DROUGHT in the US, the world's largest grower of maize, looks set to place upward pressure on global food prices - and on SA's inflation rate that had just settled back into the Reserve Bank's target range.

Falling food and fuel costs in emerging economies such as SA had lifted hopes that central bankers may cut rates to boost sluggish growth caused by the eurozone crisis.

Maize futures surged yesterday to the highest price since September last year after the US department of agriculture cut production and inventory estimates by more than analysts had predicted amid the worst drought since 1988.

Food inflation "might go back into double digits again unless there's some rain in the maize-growing areas of the US," Jannie d e Villiers, Grain SA's CEO, said yesterday.

Lower commodity prices have helped bring inflation back into the Reserve Bank's targeted band of 3%-6%. In May, Statistics SA reported that inflation had dropped to 5,7%, the first time it had been in the targeted range since September last year. Food inflation makes up about 15% of the overall inflation basket. Last month, Grain SA warned that SA's poor rains had lowered the crop forecast for this year, and said a reduced maize surplus of just a million tons - a quarter of last year's - could affect food prices.

With maize yields also expected to be lower this year in China, global demand could put pressure on food prices. Already, Chinese buyers have visited SA to explore the possibility of importing maize. SA should expect a commercial maize crop of 11,056-million tons this year, the crop estimates committee said last month.

Concern about the US harvest has already fed into local grain prices, with white maize up 9,2% last month. Yellow maize, used in animal feed, gained 10,2%.

Maize prices, quoted in the US as corn, surged to their highest since September and soya beans reached a four-year high after the US yesterday cut its forecasts yesterday.

The 12% cut in the US's maize crop forecast came just a month after it predicted a record harvest.

The US soya bean estimate was cut 4,8%. Global wheat production for last month would be less than expected, as a dry spell hurt yields in Russia, the department said.

Areas of moderate to extreme drought had expanded to 53% of the US Midwest, the main growing region, fuelling the year's biggest gains in crop prices among the 24 commodities tracked by the Standard & Poor's GSCI spot index.

"The drought of 2012 will be one for the records," Peter Meyer, senior director for agricultural commodities at PIRA Energy Group in New York, said yesterday.

"Whether it's ethanol or livestock, no one is immune from this impending disaster," Mr Meyer said. "The ramifications will be widespread, affecting everything from your food to your gasoline." December maize futures rose 0,7% to $7,22 a bushel on the Chicago Board of Trade last night, after reaching $7,48, the highest for the most-active contract since September 13. Prices surged 42% yesterday since mid-June.

Crop conditions as of July 8 were the worst for that date since the drought of 1988, government data showed. Maize is the biggest US crop, valued last year at $76,5bn.

With Bloomberg

derbyr@bdfm.co.za

Ron Derby: page 17