Focus sharpens on food price forecast

Corn has knock-on effect to food supply chain

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For years, the US Department of Agriculture’s annual outlook forum drew a small crowd of farmers and agricultural commodities traders. But this year’s attendance has exploded, underscoring the importance of rising food prices worldwide.

The 2,000 delegates at the conference in Washington, some unable to fit inside the forum’s ballroom, rose early to hear the department’s chief economist, Joseph Glauber, not only repeat the well-known fact that grains markets will be stressed this year, but that the tightness will extend well into 2012.

Projections on grain stocks, land under cultivation and prices have become critical to governments and companies grappling with rising food inflation. Higher food prices have helped destabilise regimes as protests sweep the Middle East.

In his annual outlook Mr Glauber said the US “corn market will continue to be tight” next year, wheat “will tighten further,” and soyabeans “remain tight as well.”

The cost of food – already at an all-time nominal high at a wholesale level – will rise as a result. The USDA forecasts that consumer prices for food will rise to between 3 and 4 per cent in 2011 in the US, and possibly more in the latter half of the year, ending a tame period at the supermarket.

“Food prices will be strong [in] the forthcoming year,” Mr Glauber told the Financial Times on the sidelines of the conference.

But the outlook is highly uncertain and will depend on uncontrollable variables, particularly good weather during the spring planting season and the critical growing season in the summer. The USDA believes that current high prices will spur farmers to sow 9.8m more acres with crop seeds this year, bringing total planted acreage to 255m acres for the eight major field crops. Corn, the most widely grown crop, will probably be planted on 92m acres, an increase of 3.8 acres from last year.

The increase in acreage is massive by historical standards and analysts warn that farmers will only deliver the increase under ideal weather during the planting season. And even if farmers deliver a record acreage, demand is still booming.

The outlook for corn is particularly important because the US exports around 60 per cent of the world’s supplies and the price of the grain, used to fatten livestock, filters quickly into the food supply chain, affecting meat and poultry prices.

Corn prices have risen 90 per cent from a year ago, hitting a 2½-year high of $7.24¼ a bushel this month, after the US produced a large but disappointing harvest last year and demand for animal feed grows in emerging economies. Corn consumption rose also in the US, particularly to feed ethanol plants.

The USDA indicated high corn prices were beginning to curb demand in the meat industry, as pig and poultry farmers think twice before expanding and cattle herds are in outright decline. Not so for ethanol, which in the US is refined from corn. The heavily subsidised industry has been pumping out more than 13.5bn gallons of the petrol additive annually, well above the 12.6bn gallons required under government mandates. The ethanol business is still profitable because many plants had hedged their corn input costs. At this rate the USDA projects corn use for ethanol would account for 36 per cent of US corn production in 2011-12.

Bill Clinton, former US president, expressed the conundrum policymakers face as oil prices rise above $100 a barrel. “We have to become energy independent. We don’t want to do it at the expense of food riots,” he told the forum in a speech.

The combination of rising supplies but also rising demand for corn means that the closely watched stocks-to-use ratio will only rise to 6.4 per cent by the end of the 2011-12 crop year, up from a critically low 5.0 per cent at the moment but far below the more comfortable 10 per cent which usually brings prices down.

“Unless this year’s weather is better than normal or planting increases more than expected, stock levels for corn ... should see only modest rebuilding in 2011-12,” Mr Glauber said. “This will likely mean continued volatility in those markets,” he said.

Additional reporting by Javier Blas in Washington

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