Rising Corn Prices Trigger Fears of Rising Food Costs

Rising Corn Prices Trigger Fears of Rising Food Costs

October 13, 2010

New York Times - First it was heat and drought in Russia. Then it was heat and too much rain in parts of the American Corn Belt. Extreme weather this year has sent grain prices soaring, jolting commodities markets and setting off fears of tight supplies that could eventually hit consumers’ wallets.

In the latest market lurch, corn prices dropped in early October, then soared anew, in response to changing assessments by the federal government of grain supplies and coming harvests.

The sudden movements in commodities markets are expected to have little immediate effect on the prices of corn flakes and bread in the grocery store, although American consumers are likely to see some modest price increases for meat, poultry and dairy products.

But experts warn that the impact could be much greater if next year’s harvest disappoints and if 2011 grain harvests in the Southern Hemisphere also fall short of the current robust expectations.

“We can live with high commodity prices for a period without seeing much impact at the retail level, but if that persists for several months or a couple of years, then it eventually has to get passed on” to consumers, said Darrel Good, an emeritus professor of agricultural economics at the University of Illinois.

The rise in prices is a good indication of how volatile the market has become for commodity futures in basic farm products like corn or wheat.

Grain prices started to shoot up over the summer on reports of a catastrophic drought in the major wheat-producing regions of Russia, Ukraine and Kazakhstan. Prices rose not only for wheat, but also for corn and soybeans, since those grains are interchangeable as animal feed and a drop in wheat production could mean increased demand for the other grains.

Corn prices surged again on Friday after a new report from the United States Agriculture Department said this year’s corn crop would be smaller than expected. The harvest is forecast to be 3 percent lower than the 2009 crop, which set a record.

The crop will still probably be the third-largest on record, but demand for corn to be used as animal feed on American farms, in ethanol production and for exports remains high, so supplies are expected to be tight.

December corn futures on the Chicago Board of Trade reached a high of $5.84 a bushel in trading on Tuesday. In late June, similar corn futures were trading as low as $3.43. That is a 70 percent jump.

Dr. Good said the average price for the new crop, which will encompass sales through next August, is expected to be a record, at about $5 a bushel, well above the $3.95 average price for the last three crops.

The government’s latest harvest forecast suggests that corn supplies into next year will be “precariously tight,” said Don Roose, president of U.S. Commodities, a consulting and brokerage firm in West Des Moines, Iowa. “At these levels, we have to cut back on our usage,” he said. “We can either cut back on exports, our ethanol consumption or our feed.”

It is not yet clear who will be forced to cut corn consumption.

Federal ethanol mandates mean that production of biofuel from corn will remain high, regardless of price. The export market is also going strong.

Dermot J. Hayes, a finance and economics professor at Iowa State University, said there appear to be signs of what he called panic buying by some Asian purchasers of American grains for animal feed. He said they are continuing to buy even though prices are rising out of fear that prices could go much higher.

“The psychology is, you need corn or soybeans for your diets and let’s just buy now rather than wait,” Professor Hayes said.

A wild card in the export market is China, which has not historically been a significant buyer of American corn. China surprised experts when it made some purchases earlier this year, but it is not clear if it will be a major buyer of the current crop.

“Everybody will be watching that closely, to see if China is in the market or not,” said Dr. Good.

The price increases are good news for American grain farmers, who stand to get far more for their crops than they anticipated when they planted them in the spring.

But they mean hard decisions for livestock and dairy farmers, who were hard hit during the recession and have only recently begun to recover.

Those farmers are likely to respond to higher feed prices by cutting the size of herds, or at least not increasing the number of animals they raise, say farm economists and industry executives. Many farmers will also sell animals at a slightly lower weight. Both those factors will cut supplies of meat and dairy products, eventually pushing prices up.

A similar outcome is expected for the poultry industry.

Other foodstuffs are not likely to see as strong an impact, according to economists.

That is because the cost of basic grains makes up only a small fraction of the total cost of most manufactured foods that contain them, such as breakfast cereals or bread. A large part of the cost of those items comes from transportation, processing and marketing.

The federal government forecasts that food prices will rise as much as 1.5 percent this year and 2 to 3 percent next year. The average annual increase in food prices over the last 10 years was 2.9 percent.

Despite the high commodity prices, economists do not expect a return to the raging food inflation of 2008, when worldwide demand surged and costs were propelled higher by peaking fuel prices. That led to a 5.5 percent increase in food prices in the United States in 2008 and much higher food inflation and food shortages in developing countries.

The Agriculture Department is scheduled to release an updated estimate of this year’s crop yield next month.

“There will be a lot of attention focused on the next crop report,” said Joseph Glauber, the department’s chief economist. “It just appears to be a very, very tight situation, and so there will be a lot of volatility.”