Corn supply tightens for 2012, raising prices

Published August 11, 2011

| Associated Press

Americans can expect to pay slightly higher food prices next year, because of expectations that an unseasonably hot summer damaged much of this year's corn crop.

But the rise in grocery prices might not be severe because farmers are sitting on larger supplies ahead of the fall harvest, and demand for corn is falling.

The U.S. Agriculture Department estimated Thursday that the fall harvest won't yield as much corn as first estimated. High temperatures in key U.S. corn-growing states have damaged about 4 percent of the coming yield.

The price of corn jumped 26 cents to $7.14 a bushel after the report was released. That's almost twice the price paid last year. But it's below the record $7.99 reached in June.

Corn is used in everything from beef to cereal to soft drinks. It typically takes six months for a change in corn prices to affect products on supermarket shelves.

Traders worry that grain shortages could return next year because of the damaged crops.

Farmers are expected to have a surplus of 940 million bushels when the harvest begins next month, the USDA said. That's roughly a 26-day supply of corn, slightly more than the previous month's estimate.

But the USDA said the corn surplus could dwindle next fall to only 714 million bushels — or about a 20-day supply. A 30-day supply is considered healthy.

For all of 2011, the USDA predicts food prices will rise 3 percent to 4 percent. Last month, it estimated that food inflation could slow next year to between 2.5 percent and 3.5 percent. But that figure will likely change because of the damaged crops. The USDA will release its next estimate later this month.

In any case, "I think consumers can expect higher food prices going forward," said Jason Ward, an analyst with Northstar Commodity in Minneapolis.

This year's harvest will still be larger than last fall's harvest of 12.45 billion bushels. In the spring, farmers planted the second-largest crop since World War II.

And the supply squeeze won't be as severe as it might have been. High prices have led ranchers to cut their orders and seek alternative feeds for their livestock, such as wheat. Ethanol producers have also cut demand

"Price is going to slow down demand," Ward said.

A smaller surplus drove corn prices higher earlier this year. Global demand for corn, soybeans and wheat has outstripped production for the last 10 years. Surpluses, vital to a stable food supply, have shrunk.

When surpluses drop as low as they are now, even relatively small declines in supply can send crop prices sharply higher on global commodities markets. Traders have been nervously watching the USDA crop reports, looking for any sign that the crop harvested this fall will be smaller than expected.

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