July 2, 2008

Food Inflation Might Avoid Flood Crisis

By The Associated Press

DES MOINES (AP) - Midwest floods might not contribute as much to food inflation as was feared.

Corn prices fell Monday after the government surprised traders, reporting farmers tried to cash in on soaring corn demand for ethanol by planting more acres of the crop than the market expected.

That could be good news for shoppers, although food prices still have to contend with rising costs for distribution and for fuel.

Farmers will harvest nearly 9 percent fewer acres of corn this year than last year, in part because of Midwest flooding that has damaged a portion of the crop, the government reported.

But the latest USDA figures also showed that farmers had planted more than a million additional acres of corn than they had expected to plant in March, which may remove some of the inflation potential out of the floods. Corn futures prices fell in the wake of Monday's report.

The U.S. Department of Agriculture said farmers expect to harvest 78.9 million acres of corn, down 8.7 percent from the 86.5 million harvested last year.

The report also indicates farmers planted nearly 7 percent fewer acres of corn than last year - 87.3 million acres versus last year's 93.6 million acres.

But the acres planted were still higher than the 86 million acres that farmers had anticipated planting in corn when asked about it in March.

Grain analyst Dan Basse, president of Chicago-based AgResource Co., an agricultural consulting firm, said high corn prices encouraged farmers to find more land to plant in corn.

Even with the anticipated reduction in harvested acres caused by flooding, Basse said a robust corn harvest could soften corn prices.

"They'll weaken with time, and I don't see an economic reason why new crop corn futures need to be above 8 or new crop soybean futures need to be above 16 unless we have a drought," he said.

Corn futures, which were about $6 a bushel in early June and rose to about $7.60 as recently as last week, dropped nearly 30 cents to about $7.25 on the Chicago Board of Trade.

An ethanol industry trade group, Renewable Fuels Association, said the anticipated corn harvest will be enough to satisfy projected needs.

The group said a harvest of around 11.5 billion bushels will meet projected demand and leave about 800 million bushels left over. The USDA said about 4 billion bushels of corn remain in the nation's stockpiles.

"American farmers have again proven their detractors wrong, demonstrating that they are uniquely capable of meeting the growing demand for feed, food, fiber and fuel," said RFA President Bob Dinneen in a statement. "Despite challenging spring weather conditions and an unprecedented flooding event, farmers have responded to the needs of the marketplace by planting the second- largest area of corn since 1946."

Dan Cekander, an analyst for Chicago-based Newedge USA, said grain prices are likely to have less of an impact on food inflation than other factors. Food costs climbed about 4 percent in fiscal 2007, which ended in July, and Cekander said they could climb as high as 6 to 7 percent.

"It's more of a function of distribution and energy and other factors," he said.

Grain analyst Jim Bower, Lafayette, Ind.-based Bower Trading Inc. said corn prices will be highly dependent on the remaining growing season.

"Whatever the weather does between about July 10 and Aug. 15 is which way that corn market will probably go. If the weather is bad and we keep reducing the yield down, we go up. If the weather is good, it's mild like it has been in the last 10 days or so, then probably we may have seen the highs," he said.

Soybean stocks reported at 676 million bushels were slightly lower than expected and yield-reducing weather problems also could have a major impact on soybean prices, he said.

Strong export markets and skepticism over whether the soybean crop will produce expected yields drove July soybeans 23 cents higher Monday to hit an all-time high of $16.05.

Curt Sindergard, a northwest Iowa soybean grower, was among the skeptics.

"The report seems to include the acres that have been replanted in ponds," he said. "It's common to see 3- and 4-acre patches of replanting, even in the better crop areas, but we can't expect a full yield from those."

Sindergard, also president of the Iowa Soybean Association, said the USDA likely will adjust numbers further in the August report when actual yields are clearer.

Farmers can expect to see continued volatility in the markets until crops are in their reproductive stages and reports can give better estimates, he said.

Ron Litterer, who planted 1,000 acres of corn and 500 acres of soybeans in north-central Iowa near Greene, said everyone seemed surprised that flooding hadn't damaged more of the corn crop.

"The emotion with the flooding was probably overplayed a little bit on the corn production in Iowa," said Litterer, the National Corn Growers Association president. "Everybody was looking at the worst-case scenario coming into the report and now it puts a little reality back into the market. We do need to have good weather the rest of the growing season."

The USDA report said spring rainfall totaled 20 inches or more from eastern Oklahoma into the lower Ohio Valley, disrupting planting and other spring field work. That is at least 150 percent of normal.

The planted acres decreased in nine of the 10 major corn producing states - Illinois, Indiana, Iowa, Minnesota, Missouri, Nebraska, Ohio, South Dakota, and Wisconsin - in part because of high fertilizer prices, favorable prices for other crops and a return to normal crop rotation, the USDA said.

Illinois saw the largest decline, where farmers planted 12.3 million acres down from the record high of 13.2 million planted last year. Indiana decreased 800,000 acres and Minnesota, 600,000 acres.

Iowa continues to lead the nation in corn planted area with 13.7 million acres, down 500,000 from last year.

Kansas farmers planted 4.1 million acres up from 3.9 million in 2007.

Despite the reductions, the planted acres are still the second highest since 1946, behind last year.

Harvest acres, if realized, will be the second-highest since 1944, the USDA said.

The report also said planted soybean acres will increase 17 percent from last year to 74.5 million acres.

The planted soybean acres are expected to increase in all states and the planted area for soybeans is the third-largest on record, the USDA said.

Nationally, farmers reported 79 percent of the soybean crop had been planted at the time of the survey last week, the lowest since 1996.

The USDA reinterviewed 1,200 farmers last week to get the most updated information reflecting the impact of Midwest flooding.

A government update on crop progress will come from the USDA on Aug. 12 and will be based on a survey of 9,000 farmers from mid- July, said Carol House, chairwoman of the Agriculture Statistics Board.

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