Higher food prices headed to a shop near you

Got over the bump in electricity prices? Rising food prices may be the next challenge to your family's finances.

Global grain prices are on the increase and unlike many of the daily gyrations in financial markets, these spasms will be felt by Australian households - and soon.

Victorian egg farmer Brian Ahmed says the cost of wheat used to feed his chooks has risen by almost half, or $100, to $316 a tonne in just the past fortnight.

“It's huge," Mr Ahmed says. "What we're waiting to see is if this is going to be a long-term trend."

Since grain costs make up some 60 per cent of the cost of egg production, Mr Ahmed said farmers like him "cannot absorb the increased cost without passing it on to a consumer.”

Unless there's some reversal in the wheat price jump, Mr Ahmed calculates that the price tag on a dozen eggs will jump by as much as 30 cents in the next few weeks.

If only the increases were limited to eggs. The spurt in wheat prices is matched or exceeded by the rally in corn, soybeans and other staples prices. With much of the world's grain going to feed cattle, pigs and poultry, meat price rises probably won't be far behind.

Mike Shaw, president of the Victorian Farmers Federation chicken meat group, said feeds comprise 40 per cent of the cost of chicken production.

“Any significant increase in cost of the feed, if sustained, will be passed on to consumers," he said.

America's big dry

For now, the source of higher world prices is largely the US farmbelt, now sweltering through its worst drought in 56 years. Indeed, the prolonged dry spell is affecting more than half the land of the 48 contiguous states.

As a result, corn prices are up 53 per cent since June, wheat prices have climbed 41 per cent, while soybeans are 27 per cent higher, according to the Chicago Board of Trade.

Luke Mathews, an agri-commodities expert with Commonwealth Bank, said the severity of drought and the weaker harvests meant higher food costs may persist.

“We believe there are further possible rises in the grain complex [grain-affected commodities] to come due to the US drought which is sharply reducing corn output. (This) means consumers around the world must curb their consumption,” said Mr Mathews. “And the way to curb consumption as in any market is through higher prices.”

NAB agricultural economist Michael Creed said the bank would be lifting its forecast prices for commodities on the basis of the recent run-up.

“I think there is an upside risk to prices because of drought conditions in the US and what's shaping up to be a poor harvest in the Black Sea region,” he said, referring the Russian and Ukrainian food bowl region.

Australia too

Memories of last summer's cool and damp weather are still fresh along much of Australia's eastern seaboard.

Consumers, understandably, would have reason to think Australia's agriculture sector is in rude health after recent above-average rainfall over large swathes of the country. Farmers, therefore, should be well-placed to profit from the global rally in grain prices.

The story, however, may not be so upbeat.

Key grain regions in Victoria and New South Wales have endured a drier-than-normal autumn and early winter, and more such weather is in store, according to the Bureau of Meteorology.

The chance of below-median rainfall from August to October is rated as between 60 per cent and 70 per cent over western New South Wales, most of Victoria and parts of central Western Australia, the Met said on its website today.

South Australia, another grain growing state, and northeastern Australia are also set for a drier than usual season.

Critical period

“It certainly presents a risk to agricultural production, particularly as we enter into the critical spring growing period,” said CBA's Mr Mathews.

“If we were to see lower exportable supplies here in Australia, that would help push the international market higher.”

Australia may produce 24.1 million tonnes of wheat in 2012-2013, 6.2 per cent less than an earlier estimate, on concern dry weather would curb plantings, according to the Australian Bureau of Agricultural and Resource Economics and Sciences.

Output was a record 29.5 million tonnes in 2011-2012 as La Nina-linked rains boosted yields on the east coast.

That La Nina weather pattern now looks set to be replaced by an El Nino one, which is usually associated with higher temperatures and less rainfall over much of the country.

BusinessDay with Bloomberg

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