November 14, 2006

Corn prices surge, despite a US bumper crop

US corn prices surged despite the prediction of a bumper crop this year.

A 77-percent jump in the past year has made corn the most expensive it has been since 1996, squeezing profit at Tyson Foods, which uses it as a feed for livestock.

Speculators like Pacific Investment Management have been basking in returns that go beyond forecasts made as recently as July.

Rising sales to livestock and ethanol producers and a grain shortage outside the US sent corn climbing to US$3.72 a bushel last week. Prices might need to top US$5 before demand slows, said Brent Harris, who runs a commodity fund at Pacific Investment Management in Newport Beach, California.

Historically, low prices follow big crops in the US. The record 2004 harvest of 11.8 billion bushels caused corn to sink by about 40 percent in 10 months time. But since the end of September, when most farmers started harvesting this year, prices have jumped 31 percent. The second- largest harvest was recorded last year.

According to Richard Cogdill, chief financial officer of Pilgrim's Pride, leading US poultry producer, every penny increase in the price of a bushel of corn adds US$2 million a year to its expenses for feed. Cash prices for corn might be US$1 a bushel higher on average this year, indicating an additional US$200 million in expenses for Pilgrim's Pride, leading poultry producer, next only to Tyson.

The biggest surprise in corn demand has been the increase in sales to the world's livestock breeders, who have started consuming more corn.

Ethanol makers would consume a bigger share of the US corn crop as government subsidies and high gasoline prices spur demand for the alternative fuel, said David Nelson of Credit Suisse. He also noted that every 10-cent rise in a bushel of corn cuts 5 cents a share from Tyson profit to which Tyson spokesman did not comment.