Potential grows for food crisis as prices surge - U.N.

Corn plants are seen in a drought-stricken farm field near Evansville, Indiana, July 18, 2012.

ROME (Reuters) - The world could face a food crisis of the kind seen in 2007/08 if countries restrict exports on concerns about a drought-fuelled grain price rally, the U.N.'s food agency warned on Thursday, after reporting a surge in global food prices in July.

A mix of high oil prices, growing use of biofuels, bad weather, soaring grain futures markets and restrictive export policies pushed up prices of food in 2007/08, sparking violent protests in countries including Egypt, Cameroon and Haiti.

Concern about extreme hot and dry weather in the U.S. Midwest sent corn and soybean prices to record highs last month, driving overall food prices higher again and reversing the Food and Agriculture Organisation's forecast for declines this year.

"There is potential for a situation to develop like we had back in 2007/08," the FAO's senior economist and grain analyst Abdolreza Abbassian told Reuters.

"There is an expectation that this time around we will not pursue bad policies and intervene in the market by restrictions, and if that doesn't happen we will not see such a serious situation as 2007/08. But if those policies get repeated, anything is possible."

A number of major producers imposed various restrictions on exports in an attempt to control domestic prices in the 2007/08 crisis, including outright bans as well as quotas or higher tariffs on exports of foods including rice, corn and wheat.

The restrictions reduced supply on international markets, helping to drive prices even higher.

Grain markets have been boosted recently by speculation that Black Sea grain producers, particularly Russia, might impose export restrictions after a drought there hit crops.

Markets drew a little comfort from official Russian comments on Wednesday that the country saw no grounds to ban grain exports this year but did not rule out protective export tariffs after the end of the 2012 calendar year.

The FAO Food Price Index, which measures monthly price changes for a food basket of cereals, oilseeds, dairy, meat and sugar, averaged 213 points in July, up 6 percent from 201 points in June, the FAO said in its monthly index update.

The rise, which followed three months of declines, was driven mainly by a surge in grain and sugar prices, while meat and dairy prices were little changed, the FAO said.

HUNGER RISK

It said the U.S. drought, which is the worst to hit the Midwest in 56 years, had pushed up corn prices by almost 23 percent in July, and international wheat prices had followed, rising about 19 percent amid worsening output prospects.

Although below a peak of 238 points in February 2011, when high food prices helped drive the Arab Spring uprisings in the Middle East and North Africa, the index is still higher now than during the food price crisis in 2007/08.

Higher food prices mean higher import bills for the poorest countries, which do not produce enough food domestically, and a strong dollar would deepen that impact.

"The very strong appreciation of the dollar, and the surge in prices, is basically a double blow which is going to be quite stressful for some of the more fragile countries," Abbassian said.

Charity Oxfam said that the surge in prices could drag millions of people around the world into conditions of hunger and malnourishment, in addition to nearly one billion who are already too poor to feed themselves.

"These price hikes are being driven by more than just a drought in the US corn-belt and problem harvests elsewhere. Our food system should be more resilient than this," Oxfam spokesman Colin Roche said in a statement.

Roche said governments needed to invest more in small-holder farmers, reconsider biofuel policies and make more effort to tackle climate change.

The FAO's Abbassian said the situation was still quite different from 2007/08, when crude oil prices were at record levels, adding to farmers' costs.

Abundant supplies of rice and sluggish economic growth should also ease the upward pressure on prices, but a lot will depend on how the weather develops for U.S. crops and how demand develops in coming months, he said.

"We will have to see how the high price will ration demand, and to what extent, be it lesser exports or lesser use for biofuels," Abbassian said.

"What is quite certain is that it is not going to be a season where prices fall below the previous year, which is what we had anticipated. It is going to be another season of very high prices."

(Editing by Veronica Brown and Keiron Henderson)