January 13, 2012

A factor that should keep food prices high in the New Year is the US government's estimates for next fall's corn supply to be steady, it said Thursday (Jan 12).

The USDA estimated that there will be 846 million bushels of corn on hand at the end of the summer. The forecast was mostly unchanged from last month's estimate.

The surplus would satisfy demand for less than 25 days. A 30-day supply is considered healthy. A low supply of corn pushed food prices higher last year because corn is a key ingredient in everything from soda to cereal to animal feed.

Still, corn futures fell by the maximum allowed by trading boards, to US$6.12 per bushel. The reason was that traders had been expecting a decline in the monthly estimate.

The supply held steady largely because the Agriculture Department said last summer's hot weather didn't damage the 2011 harvest as badly as it had anticipated. That kept surplus levels higher going into this year.

Pricier corn has been a key driver of food inflation this year. When grain prices rise, food processors and meat companies tend to pass on the higher costs to consumers. It usually takes about six months for changes in corn prices to trickle all the way down to the retail level.

The USDA estimates that food prices rose between 3.25% and 3.75% last year. The USDA predicts that food inflation will slow, dropping to between 2.5% and 3.5% for all of 2012, according to its most recent estimate.

Corn futures hit a record high of US$7.99 a bushel in June on fears that growing demand would create a global shortage. Prices have since fallen, in part because US farmers planted the second-biggest corn crop since World War II.

Jefferies & Co. analyst Stephen Volkmann said corn is likely to remain above US$6 a bushel throughout 2012, keeping food prices elevated throughout the year. Growing demand from livestock producers in China, and the US ethanol industry, will strip away any big surpluses that might have been harvest this year.