March 31, 2011

US corn production unable to keep pace with demand

US corn planting is set to expand this year to cover the second-largest area since World War II, but still fails to meet demand for feed and ethanol, causing a rise in corn prices to their highest in at least 34 years.

Corn sowing will expand by 4% to about 91.75 million acres, the most since 2007 and the second-highest since 1944, according to a Bloomberg survey of 32 analysts. Corn will rise 5.7% to an average of US$7.15 a bushel in the third quarter, the most since at least 1977, Abah Ofon and Koun-Ken Lee, analysts at Standard Chartered Bank in Singapore, wrote in a report.

A UN index that tracks the cost of 55 foods rose to a record in February, with higher prices causing riots in the Middle East and northern Africa that toppled leaders in Egypt and Tunisia. Inflation is driven up and is spurring central banks to consider higher interest rates that may slow global growth.

"We will have inadequate acreage, which without spectacularly favourable weather, will usher in a significant food shortage in some parts of the world", said Doug Jackson, a West Des Moines, Iowa-based vice president at INTL FCStone. "Demand is outrunning normal production expansion, led by biofuel policy."

Animal feed use is being driven by record prices for cattle and hogs, and biofuel demand is forecast by the USDA to increase by more than 8%. The agency will release a forecast on planting intentions today (Mar 31).

Since October 1 last year, the price of the fuel has jumped 45% on the New York Mercantile Exchange. Corn jumped 89% in the past 12 months. Wet spring weather can delay corn planting. Farmers need warm, dry weather in April to ensure the crop is planted before May 10 in the Midwest to avoid yield losses from heat in July and August and possible frost damage in September.

Some farmers may shift to soy, rather than risk a late-developing corn crop. The outlook for prices will also determine acreage, said Jerry Gidel, a market analyst at North American Risk Management Services in Chicago.

Corn is the biggest US crop, with a 2010 value of US$66.7 billion, followed by soy at US$38.9 billion, government figures show. Wheat is fourth at US$13 billion, behind hay.