March 30 (Bloomberg) -- U.S. farmers are preparing to plant record amounts of soybeans and demand for corn is falling, driving prices to the lowest levels in more than two years.

Just a year after record grain costs sparked riots in Egypt and food shortages in Argentina, U.S. farmers will sow crops on a record 163.7 million acres, according to a Bloomberg News survey of 24 analysts and traders last week. Soybean fields will expand by 4.5 percent. While corn acreage will slip 1.5 percent, the recession will force livestock, dairy and ethanol producers to cut purchases, leaving the highest inventories for March in two decades, the survey shows.

“The wheels are already in motion to produce more than the world needs, barring any unusual weather,” said Jim Gerlach, president of A/C Trading Inc., a brokerage in Fowler, Indiana.

Cash prices of soybeans will probably drop 28 percent this year to below $6.50 a bushel for the first time since April 2007, while corn will tumble 31 percent to less than $2.50, the lowest since October 2006, said Commodity Information Systems President Bill Gary, who has been trading grain since 1961.

“This recession is going to last a lot longer than the one in the 1970s,” hurting demand for raw materials, Gary, 68, said by telephone on March 26 from Oklahoma City. “I don’t see any major bull move in commodities in the next several years,” said Gary, who correctly predicted in July that prices would plunge as credit tightened.

Prices Fall

Corn and soybean prices fell to the lowest in at least two weeks on the Chicago Board of Trade as tumbling equities dimmed the demand outlook. Corn slipped 0.75 cent to $3.8625 a bushel after earlier reaching $3.7675, the lowest since March 12. Soybeans fell 12.5 cents to $9.045 a bushel after touching $8.97, the lowest since March 16.

Cheaper crops may contribute to a drop in U.S. farm income after two years of record profits, threatening to reduce growers’ $367.5 billion in sales last year and curb purchases of Monsanto Co. corn seeds, Agrium Inc. fertilizer and Deere & Co. tractors. The U.S. Department of Agriculture estimated last month that net farm income will decline 20 percent to $71.2 billion this year from $89.3 billion in 2008.

“Farm income has to come down,” said Michael Swanson, a senior agricultural economist at Wells Fargo & Co. in Minneapolis. “We don’t need any more wheat, soybeans or cotton, and corn supplies should be adequate with the drop in demand.”

Planting More Soybeans

Farmers are planting more soybeans because they cost about 32 percent less to raise than corn, according to a University of Illinois study. Informa Economics, a private forecaster in Memphis, Tennessee, told clients on March 13 that soybean acres may exceed corn for the first time ever.

Analysts in the Bloomberg survey on average expected farmers to plant soybeans on 79.11 million acres, up from 75.72 million last year. The increase is equal to the state of Connecticut, plus 279 square miles.

To make room, growers probably will use less land for corn, the most-valuable U.S. crop. Planting will drop to 84.7 million acres from almost 86 million last year, the Bloomberg survey shows. Corn stockpiles at the beginning of March probably totaled 7.012 billion bushels, up 2.2 percent from a year earlier and the highest for that date since 1988, analysts in the survey said.

The Agriculture Department will issue its first projection of spring plantings tomorrow based on surveys of about 86,000 producers from Feb. 27 through March 16. A second survey in June will show what farmers did.

Rising Corn Costs

The cost of planting corn in Illinois, the second-biggest U.S. producer, will rise as much as 34 percent this year, according to a survey by the University of Illinois in Urbana. In northern parts of the state, the cost will jump 30 percent to $532 an acre from $408 a year earlier, including fuel, seed, fertilizer, pesticides, machinery and labor, the survey shows.

While expenses for soybeans will jump about 19 percent to $311 an acre from $261 in 2008 in northern parts of the state, it’s still cheap enough to reduce the corn crop, said Gary Schnitkey, a professor in the university’s agricultural and consumer economics department.

Patrick Solon, 45, who farms corn and beans on 1,200 acres near Streator, in northern Illinois, said his costs for seed, fertilizer and machinery will jump at least 25 percent this year. He plans to plant 720 acres of corn, down 14 percent from about 840 last year.

Dropping Farm Income

“My income is going to fall this year and I’m putting aside some of last year’s profit for next year,” Solon said by telephone.

The final acreage mix probably will depend more on Midwest weather in the next 60 days than on commodity prices, based on historical patterns, said William Tierney, a senior economist for LMC International in Washington.

There are some signs that farmers have economic incentives to plant corn rather than soybeans, he said. The current price ratio of post-harvest soybeans to corn is 2.05, up from 1.97 on March 13. A ratio above 2.4 is a signal to plant more soybeans, and below 2.1 suggests farmers should plant more corn, Tierney said. He expects prices of both to rise because farmers won’t apply as much fertilizer this year, reducing global supplies faster than demand declines.

Crop prices are among the biggest losers this year on the Reuters/Jefferies CRB Index of 19 commodities. While gasoline rallied 48 percent and copper 32 percent through March 27, wheat plunged 17 percent to $5.0725 a bushel on the Chicago Board of Trade, corn dropped 4.9 percent to $3.87, and soybeans slipped 6.4 percent to $9.17.

