USDA Warns Food Prices to rise 3.5 pct in 2011, could challenge 2008's 5.5 pct rise

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Food prices could reach 2008 level - USDA

 * US food prices to rise 3.5 pct in 2011 - USDA

  * Higher commodity, energy prices drive the increase

  * Food prices could challenge 2008's 5.5 pct rise
  (Adds USDA economist quotes, increases compared to January)

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Thu Feb 24, 2011

By Christopher Doering

WASHINGTON, Feb 24 (Reuters) - U.S. consumers could see
food costs spiking to levels seen during the food crisis of
2008 as higher commodity and energy prices force companies to
raise prices on products lining grocery store shelves, the
Agriculture Department said on Thursday.

  Food prices are forecast to rise a sharp 3.5 percent this
year -- nearly double the overall inflation rate. The lion's
share of the increase is expected in the second half of 2011
when the recent uptick for commodities, such as corn and
soybeans, makes its way through the food system. Just last
month, USDA forecast an increase of 2.5 percent in 2011.

  Food prices soared to 4 percent in 2007 and rose to 5.5
percent a year later -- the biggest increase since 1990 -- as
stockpiles ran low around the world.

Volatile agriculture and energy prices could help food
prices challenge those levels in 2011, said USDA economist
Ephraim Leibtag at the department's annual Outlook Forum.

"Given that it's still earlier in the year, I'm prone to
be conservative on the side of the forecast," said Leibtag.
"It's a possibility. I wouldn't be shocked but I'm not
predicting it now."

FOOD INFLATION COULD LEAD TO RIOTS

Global food inflation, the result of growing demand for
food and tight commodity supplies following catastrophic storms
and droughts in leading agriculture producers such as Russia
and Australia, is a growing worry for world leaders.

World Bank chief Robert Zoellick said last week global
food prices have reached "dangerous levels," and warned they
could complicate fragile political and social conditions in the
Middle East and Central Asia.

It would be a stark similarity to 2008 when soaring food
prices sparked food riots and led to political instability in
some parts of the world, including Haiti and Egypt.

Agriculture Secretary Tom Vilsack said the United States
and other global producers are "better prepared to respond" to
rising food prices after the run-up in 2007 and 2008. "We're
keeping an eye on this," he said.

In its new forecast, USDA said food will rise party due to
higher costs for meats, poultry and fish, which make up 12.5
percent of total food spending. Overall, costs for these items
are forecast to rise 4 percent compared with 3 percent forecast
last month.

Prices for fruits and vegetables, which account for 8.4
percent of food spending, also will rise 3.5 percent, an
increase from 3 percent forecast in January. Cereals and bakery
products were increased to up 4 percent from 2.5 percent, and
sugar and sweets up 3 percent from 2.5 percent.

Despite the recent pullback for some commodities such as
wheat, soybeans and corn remain near a 2-1/2 year high. Oil
surged to 2-1/2 year highs near $120 a barrel on Thursday as
the revolt in Libya choked exports but prices later eased as
Saudi Arabia assured European refiners it could fill any supply
shortfalls. [O/R]

Energy is used for everything from producing, transporting
and making packaging for food.

RETAILERS FACE HIGHER INPUT COSTS

Big companies have had to adjust to higher raw material
costs. Kellogg Co (K.N), the world's largest breakfast cereal
company, and consumer goods giant Unilever (ULVR.L) (UNc.AS)
have boosted prices on many of their products to offset rising
costs for ingredients such as grains and sugar.

Grocers are doing what they can to keep prices low, as
they do not want to turn off shoppers already feeling pressure
from higher gasoline costs and the generally bleak economy.

Leibtag said the willingness of retailers to absorb price
increases and not pass all of them onto consumers is, for now,
helping keep prices below their 2007 and 2008 levels.

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