Ayelet Nir - David Bachar
Ayelet Nir Photo by David Bachar
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The worst threat to global economic growth may well be food, not oil, say economists - and the price hikes may well land in Israel this year.

Emerging markets that led the recovery from economic crisis may be hardest hit, if food costs start eating into developing economy growth rates. Emerging and developing economies are expected to grow at a 6.5% clip this year, the International Monetary Fund estimates. But it predicts that the advanced economies may post just 2.5% growth. In other words, the global economy needs emerging markets' vim - but everyone has to eat, and prices of commodities, notably of agricultural commodities from corn to cocoa to grains, have been jumping high. On Friday cocoa beans soared to a 32-year high of $3,775 per ton in world markets, the highest level since 1979.

In its weekly macroeconomic report, the Tel Aviv-based investments firm IBI writes that the increase in Israeli food prices has lagged far, far behind the increase in the prices of agricultural commodities, for a variety of reasons. But the index tracking food prices in Israel is going to jump this year by at least 8%, predicts IBI chief economist Ayelet Nir.

The Goldman Sachs index of agricultural commodities rose 64.9% in the last 12 months as of January's end (compared with 44.5% in 2010 ) while the Israeli food index (excluding fruit and vegetables ) rose by 2.9% in that time (compared with 2.0% in 2010 ), she wrote.

Why have Israeli food prices risen so slightly compared with the global index?

"The modest increase by the Israeli food index compared with the commodities index is due to two factors," wrote Nir in the report, one being that it responds at a lag. The other is that consumer product prices in Israel depend on a wide range of factors, and the price of raw materials is just one of them. "Among these factors are transport, wages, electricity, outlay on advertising, and more. It is true that at least some of these factors have risen in recent months, but by less than the change in prices of raw materials, which blunts the impact of the steep increase in prices of raw materials on the CPI," she explains.

Yet another factor is that to a degree, Israel's manufacturers took the brunt of the rising cost of raw materials. But more will likely be rolled onto households.

"The food index will rise further, and by a lot, in the near future," Nir predicts in her report.

Based on the steep increase in the index of agricultural commodities in the last 12 months, she predicts the Israeli food prices index will jump by more than 8% this year.

Note that the increase had been even steeper in 2008, Nir says: This time around it's being dampened to a degree by fiercer competition and the appreciation of the shekel.

But she notes that this year, the increase in food prices will be driven by more than just the commodities index - wages are rising, transport costs are too and so are other costs.

What risk the unrest will spread to Saudi Arabia?

Meanwhile, oil market investors are pricing in only a small risk that Middle East unrest will spread to top oil producer Saudi Arabia. But if it does, that would instantly catapult oil to the top of the global economic risk list. Assuming Saudi Arabia's oil flows unimpeded, the blow to global consumer spending looks relatively modest. Food prices, however, are expected to remain elevated for some time, which puts more pressure on households.

"At the moment, the increase in food prices is much more of a concern," Thomas Helbling, an advisor at the IMF research department, told Reuters Insider.

U.S. Treasury Secretary Timothy Geithner echoed that view last week, pointing out that rich nations could tap strategic oil reserves if needed, while food prices will remain high "for a long period of time."

Retail sales figures due this week from the United States, China and Britain will shed some light on how consumers coped in February, when violence in Libya drove energy prices sharply higher.

Though one might have expected otherwise, so far U.S. consumer confidence has risen right along with gasoline prices, according to the Thomson Reuters-University of Michigan Surveys of Consumers. But if oil prices continue to climb, it will be confidence that breaks first, predicts Richard Curtin, the survey's director.

"That aberrant trend is unlikely to continue," Curtin said. "Either gas prices will begin to decline or, more likely, expectations will fall."

If investors are right, however, oil prices will top out around $106 a barrel and then drift lower next year.