Q&A: World food and fuel prices

There seems to be no end to the volatility in food prices around the world.

Extreme weather conditions have hit grain crops in the US Midwest and the western corn belt, prompting fears of wheat shortages and sending prices higher.

As a result, the UN's Food and Agriculture Organization (FAO) is warning that its food price index could soon see a sharp rebound after three consecutive months of decline.

As measured by the FAO, the wholesale cost of food hit its highest monthly figure on record in February 2011 and has since fallen by 15.4%.

But retail food price rises are still a major factor in consumer price inflation in the UK and around the world, giving rise to accusations that speculators are responsible for driving up the price of our weekly shopping basket.

In the meantime, oil prices have also fallen back since earlier this year, but forecasts of declining supply and rising demand suggest that they may not stay that way for long.

What are the main pressures on food prices?

Worries about food scarcity seem to have eased since 2008, when soaring prices prompted riots and demonstrations around the world.

The FAO said in its latest assessment that "the overall supply and demand situation in 2012-13 remains adequate".

It pointed to abundant supplies of rice, which is a staple in many Asian countries, as well as enough wheat and other grains available for export.

It adds that world cereal production is expected to hit another new record this year of 2.4 billion tonnes, 2% higher than last year's record high.

millions of tonnes, Source: US Department of Agriculture

2006-07

596

616

131

2007-08

611

617

125

2008-09

684

642

167

2009-10

683

652

197

2010-11

651

653

197

2011-12

694

689

197

However, with key crop-growing areas of the US facing their worst drought in almost 25 years, wheat, corn and soybean prices have been rising sharply.

Wheat prices alone have gone up 35% in the past month.

What about the prices of other foods?

The FAO says prices of all food commodity groups were down in June, with the largest fall registered by oils and fats.

Events in North America certainly bear that out. While US farmers are eyeing their frazzled grain fields in despair, their Canadian counterparts are anticipating a record crop of rapeseed, a key source of vegetable oil.

But further south, top sugar producer Brazil has been suffering delays to the harvest because of wet weather, leaving stocks low and pushing up prices.

And over in India, the world's second-largest producer of rice and sugar, there are fears that this year's below-average monsoon rains will reduce output after two years of bumper harvests.

"It is a challenge for farmers to meet the same performance as in the last two years," Indian farm minister Sharad Pawar said on Monday. "This year, the monsoon is playing hide-and-seek."

What about speculators?

Earlier this month, FAO director general Jose Graziano da Silva pointed the finger firmly at speculation on the financial markets, saying that "more understanding is needed" about its impact on food price volatility.

"We are not talking about speculation related to price discovery and the normal functioning of the futures markets," he said.

"We are talking about excessive speculation in derivative markets, which can increase price swings and their speed.

"Excessive food price volatility, especially at the speed at which they have been occurring since 2007, has negative impacts on poor consumers and poor producers alike all over the world."

The Economist Intelligence Unit has also noted instances in which speculators who treat commodity shortages as an investment opportunity have "helped exaggerate" price rallies.

The World Development Movement (WDM) is keen to curb this betting on prices.

It wants greater regulation of the buying and selling of futures contracts, which are an agreement to sell a commodity at a certain price at a set time.

These were created to reduce uncertainty, as the producer has a guaranteed price and the buyer secures the goods they need. It is in effect a way for both sides to reduce the risk of doing business.

But the WDM and others think that trading these contracts like stocks and shares is pushing food prices even higher, to the detriment of the poorest people.

And what's happening to the price of oil?

The price of a barrel of oil on the London market has retreated since April, when it was trading at about $125 a barrel. Prices are now not much above the $100 mark.

However, political tensions continue to affect some oil-producing countries in the Middle East.

Iran is still threatening to block shipping via the Strait of Hormuz, through which up to one-fifth of the world's oil currently passes, unless sanctions against it are lifted.

Underlying this uncertainty is the rising demand for oil.

Analysts point, in particular, to the thirst from China for energy to fuel its factories and power thousands of new cars.

Like food, it is difficult to escape the impact of the rising crude prices.

It not only directly affects the cost of fuel and energy, but also feeds into the prices of other goods by raising the cost of production and transport.

As many economies around the world struggle to cope with a painful global downturn, wages are not rising to keep pace. So many are really feeling the squeeze.