Is food inflation set to spike?

Only weeks ago, farmers in America's corn belt were expecting a record harvest. Thanks to the hot and dry summer in the US, the world's top exporter of corn, wheat and soybeans, those hopes have rapidly turned "into a mirage", says Gregory Meyer in the FT. Since mid-June, corn prices have leapt by 30% to near-record levels around $7.70 a bushel.

Corn has dragged up the other major crops in its wake. Soybeans have hit a new record of almost $17 a bushel. A bout of food inflation "is once again firmly on the agenda", says Garry White in The Daily Telegraph. In 2008, a prolonged period of high food prices sparked over 60 food riots worldwide.

The heat in the US has hit corn in its fragile pollination stage, when final yields are most vulnerable to high temperatures. The US government forecast that the average corn field would yield 166 bushels (4.2 tonnes) an acre this year, an all-time peak. But some forecasters are now pencilling in a yield as low as 150.

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Corn stocks, meanwhile, are "precariously low" worldwide, as Morgan Stanley points out. Soybean stocks are also tight and demand from emerging markets, notably China, has continued to rise as the agricultural sector has developed, says Meyer. Farmers have shifted from backyard' operations to major facilities feeding animals soybeans and corn.

The near-term weather forecast presages fading heat but scant rain. Without rain, prices look set to rise even further and continue to stoke inflation. In Britain, 10% of the consumer price index is related to food the figure is far higher in emerging markets and that doesn't include the impact on hotels and restaurants, notes White. Throw in quantitative easing, and "inflation could become a problem once more".

Let's not panic just yet, says Capital Economics. South America, also a key corn exporter, is set to alleviate the supply squeeze, especially as it recovers from last year's drought. Moreover, while supply shocks tend to drive agricultural commodity prices in the short-term, in the medium-term macroeconomic and financial factors are more important.

The weakening global economy should reduce oil prices further, undermining demand for corn to produce ethanol. Slower growth and declining risk appetite, moreover, should decrease speculation in commodities markets. Corn prices seem more likely to fall than rise over the next few months.