Smaller corn surplus could push food prices higher
Posted: 10:31 am Mon, September 12, 2011
NEW YORK — Food prices could rise next year because an unseasonably hot summer is expected to damage much of this year’s U.S. corn crop.
The Department of Agriculture estimates a surplus of 672 million bushels of corn will be left over at the end of next summer. The estimated surplus is down from last month’s forecast and well below levels that are considered healthy.
This spring, farmers planted the second-largest crop since World War II. But high temperatures stunted the plants.
Corn prices soared to record levels earlier this year because of limited supplies. On Monday, corn was trading at $7.30 a bushel. While that’s down from the peak of $7.87 a bushel reached on June 10, it’s still nearly twice the price of corn at the end of July 2010.
More expensive corn drives food prices higher because corn is an ingredient in everything from animal feed to cereal to soft drinks. It takes about six months for corn prices to trickle down to products at the grocery store.
Traders worry that grain shortages could return next year because of the damaged crops.
Farmers are expected to have a surplus of 920 million bushels when the harvest begins next month, the USDA said. That’s roughly a 26-day supply of corn, slightly less than the previous month’s estimate.
But the USDA said the corn surplus could dwindle next fall to about a 19-day supply. A 30-day supply is considered healthy.
When crop reserves are low, market prices can jump quickly, said Scott Irwin, an agriculture economics professor at the University of Illinois. When reserves are at adequate levels, a decline in grain supplies tends to cause prices to rise modestly. But when reserves are unusually low relative to demand, short-term supply disruptions can cause prices to jump exponentially, Irwin said.
In part, that’s because unlike with other goods, rising food prices generally don’t cause people to buy less food. Rather, they typically cut spending on other things so they can keep the diets they’re accustomed to. Prices tend to stay high until demand finally slackens.
A smaller surplus drove corn prices higher earlier this year. Global demand for corn, soybeans and wheat has outstripped production for the last 10 years. Surpluses, vital to a stable food supply, have shrunk.
A bushel of corn equals 25.4 kilograms, or 56 pounds.
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