Shortages, Food Riots

All three are down at least 40 percent from records last year, when consumers and exporting countries hoarded supplies and the United Nations’ World Food Programme said higher prices meant a $755 million increase in the cost of feeding the world’s hungry. Soaring grains led to riots and protests in 34 countries last year, including Egypt, where bread costs jumped more than 25 percent in 12 months. Food shortages from a farmers’ strike in Argentina prompted street demonstrations in Buenos Aires.

Growers responded to rising prices by increasing production of wheat, corn, barley, rice and soybeans 4.5 percent to a record 2.29 billion metric tons last year, raising inventories before this year’s Northern Hemisphere harvest by 16 percent to 466 million tons, data from the USDA shows.

While the Organization of Petroleum Exporting Countries reduces oil production and metals companies including Freeport McMoRan Copper & Gold Inc. shut mines and smelters to prop up prices, farmers are unlikely to leave land fallow.

Grain Outlook

The world grain harvest in the 12 months through June 2010 will probably be 3.4 percent smaller than the current year’s record high, the International Grains Council said on March 26. Rising reserves will cushion the drop, keeping supplies at an all-time high, the group said.

“There is a big difference between renewable commodities such as grains, oilseeds and livestock and non-renewable commodities such as energy and metals,” A/C Trading’s Gerlach said. “It is difficult to idle farm ground to cut production like miners and energy producers, so there is a lag in the time supply and demand will be balanced in agriculture.”

The CRB index is down 53 percent since reaching a record on July 3 as the World Bank forecasts the global economy to shrink for the first time since World War II. U.S. gross domestic product contracted at a 6.3 percent annual rate in the fourth quarter, the weakest since 1982, Commerce Department data show.

Livestock Slump

Slumping livestock production and a collapse in ethanol industry growth are the biggest reasons for slowing grain demand.

About 49 percent of U.S. corn consumption is for animal feed, and domestic cattle, hog and poultry producers plan to reduce their herds and flocks simultaneously for the first time since 1973, USDA data show. The number of dairy cows is declining, with farmers selling more animals for slaughter as the average U.S. milk price drops to the lowest since before 1980, according to the department.

Cattle ranchers have lost money for 21 straight months, according to Ron Plain, an economist at the University of Missouri in Columbia. Feedlot operators had losses of $150 per steer and heifer sold in February, compared with $230 a head in January, Plain said. The U.S. cattle herd on Jan. 1 was the smallest since 1959 at 94.5 million head, the USDA said.

Producer Losses

Hog producers lost $21.50 per head in February, compared with $23 per animal in January and $24 in February 2008, Plain said. Producers only made money in August and May during the past 17 months, he said. The total hog inventory on March 1 fell 2.7 percent from a year earlier.

“Speculators can bet on higher prices from reduced acreage, but that will only intensify the liquidation cycle in the U.S. livestock industry” by boosting feed costs, said Dale Schultz, a commodity specialist for Gottsch Enterprises, the cattle and hog producer in Hastings, Nebraska.

Ethanol sales haven’t kept pace with the industry’s expansion, as the 64 percent plunge in crude-oil prices from the record in July has curbed demand for alternative fuels. Increased U.S. fuel-efficiency standards may cap the growth in ethanol just as yield-enhancing seed technology from St. Louis- based Monsanto boosts corn output, Wells Fargo’s Swanson said.

About 3.7 billion bushels of corn will be distilled to ethanol in the marketing year that began Sept. 1, up from a February forecast of 3.6 billion and 22 percent more than last year, the USDA said this month. In February 2008, it forecast 4.1 billion bushels would be used for ethanol this year.

Ethanol Production

Ethanol production will consume about 31 percent of this year’s U.S. corn crop, up from 23 percent in 2008, the USDA forecast on March 11. Distillery shutdowns from New York to California are gripping the industry as producers curb output or seek bankruptcy protection. Archer Daniels Midland Co., the second-largest U.S. maker of the fuel, estimated on Feb. 3 that 2.7 billion gallons, or 22 percent of U.S. capacity, was idle.

At least six companies have sought bankruptcy protection in the past year, including VeraSun Energy Corp., once the largest publicly traded ethanol producer. The Sioux Falls, South Dakota, distiller entered Chapter 11 proceedings in October after bad bets on corn prices.

Every 1 billion gallons of ethanol production requires about 7 million acres of corn, Wells Fargo’s Swanson said. He estimates corn demand for ethanol may fall to as little as 3.4 billion bushels this year.

Bearable Losses

“We can lose 2 or 3 million acres of corn and not significantly tighten supplies,” Swanson said.

Farmers have little choice other than to keep planting and hope that crops in another area are damaged by weather, said Byron Jones, 68, who farms near Saybrook, Illinois. The economics may get even worse next year, as higher costs and lower revenue curb profit, making loans harder to get, he said.

“Global demand has diminished because of falling incomes,” Jones said. “Agriculture always lags the rest of the economy.”

To contact the reporter on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net.

Last Updated: March 30, 2009 16:41 EDT