October 12, 2010

 

Increase in US grain prices could hurt farm producers

 

 

US grain prices moved sharply higher, easily adding a US$1 billion or more to Minnesota's farm income, but it could also hurt livestock producers and push food prices higher.

 

The jump came after the US Department of Agriculture slashed its corn crop estimate.

 

Corn, soy, and wheat prices all went up the daily maximum after the USDA delivered its forecast. The agriculture department's estimated soy production fell 2%, compared to last month's prediction. The corn yield fell 4%.

 

The harvest is likely to be huge, but the reduction means there will be a smaller supply of grain than expected. There had been speculation in the grain trade that the nation's corn crop would be much smaller than previously estimated but the decline was greater than expected.

 

"It was the largest decline from month-to-month in USDA History," said Jason Ward, a grain market analyst.

 

Excessive rain and heat over much of the Midwest during the summer reduced the size of the harvest. In reaction to the prospects of lower supplies, grain prices moved up about 7%.

 

Ward said prices could rise another 20% or so in the days ahead. That will boost revenue for Minnesota corn and soy farmers, whose crops bring in US$7.5 billion a year.

 

But higher prices could hurt farmers who use corn as feed for hogs, cattle, turkeys or dairy cows. Combined, they're a US$4.4 billion industry.

 

Corn feed is a major expense for hog farmers. Currently, hog production is profitable after a deep and painful slump resulting from the last spike in corn prices two years ago. Tough times could return if corn prices continue to rise, boosting the cost of raising the animals.

 

The rising farm commodity markets could eventually affect food prices. Over the past year consumer food costs have risen only 1% or so. The federal government predicts a 2-3% increase for next year. It could be more if grain prices continue upwards.

 

USDA economist Ephraim Leibtag said food prices have increased by about 1% the past year. He said the increase next year will be 2-3%.

 

"Part of that increase projected for 2011 is based on the higher commodity prices and ingredient prices that we've seen the last two or three months," Leibtag said. "And if prices were to rise more in the commodity markets that would have upward pressure on our inflation forecast as well," he said.