Wheat prices not yet a threat to inflation: FAO

World wheat price rises are not yet sufficient to trigger global food inflation, an economist at the UN Food and Agricultural Organization said on Friday, even though they almost doubled in the space of two months.

A drought and heat wave in the Black Sea region, declared to be over in Russia earlier this week, is estimated to have destroyed a quarter of its grain crop and led to a ban on exports. Ukraine is also ready to impose export quotas, which traders have criticized as overly restrictive.

FAO economist and cereals analyst Abdolreza Abbassian told Reuters in a telephone interview that he expected wheat prices to remain high and volatile in the coming months but that they did not pose a threat of global inflation.

"To talk about food inflation when the bulk of the increase is in wheat is a bit too early," he said.

Earlier this month, wheat futures in Chicago rose to the highest levels in about two years, peaking at $8.41 a bushel after a two-month rally fueled by the Russian drought.

They have subsequently fallen back below $7.00 a bushel on the front month as high global stocks also helped cap the rally and keep prices far below the peak of $13.34-1/2 set in February 2008.

Buyers such as Egypt, the world's largest wheat importer, also are turning to the United States, which has ample capacity.

Prices were bolstered on Thursday by analysts' and traders' comments that Russia might become a significant importer of wheat this season.

But a spokesman for the Agricultural Ministry told RIA news agency on Friday that the country had no plans to import grain this year. "This rumor is being spread by dishonest grain traders in order to heat up the market," he said.

Changes in Output Forecasts

On Friday, Abbassian estimated that wheat output in Russia was likely to fall by about 20 million tons to 42-43 million tons this year.

He had said on Thursday the FAO was set to cut its 2010 world wheat output outlook by 5-7 million tons and trim its global wheat stocks estimate by a couple of million tons to take into account Russia's shortfalls.

FAO's food price index, a measure of monthly changes in international prices of a basket of food commodities, in August is set to exceed July's five-month high and is likely to keep rising in the next two to three months, he said.

The index rise in August will be driven by cereals, sugar and vegetable oils and fats, he said.

It rose to a 165.5 reading in July, its highest since February, but it was still far away from its peak reading of 213.5 in June 2008, in the middle of the global food crisis which triggered food riots in developing countries.

Countries such as India where food accounts for a large part of the inflation index could indeed see a risk of food inflation, Abbassian added.

Moreover, if bad weather continues in Russia and hits other major producers in the northern hemisphere as they prepare for their winter plantings campaign, then next season's global wheat supplies could be at risk, he said.

But that possibility is "very small" at present, because weather conditions appear to be improving in Russia, he said.

Surging wheat prices are likely to prompt farmers around the globe to sow more wheat for the next season, creating the theoretical possibility of a glut, he added.

Rains started in Russia on Tuesday and are forecast to continue through at least August 22 in most parts of the country, the Hydrometcentre weather forecasting service said on Friday.

Large-scale winter grain sowing, which normally starts in August, is unlikely until September 10, it said.

A senior Ukraine Agriculture Ministry official said, meanwhile, that the government was open to adjusting export quotas after talks with traders and depending on market conditions. The quotas are due to be finalized at a government meeting on August 25.

[Source: By Svetlana Kovalyova, Reuters, Milan, 20Aug10]

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