Tighter U.S. corn supplies may mean higher food prices

Thursday, November 11, 2010

JEFFERSON CITY, Mo. -- Higher food prices are one of the implications of the forces at work in the commodities markets.

Missouri's corn production forecast is now pegged at 127 bushels per acre, down by 7 bushels per acre since October, according to a report released Tuesday by the U.S. Department of Agriculture's National Agricultural Statistics Service.

The report also cut the national corn yield by 1.5 bushels per acre to 154.3. The service dropped nationwide production by 1 percent to 12.5 billion bushels.

"It's still a very good corn crop, but not as good as predicted [and] this is not good enough," Abdolreza Abbassian, an economist with the Food and Agriculture Organization of the United Nations, said Wednesday.

The U.S. stocks-to-use ratio, which estimates how much corn remains in storage at the end of the marketing year compared to overall use, is at a 15-year low.

Global corn demand is underpinned by challenges facing wheat and barley crops, Abbassian said. But, he said, world stocks are not now tight enough to render the food riots sparked by shortages in 2007 and 2008. At that time, the U.S. had adequate supplies and was filling the world's needs; this time the demand conflict is unfolding in the U.S., he said.

"Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months, the Wall Street Journal reported Nov. 4. "And food makers and retailers including McDonald's Corp., Kellogg Co. and Kroger Co. have begun to signal that they'll try to make consumers shoulder more of the higher costs for ingredients."

As of September, the 12-month consumer price index for food was rising faster than overall inflation, a trend the USDA predicted would continue with 2011 food inflation targeted at about 2 to 3 percent, the Journal said.

Those pressures unfold as increasing legions of recession-scarred consumers seek assistance in covering basic food needs.

As of July in Missouri, 918,839 individuals -- or about 15 percent of the state's population -- received support from the federal food stamp program, according to the most recent statistics available. That reflects a 9.7 percent change from a year earlier and a 37 percent increase over July 2006.

Legal action taken Tuesday by large-scale oil and food interests against the federal government's increased ethanol-gasoline blending standards illustrates how the conflicting interests of end users are enflamed by higher corn prices, said economist Sid Love, president of the Kansas City-area Kropf/Love consulting firm.

Food-related trade groups, including the American Meat Institute, the Grocery Manufacturers Association, and the National Council of Chain Restaurants, joined the American Petroleum Institute in suing the U.S. Environmental Protection Agency, citing, in part, concerns that an expanded ethanol market will drive up food prices.

"The truth is, we're going to be using as much corn for ethanol as we feed," Love said. "When you use your food to make fuel somebody loses."

According the USDA's numbers, livestock feeders are losing.

"Higher prices are expected to curb corn feed use by 100 million bushels from the previous forecast to 5.3 billion," said St. Louis-based Doane Advisory Services in a summary of the USDA report.

"Exports are down 50 million bushels to 1.95 billion. However, partially offsetting the cuts is a 100 million bushel upward revision in corn for ethanol to 4.8 billion bushels.

"Weekly ethanol production statistics show ethanol production running well ahead of the level implied by the previous forecast."

Despite the trimmed forecast, exports are still running about even with last year.

The pressure of higher prices on exports is being offset by the weaker U.S. dollar in relation to much of the world's currency, China's position as a net corn importer and short wheat and course grain crops in Russia, Ukraine and Kazakhstan, said Pat Westhoff, a co-director the Food and Agriculture Policy Research Institute at the University of Missouri.

But tax credits supporting the ethanol industry face an uncertain future.

"The ethanol tax credits are currently set to expire on Dec. 31," Westhoff said. "If Congress does not take any action, what's now a 45-cent-per-gallon benefit for those that blend ethanol for gasoline will disappear on Jan. 1.? That will result in lower ethanol prices, if not lower production."

Still, commodity prices across the board remain high, driven not just by demand for the physical commodities but also for the futures contracts that outside investors are increasingly using to diversify their portfolios.

Economists predict these high prices will heighten spring acreage wars as farmers debate what crops to plant.

Cotton prices are at their highest since the Civil War and stocks are at their lowest levels since 1925, Doane noted.

"That has implications not just for Bootheel farmers, but also for farmers in the rest of the state because it means they'll be more competition from cotton for land," Westhoff said. "There will be less corn and soybeans in southern states than might have been produced otherwise."

While American producers and consumers negotiate what supply-demand balance works for them, the rest of the world takes note.

Higher prices trigger more investment in global agriculture and incentive for farmers in developing countries to improve production, said the FAO's Abbassian.

This can allow poorer countries to better supply their own food needs, but sometimes government policies meant to insulate vulnerable people from malnutrition actually short circuit the market signals that drive improved agricultural infrastructure, Abbassian said.

He advocated a comprised policy approach that allowed free markets to dictate commodity prices with targeted safety nets put in place to protect those needing assistance.

Recent prices increases overshadow the fact that agricultural prices are at a 100-year low when they are adjusted to the cost of living, he said. Keeping that in mind, he added, plenty of resources are available to aid in-need populations worldwide while the market does its job.

Abbassian also noted that as U.S. farmers cut back on plantings on crop such as wheat in favor of other, higher-value crops, opportunities are opened for other countries to fill the void.

All in all, the complexity of supply and demand signals in global commodities markets accentuated by the added affects of biofuels and speculative investment leaves the details of price predictions subject to significant uncertainty.

As Love noted, "It's going to be a really choppy ride."

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