Warning on farm input costs

The rapid recovery in international food prices could have unintended consequences, with fears input costs could rise sharply and some products may face a price correction.

Rabobank's manager of food and agribusiness research and advisory, Justin Sherrard, said the quicker-than-expected return in global growth raised questions as to whether the financial crisis would have any lasting impact on the food and agribusiness sector.

The increase in food prices since March 2009 was greater than the trend during the mid part of the decade, and was expected to continue.

Mr Sherrard said while that was good for producers, the increase was not even, with dairy prices rising more quickly than those for red meat .

The bank's senior analyst for economics and commodities, Wayne Gordon, said risks remained, specifically that price increases may have "overshot market fundamentals".

"This may lead to some near-term correction."

Another threat was from rising farm input costs as global supply chains adjusted after the recession.

Bank analyst Adam Tomlinson said many manufacturers and distributors of farm inputs had run down inventory, and any sharp increase in demand could create a bottleneck, pushing up short-term prices.

"Lower demand levels have meant that global prices for manufactured farm inputs remained subdued throughout 2009."

The collapse in prices meant manufacturers were caught with high-priced inventory and excess production capacity which forced them to wind back production and run down stock.

Mr Tomlinson said he expected farm input costs to stay above pre-2006 levels in the short to medium term due to increases in production as global food demand rose.

He warned the price of energy and raw materials and increased costs for managing carbon pollution could all impact on farm input costs.