Source: Reuters - Christopher Doering

WASHINGTON - U.S. consumers should brace for the biggest increase in food prices in nearly 20 years in 2008 and even more pain next year due to surging meat and produce prices, the Agriculture Department said on Wednesday.

Food prices are forecast to rise by 5 percent to 6 percent this year, making it the largest annual increase since 1990. Just last month, USDA forecast food prices would climb between 4.5 and 5.5 percent in 2008.

"It's a little bit of a surprise how strong some of the numbers were in July," USDA economist Ephraim Leibtag, who prepared the forecast, said in an interview.

"We've been waiting for some moderation, but especially with some of the meat prices and how much has come through relatively recently (at the retail level) leads me to believe the overall number may be a little bit higher for the year," he added.

Leibtag said he expected food prices to moderate, but the timing depends on what happens to volatile energy and food ingredient costs.

Prices are expected to rise by 4 percent to 5 percent in 2009, lead by red meat and poultry. The forecast, if correct, would be the third straight year where food prices have surged at least 4 percent.

In its latest food prices report, USDA said the increase for 2008 was due partly to higher costs for meat, poultry and fish, which make up about 12 percent of total food spending. Overall, costs for these items are forecast to rise 3 percent compared to 2.5 percent estimated last month.

Prices for fruits and vegetables, which account for more than 8 percent of food spending, will also rise 5.5 percent versus 5 percent predicted in July.

USDA also forecast increases this year of 9.5 percent for cereals and bakery products, a 14 percent surge for eggs and a 13.5 percent hike for fats and oils.

A broad range of commodities posted record highs this year, including corn and soybeans. Prices have since backed off as concerns over smaller crops due to a wet spring in the U.S. Midwest have largely dissipated.

In its first estimate of the fall harvest, USDA last week forecast a corn crop of 12.29 billion bushels, the second largest on record.

Despite the near-record crops, farm-gate prices for this year's corn, wheat and soybean crops, while lower than earlier forecasts, will still set records.

Agriculture Secretary Ed Schafer said last week he did not see any relief for food prices during the remainder of the year.

The cost of energy -- used to transport, package and process foods -- is still boosting food prices, even though energy prices have dropped. Oil has slumped from a record high above $147 a barrel on July 11 to $115.

"We haven't seen those prices reflected in the finished products yet," Schafer said.

Americans spend more than $1 trillion a year on groceries, snacks, carry-out food and meals in restaurants. Farmers get 20 cents of the food dollar and the rest goes to processing, labor, transportation and distribution. (Editing by Christian Wiessner)