Fewer Acres of Corn Likely To Keep Prices High - Truth About Trade and Technology

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Fewer Acres of Corn Likely To Keep Prices High

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Tuesday, 01 April 2008 21:11

The Wall Street Journal

U.S. farmers will plant 8% fewer acres of corn this year, according to a government report released Monday, meaning corn prices are likely to stay high and could climb in coming months.

Farmers are shifting to higher-priced soybeans and wheat despite growing demand for corn in the U.S. and abroad, according to the U.S. Department of Agriculture's first estimate of what farmers intend to plant this season. The report said producers intend to plant 18% more soybean acres this year over last and 6% more wheat acres to cash in on the higher prices.

At the Chicago Board of Trade, corn closed at $5.67 per bushel, while soybeans closed at $11.97 after heavy trading.

Terry Roggensack, principal at The Hightower Report, a Chicago-based commodities forecast service, said U.S. corn supplies will be "extremely tight."

Stocks of corn just before the new harvest could fall to a decades-long low of 636 million bushels, compared with 1.4 billion bushels currently. If corn usage remains unchanged and if yields are the same as last year, he says, "we'll run out of corn."

The tight grain situation, combined with rising energy prices, could exacerbate food inflation and retrigger debates over using food for fuel at a time when many low-income consumers are being roiled by high food prices, the crash in housing prices and a likely recession.

Already, some members of Congress are calling for renewed attention to the government's policy on fuel ethanol, which requires the use of as much as 15 billion gallons of corn-based ethanol by 2015, up from about nine billion currently.

"There are some of us who are concerned about a possible over-reliance on corn ethanol," says Rep. Jim McGovern, the Massachusetts Democrat who co-chairs the House hunger caucus.

Scott Faber at the Washington-based Grocery Manufacturers Association, says, "Clearly, Congress needs to revisit the food-to-fuel mandates in light of today's crop report." Mr. Faber says his organization expects food inflation to be more than 8% this year. Last year, food inflation was around 4%.

There is no sign the government plans to revamp the law, especially since the policy is a hallmark of President Bush's energy policy and because there are powerful interests in Congress that benefit from it.

Meanwhile, farmers are trying to plant as big a crop as possible to supply the world with food and to cash in on high prices. This year, they will plant 242 million acres of food crops, including corn, wheat, soybeans, barley, rice, oats and sorghum, up from about 228 million two years ago, Credit Suisse says.

Still, the world may come up short. A smaller corn crop is good news for farmers who could reap $6 a bushel this season, up from around $2 a couple years ago, if prospective corn acreage remains at the forecasted level and if a soggy spring keeps farmers in the Corn Belt out of the fields until later in the season.

The report is bullish for fertilizer and seed companies that have made a killing off of the booming agriculture markets. Monsanto Co., which last week raised its full-year earnings forecast for the third time this year, recently announced a 25% price increase for some of its genetically modified seed. The stock price of Potash Corp. of Saskatchewan Inc., one of the world's largest fertilizer companies, has more than tripled over the last year.

The report is less than sanguine for businesses that rely on cheap corn to stay profitable. Chicken producers like Pilgrim's Pride Corp. say grain prices have hit their bottom lines to the tune of billions. Packaged-food companies like Kraft Foods Inc. and Sara Lee Corp. have repeatedly cited higher grain prices, along with rising energy costs, as dragging on profits. Restaurant chains like Yum Brands Inc., owner of Taco Bell and Pizza Hut, also have been hit.

Pacific Ethanol Inc., the once-high-flying ethanol start-up, is on the ropes largely because of the soaring cost of corn. Monday, the company reported a $14.4 million loss for fiscal 2007.

The season is young. Now that the report is out, investors will be preparing for volatility and scrutinizing the weather.