UPDATE 4-Mexico group warns tortilla prices to jump

(Adds govt stance on prices paragraphs 3-4, 9-10)

By Jason Lange and Luis Rojas Mena

MEXICO CITY, May 14 (Reuters) - The price of tortillas, a politically sensitive issue in Mexico where the corn pancakes are eaten more often than bread, is expected to jump about 18 percent by June on rising costs for fuel and corn, a major industry group said on Wednesday.

Average tortilla prices should rise to 10 pesos ($0.95) per kilo in June from 8.5 pesos per kilo now, Rafael Ortega, who heads the National Chamber for the Tortilla and Dough Industry, told Reuters. Ortega's organization groups together about 40 percent of the country's tortilla producers.

But Economy Minister Eduardo Sojo said the government is working with the tortilla industry to keep a lid on prices, such as offering subsidies for transport and warehousing, and said that prices -- even though not state controlled -- would not rise.

"There is no price increase, it will not go up tomorrow," Sojo told reporters. "We are going to work with them to support the productive chain so that we keep prices reasonable for tortillas."

The tortilla chamber's forecast, together with other projections of even sharper increases that have been published in Mexican newspapers, contradicted recent statements from major retailers that tortilla prices will not rise sharply this year.

Global grain prices have surged on higher demand from countries like China, scant harvests in many countries and growing demand for grain from the biofuel industry.

In some parts of the world, soaring prices for basic food staples such as rice have sparked street protests and riots.

Food costs are a serious concern for the poor in Mexico, where the minimum wage is around $5 a day. In the past, the government has made deals with retailers and producers to control tortilla costs.

GOVT PRIORITY

Sojo said food costs started to impact Mexico in late 2006 and early 2007. "We have been taking measures since then, so it is not a surprise and it is a topic that is a priority," Sojo told local radio.

Sojo said the government's efforts have kept tortilla price increases to a minimum, rising to an average country-wide price of 8.01 pesos this week, from 7.90 pesos at the close of 2007.

But investors seized on the Mexican inflation forecasts as more evidence that the possible price increases will fuel higher inflation and might lead the central bank to raise interest rates this year.

Yields on Mexican interest rate futures <0#TII:> surged on Wednesday, showing investors had significantly increased bets of a rate hike sometime this year.

The yield on Mexico's benchmark 10-year peso bond <MX10YT=RR> rose 7 basis points to bid 8.10 percent.  Continued...