U.S. Corn Reserves Expected to Fall to 15-year Low, Leading to Higher Grain and Food Prices This Year

U.S. Corn Reserves Expected to Fall to 15-year Low, Leading to Higher Grain and Food Prices This Year

April 8, 2011

AP – Rising demand for corn from ethanol producers is pushing U.S. reserves to the lowest point in 15 years, a trend that could lead to higher grain and food prices this year.

The Agriculture Department on Friday left its estimate for corn reserves unchanged from the previous month. The reserves are projected to fall to 675 million bushels in late August, when the harvest begins, or roughly 5 percent of all corn consumed in the United States. That would be the lowest surplus level since 1996.

The limited supply is chiefly because of increasing demand from ethanol makers, which rose 1 percent to 5 billion bushels. That's about 40 percent of the total crop.

But the increase didn't alter the agency's overall estimate, mostly because livestock producers are expected to scale back their corn purchases.

The Agriculture Department estimated that demand from livestock producers fell 1 percent to 5.15 billion bushels.

Crops prices rose about 1 percent to $7.67 during morning trading, shortly after the report was released. The price of soybean rose 1 percent to $13.80 a bushel. Wheat was virtually unchanged at $7.76 a bushel.

Corn prices affect most products in supermarkets. Corn is used to feed the cattle, hogs and chickens that fill the meat case, and it is the main ingredient in cereals and soft drinks.

Corn Prices Up 87%, Soybeans 41%, Wheat 54%

April 5, 2011

DailyFinance.com - Just when it seemed like it couldn't get much worse on the price front – how can you top $4 a gallon gasoline? – comes news the cherished summer barbecue is about to get more expensive.

Contracts for future deliveries of corn, soybeans and wheat prices surged to the most permitted by the Chicago Board of Trade in a single day. Corn was up 4.5%, soybeans were up 3.25% and wheat was up 5%. So far in the past year, corn prices have risen by 87%, soybeans have jumped 41% and wheat has climbed 54% -- thanks in part to bad weather in Russia and Australia, two major wheat producers. The surge in prices on the futures exchanges was in reaction to a report by the U.S. Department of Agriculture that stockpiles of corn measured at the beginning of March had fallen 15% from their levels a year ago.

Higher Grain Prices = Higher Meat Prices

The U.S. is the world's largest consumer of corn. It seems to be in nearly everything -- cereals, sweeteners and ethanol for our cars. Corn, and to a lesser extent soybeans, are also important for feeding livestock. According to the National Corn Growers Association, about 80% of all corn grown in the U.S. is consumed by "domestic and overseas livestock, poultry, and fish production." So higher prices for these commodities means that prices for beef, pork and chicken are likely to go up as well down the road.

"It looks like these reports will extend the price rally we've seen, not only for food commodities that are directly manufactured from corn, soybeans and wheat but also livestock products that depend on those commodities," says Darrel L. Good, a professor of agricultural and consumer economics at the University of Illinois.

"The real test will come this summer, when we have the highest seasonal prices, particularly of pork," he says. "It looks like those prices could be sharply higher than we have ever experienced before."

Revising the Grocery Bill Upwards

Compounding these price pressures are not only higher commodity prices, but also surging demand from foreign countries for U.S. beef and pork products. That's mainly a result of the improving world economy., especially in India and China.

Art Barnaby, an agricultural economist at Kansas State University, says the economic upswing is also producing higher demand for steak at home in the U.S. -- as families stop eating mac and cheese and other less expensive foods. Higher demand adds up to higher prices in the long run, he says, even without higher feed prices.

Just how much have beef and pork prices headed higher? Since last summer, beef has risen 27% and pork is up 32%. 'That's huge; we've never experienced cattle prices at this level," says Good.

Ephraim Leibtag, an economist at the Department of Agriculture's Economic Research Service, says his department has revised upwards its grocery price forecast for the coming year. It now expects prices to rise 4% in 2011.

"If commodity prices continue to rise or even stay at these high levels," he says, "there's an upside risk for future increases later on in the year. It could take several months before the higher commodity prices are reflected in higher meat price."

Good says the reason that corn inventories are down so dramatically is the 2010 crop was smaller than in previous years -- and that we're consuming corn at a much faster rate than last year.

Overseas Demand Also Surging

It's worth bearing in mind that it's not just American consumers who are taking on the chin at the supermarket. According to the U.N.'s Food and Agriculture Organization, food prices surged 2.2% in February over January, with the FAO's cereals index up 3.7% and meat up 2% in a single month.

The agency also warns the rise in oil prices could "further exacerbate an already precarious situation in food markets."

This is particularly true in developing countries. It was a crisis over food price hikes that touched off a wave of demonstrations in Tunisia earlier this year -- which eventually led to popular protests against governments in Egypt, Libya, Bahrain and Yemen.