Bumper crop brings food price relief for consumers

Corn is deposited into a semi-trailer after being harvested in Shelbyville, Kentucky.
Luke Sharrett | Bloomberg | Getty Images
Corn is deposited into a semi-trailer after being harvested in Shelbyville, Kentucky.

After recent shortages in parts of the world and a run-up in prices, a bumper grain crop is shaping up this year—promising some price relief for consumers at the grocery checkout.

Rising production and large stocks have sent prices of corn, soybeans and wheat down by more than 40 percent from their 2014 highs, according to Hamish Smith, a commodities economist at Capital Economics.

"With a growing glut in the world market, we think prices have further to fall," he said in a report Monday.

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The USDA recently bumped up its estimate for grain production around the world, based on good growing conditions in the U.S. and Europe. That will help push prices even lower into next year.

In the U.S., higher food prices earlier this year raised fears that inflation might accelerate.Those higher costs were the result of the ongoing drought in California, along with brutal winter storms and freezing temperatures in the Midwest.

But food prices—along with a sharp drop in oil and gasoline prices—have largely eliminated those concerns.

The strengthening dollar will also help push U.S. prices lower, according to Smith. He also notes that lower oil prices will reduce production costs for farmers and food processors.

In Europe, wheat production is projected to set a new record, with French, German, and United Kingdom crops much higher than last year, according to the USDA. Since France and Germany are the biggest European exporters, those bumper crops are forcing global prices lower.

That helped push world food prices last month to their lowest since August 2010, as prices of all major food groups except meat dropped, led by a sharp drop in dairy prices, according to the U.N.'s food agency.

The Food and Agriculture Organization's (FAO) price index, which measures monthly price changes for a basket of cereals, dairy, meat and other products fell 2.6 percent from Augustthe sixth consecutive drop and the longest continuous slide since the late 1990s.

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In addition to the surge in grain production, the FAO said dairy prices are falling because European sanctions on Moscow over the conflict in Ukraine have cut into dairy exports to Russia.

Underpinning falling prices are strong output forecasts for cereal and wheat, and expected high levels of cereal stocks at the end of the year.

Consumers aren't the only ones keeping a close eye on food prices. Central bankers in the U.S. and Europe are trying to prevent inflation from falling too low and spark a painful bout of deflation. That could drag corporate profits and wages lower and send the economy back into a recession.

On the other hand, low levels of inflation have allowed the Federal Reserve to boost the economy with an unprecedented round of bond buying, forcing interest rates to record lows. Moderate inflation will help give the Fed more leeway in holding off on raising rates to more normal levels.