of ketchup in a New Delhi grocery.

In addition to raising interest rates, Indian officials have
also lifted import duties on corn and barred exports of wheat,
to make sure supplies are available for domestic consumption.

But it isn't clear whether those and other moves will be enough
to make a big difference in the long run. The main problem is
that yields of some crops aren't growing fast enough to keep up
with India's rapidly increasing food demand. India's corn
production, for example, has climbed about 4% a year since 2001,
says Amit Sachdev, a New Delhi-area agriculture-industry
analyst, while demand has been increasing nearly 5.5% a year.

"If I look at the trend line, [it] indicates to me that the
requirements are going up much faster than what you can produce"
in India, he says.

--Lauren Etter, Conor Dougherty, Hanting Tang, Kersten Zhang
and Binny Sabharwal contributed to this article.