GO
Loading...

Food Prices Rise, Farmers Respond

Faced with strong worldwide food demand and the accompanying higher prices, American farmers are beginning to respond to the signals of the market. In a new government report, farmers said they would make significant cuts in corn acreage this year in favor of soybeans.

If they carry through with their intentions, the resulting additional soybean oil could help alleviate global shortages of cooking oil that have led to sharply higher prices, hitting poor countries hard.

But a smaller corn harvest would most likely raise prices for that crop, which could also increase the prices Americans pay for meat. Most corn is used as animal feed.Higher corn prices may also compound the difficulties of companies that use corn to produce ethanol as a motor fuel. Despite government mandates for the use of ethanol, those companies are struggling. They expanded so rapidly in recent years that an oversupply of ethanol depressed prices, even as the cost of their main feedstock — corn — was rising.

Soybean crop
AP
Soybean crop

The release Monday morning of the Agriculture Department’s report on farmers’ plans, based on interviews with growers during the first two weeks of March, caused the price of corn in the commodities markets to rise past $6 a bushel for the first time, before falling back. Soybean prices, meanwhile, fell 70 cents to $10.89 on expectations of a greater supply.

The commodities markets have been extremely volatile recently, with prices swinging more widely in a few days than they used to move in a year. Overall the trend has been sharply upward, making for an uneasy winter.

Consumers are confronting sticker shock at the grocery store, while farmers insist they are not getting rich because their own costs, like diesel fuel, are up. Wheat and soybean stockpiles have fallen in the last year, the government said in a separate report, meaning there is little buffer if the weather is not favorable this year and harvests are disappointing.

“We’re hoping for good yields,” said David Orden, a senior research fellow at the International Food Policy Research Institute in Washington. “If we get bad yields and tight commodity markets are pushed even tighter, we’ll get food prices skyrocketing, inflationary pressures and food riots in developing countries, and countries cutting off their exports.”

Many of those unfortunate trends, Mr. Orden said, are happening already.

Soybean producers told the government they would plant 74.8 million acres, up 18 percent from last year and just below the record high in 2006. Corn growers said they would plant 86 million acres, down 8 percent from 2007.

The soybean number was a little higher than analysts had been predicting, while the corn number was a little lower. The 2007 corn crop was the biggest since 1944 as growers rushed to capitalize on the government-mandated demand for ethanol. Three years ago, before the ethanol mandates, the price was less than $2.50 a bushel.

“In February, we were thinking farmers would plant as much as 90 million acres of corn,” said the Agriculture Department’s chief economist, Joseph Glauber. But the relatively high prices of soybeans might have caused some of them to switch. Soybeans also require less fertilizer, another commodity whose prices have been breaking records.

Mr. Glauber cautioned that the planting report not only reflected the intentions of farmers, but could affect them too. Last year’s report underestimated actual corn plantings by three million acres. A rise in corn prices and a drop in soybean prices might inspire other farmers to change their minds.

That is what the ethanol industry is hoping. “We do certainly use corn and it is going to have an impact,” said Bob Dinneen, president of the Renewable Fuels Association. “But I’m sure the marketplace will respond to this signal.”

Joe Victor, an analyst with the market research firm Allendale, said he expected corn to rise as high as $7.50 by summer.

Market Forces Help Determine Which Crop to Plant

Farmers are not necessarily planting less corn for economic reasons, Mr. Victor said: “They’re going back to a more normal crop rotation. They needed to give their corn acres a bit of a rest.” Next year, he predicted, the ratio will shift again, and farmers will cut back on soybeans in favor of corn.

A handful of farmers, principally in Texas and California, told the government they were planning to grow more corn. But in the heart of the Corn Belt, it was a different story. Indiana is projected to be down 800,000 acres, Illinois 600,000, Nebraska 600,000, Iowa 1 million.

Ray Gaesser in Corning, Iowa, said he would devote about 48 percent of his 6,000 acres to corn, down from 52 percent last year. The rest would be soybeans.

“Last year, the price ratio of corn to soybeans was telling us we should plant more corn,” said Mr. Gaesser, a former president of the Iowa Soybean Association. Now the ratio is more in line with historical norms. The result is that “many of the increased corn acres in 2007 are going back to soybeans,” he said.

Mr. Gaesser sells his corn to the local ethanol plant, where he is an investor. “If corn prices get low, we make money at the plant,” he said. “If they’re high, we make money in our core business, which is agriculture.” He had already contracted to sell his corn, he said, which meant he would not benefit from any further price rises.

For bakers worried about the price of flour, the plantings report offered a little relief. Wheat farmers said they planned to plant 63.8 million acres, up 6 percent, about what the commodities markets had been expecting. Cotton plantings are expected to fall 13 percent to 9.39 million acres. Cotton farmers have been abandoning the crop for corn and wheat.

The Agriculture Department said farmers would devote 323.8 million acres to 19 principal crops this year, up 3.8 million acres from last year and 7.8 million acres from 2006. Some of the increase has come from land pulled out of conservation programs, some from pasture, and some from the double-cropping of wheat and soybeans.

Despite the back-to-back increases, the number of acres under cultivation is still about six million below the level of a decade ago. The government is not entirely sure why that is happening, but one possibility is that some land has been swallowed up by suburban construction.

Featured

Contact U.S. News

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More

Don't Miss

U.S. Video

  • Mark Bertolini, Aetna chairman & CEO, discusses the company's quarterly results and the impact of the Affordable Care Act.

  • Social media is directly responsible for the success of the "Sharknado" franchise, says Ian Ziering, "Sharknado 2" actor, discussing the movie's smashing success on the eve of its Wednesday night premiere on the Syfy Network.

  • Arne Sorenson, Marriott president & CEO, breaks down Marriott's second quarter results and weighs in on current travel trends, including trips to Russia.