January 14, 2011

 

Lower corn, soy outputs raise US grain prices to almost three-year high

 

 

An unexpected drop in the US corn and soy harvest has sent grain prices surging to their highest level in two and a half years on Wednesday (Jan 12).

 

The price increases stoked concerns about higher food prices and tighter supplies of feedstock for food and biofuels.

 

Wet weather and abnormally higher temperatures contributed to lower US corn production in 2010, according to an USDA report. The report also showed declines in soy, wheat and grain sorghum production.

 

January corn futures jumped from US$0.20-$0.25 to US$6.30 a bushel. Soy prices jumped US$0.50-$0.60 to just over US$14 a bushel.

 

The report confirmed traders’ fears that historically low stockpiles of grain and oilseeds could leave little buffer in coming months as demand rises with a growing global economy. Prices reached their highest points since the financial crisis of 2008 caused a collapse in global demand for food and fuel.

 

“It’s just confirming that supplies are lower than we thought, and demand is better than we thought, and when that happens you see prices bidding up,” said Chad Hart, an Iowa State University grain marketing specialist.

 

It can take months for higher grain prices to work their way to the grocery store. Raw ingredients are just a fraction of the cost for processed foods.

 

But companies like Hormel Foods Corp. have already announced price hikes of more than 3% this year. Higher grain costs will put more pressure on them to pass costs along to consumers.

 

US corn production dropped 5% in 2010 to 12.4 billion bushels but remained the third-highest level on record. The record was set in 2009, when 13.2 billion bushels were harvested.

 

At issue is the amount of grain being carried over from year to year. That’s a crucial surplus that creates a buffer for global markets. The report shows that stockpiles of corn are among the lowest levels ever seen at just 5% of the total amount of corn used, Hart said.

 

The report shows that just 745 million bushels of corn will be stockpiled by August, down about one billion bushels from August 2010.

 

“That’s a significant drop. Normally we like to keep those levels above 10%,” Hart said.

 

Hart said demand continues to rise, with the ethanol industry being the largest sector of growth in the industry and eating into the stockpiles. The largest demand remains the livestock industry but demand by the ethanol industry is seeing larger growth.

 

A similar issue with decreased stockpiles is being seen with soy, wheat and cotton, Hart said.

 

“Things were already really thin with soybeans and have been for the past three years that this report, although it’s small changes, it shows things aren’t getting any better as far at that stock situation,” Hart said.

 

Soy production fell just 1% in 2010 to 3.33 billion bushels with average yields of 43.5 bushels per acre.

 

Wheat production fell 1% to 2.21 billion bushels in 2010 but saw record yields of 46.4 bushels per acre. Grain sorghum fell 10% to 345 million bushels last year.