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Food crisis fears grow as corn prices surge

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Food crisis fears grow as corn prices surge

Warnings from the US about its poor harvests have led to fears of an impending food crisis, as soft commodity prices soar.

The US department of agriculture (USDA) warned last week that the country's corn stocks are to fall to their lowest level in 14 years following the impact of adverse weather conditions.

The tighter supply picture for corn and barley caused agricultural commodities prices to surge both in the US and Europe, with the price of corn hitting a two year high on Monday.

The US is far from the only country to have recently warned on its agriculture output; Brazil has been hit by a drought, while heavy rain in Canada and parts of Europe have also hit crops. Earlier this year, a combination of wildfires and drought hit Russia's wheat harvest and caused it to impose restrictions on its wheat exports.

As a result, some commentators are predicting a repeat of the global food crisis seen in 2007-2008, but commodity analyst Connor Noonan, who works on the Aliquot Agriculture (UCITS) Fund at Castlestone Management, thinks it will not lead to a food crisis on the same level.

He points to the price of rice as an indicator that any food crisis will not be as severe as previously, as this time it has not been rising in line with other commodities. In fact, the price of rice is down in the year to date, he says. 'So I don't see crisis levels of food inflation.'

Noonan says Monday's moves in the corn market were certainly 'fundamentally-driven, not speculator-driven,' and that although most investors had been expecting more bad news on corn, the severity of the USDA's announcement last week caught many off guard. 'With such a dramatic report, the USDA has caused a lot of uncertainty. The previous downward adjustments had been incremental, but this was a dramatic drop,' he said.

Commodities specialist Castlestone has been bullish on grain and corn this year for the Aliquot Agriculture fund, but now Noonan is looking further afield for other areas which can prosper from high corn prices.

He thinks soya beans, for example, will be in high demand among consumers, but with the rising price of corn farmers may overlook it and opt to plant corn instead, hitting soya supply.

Also, he is looking at lean hogs and live cattle as other areas which can benefit from corn's inflated price. Corn is the main constituent of animal feed, and as a result farmers will find their costs greatly increased. In order to cover these additional costs, Noonan expects farmers to bump up the price of pork and beef.

The Aliquot Agriculture (Ucits) fund has lost 23.2% in dollar terms since its launch in September 2008, compared to a 42.2% fall in the S&P GSCI agriculture and livestock index.

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