Global food prices could rise further in the short term and keep rising over the longer term as supplies are unlikely to match increased demand, a European Central Bank note said.
The note, prepared for a meeting of European Union finance ministers next Monday and Tuesday, said other factors like protectionist trade policies, speculation and the fall of the U.S. dollar were also boosting food prices.
"In the short term upside risks persist, particularly because futures prices - used as technical assumptions - have proved to be rather unreliable predictors of global food prices," the ECB note, obtained by Reuters, showed.
People in some European Union countries have been protesting against their loss of purchasing power as the price of basic foodstuffs like bread, milk and potatoes increase.
Hikes in food prices have already triggered rioting in some Asian countries.
Hikes in food and oil price have helped to push euro zone inflation to a record high of 3.6 percent, and the outlook for consumer and wholesale prices will be a central concern at the meeting on Monday of the ECB and euro zone finance ministers.
"Taking a longer term perspective...there are indications that more structural factors may have triggered a re-adjustment of relative prices, suggesting that prices may remain at elevated levels and rise even further going forward," it said.
Food prices have jumped 6 percent over the 12 months to April, mainly on rising demand triggered by rising consumption in China and India, more expensive oil which raises production and transport costs as well as demand from biofuel producers.
Supply disruptions, caused by poor weather which negatively affected harvests, added more pressure, the note said. The note said that higher supply of food was key to ease the upward pressure on prices.
"The longer term prospects for the supply of agricultural products are presumably the most critical factors. A supply response takes time to evolve and, thus, it seems unlikely, that it would match rising global demand. Prospects are not promising," the note said.
"At the current juncture, a strong acceleration of yield increases seems unlikely and the expansion of arable land is likely to evolve only gradually. On top of this, of course there is always the possibility of weather-related production shocks, which could even become more frequent, should climate change impacts materialise," it said.
Protectionist Trade Policies
It also pointed to protectionist trade policies of Russia, Ukraine and Argentina, which imposed taxes on cereals and cut tariffs on edible oils, and of India, which imposed a ban on basmati rice exports and raised export taxes on palm oil.
It said speculation was also boosting prices as was the depreciation of the U.S. dollar, "which raised demand and reduced the supply response." Another note on food prices for the ministers' meeting, prepared by junior finance ministers and central bankers, also forecast food could become even more expensive, driven by factors outside Europe.
"Despite the recent fall in (wholesale) prices for some commodities, such as wheat or certain dairy products, the agricultural markets are still tight and the risk of further price increases remains," the junior ministers' note said.
"In the short term, it seems that the growth rates of food prices have reached a peak and are expected to moderate," it said.
"However, looking ahead, the most likely scenario is that global demographic trends combined with rising incomes and changing food consumption patterns, notably in the emerging markets, and increasing biofuel production, will continue to increase demand for agricultural commodities," it said.
The junior ministers' note said it was therefore important to come up with policy responses that would reduce distortions in agriculture and improve supply.
"A number of (EU) Member States have envisaged short-term measures to cushion the temporary impact of the recent commodity price developments for low income households," it said.
"However, it is important to ensure that price signals are not distorted and to avoid broad-based second round effects on wages and prices (including through indexation schemes)," the note said. "In this context, and in line with the Manchester statement on oil prices, any measures should be short-term and targeted."
EU finance ministers agreed in 2005 in Manchester not to use taxes to cushion the negative impact of rising oil prices for consumers, because their rise was not temporary and such measures would only artificially support demand.