Food prices tipped to rise

Rabobank have said governments may need to intervene to contain strong price increases in 2011. Photo / Thinkstock

Agricultural prices are likely to jump in 2011 on the back of tightening stocks, supply limits and strong demand, agribusiness lender Rabobank says.

It says widespread government intervention to contain strong price increases, as happened in 2007/08, may return in 2011.

"In the current price rally, which in our view is both broader and more structurally based, stocks-to-use levels in many major products are at, or below, those seen in 2007/08, with the exception of wheat, but prices have not responded on the same scale," Rabobank said in a research note.

"We believe that favourable weather conditions are necessary for almost all agricultural commodity markets in 2011 to rebuild inventory levels and prevent a rally in prices back to the highs of the 2007/08 commodity boom," it said.

Rabobank said it expected "bearish macro headwinds" would lead to further price uncertainty next year, with heightened volatility making the road to higher prices a bumpy one.

It said global inventories for a number of agricultural commodities were at, or nearing, record low levels and demand growth was expected to be robust, particularly from China.

"Agricultural prices are likely to be extremely sensitive to any further weather or policy-induced supply shocks, as seen in 2010," it said.

Rabobank said one of the strongest La Nina weather patterns in the past 50 years and increasing concern about supply shortages meant higher prices were more likely in a number of markets.

Demand had also become stronger and more price inelastic, contributing to a longer-lasting rally, it said.

"Further price gains are expected over the next 12 months in a number of agricultural markets, despite many of the commodities entering the season at already elevated price levels," Rabobank said.

It said world demand for soybeans was likely to jump 6.8 per cent in 2010/11, corn demand was expected to be up 3.1 per cent, sugar up 2.6 per cent and wheat would probably rise 1.8 per cent.