Grain Prices Surge on U.S. Supply Cuts, Boosting Food Costs

Grain and oilseed prices rose the most allowed by the Chicago Board of Trade after the U.S. government said supplies will be smaller than forecast last month, increasing the cost of producing food and fuel.

The U.S. Department of Agriculture cut its domestic corn-crop estimate for the second time in as many months, predicting a 3.4 percent drop from last year. While farmers will collect the most soybeans ever, the total will be 2.2 percent less than forecast in September, the USDA said. Global wheat inventories will be 1.8 percent less than projected last month.

Corn prices are near the highest level in two years, after surging 41 percent since June, as unfavorable weather hurt crops in the U.S., the world’s largest grower and exporter. The jump in feed costs today sent shares of Tyson Foods Inc., the largest U.S. chicken processor, to its biggest drop since July 2009 and revived concern that food inflation will accelerate.

“People have not come to grips with the rising cost of producing food,” said Michael Swanson, a senior agricultural economist at Minneapolis-based Wells Fargo & Co., the largest U.S. farm lender. “Feed costs are going to balloon” for livestock, dairy and poultry producers, he said.

Meat and dairy producers may lose money if they haven’t already secured feed, Swanson said. Some hog producers may get 80 cents for a pound of pork that was produced with a $1 of corn, encouraging reductions in the herd, he said.

Compounding tight feed supplies for domestic buyers is the slumping dollar, which makes commodities cheaper for importers using other currencies, Swanson said. The dollar dropped below 82 yen for the first time in 15 years on concern the economic recovery is stalling.

Tyson, Smithfield

Tyson Foods, based in Springdale, Arkansas, fell $1.27, or 7.8 percent, to $15 at 2:18 p.m. on the New York Stock Exchange. A close at that price would be the biggest decline since July 20, 2009. Smithfield Foods Inc., the largest pork processor, dropped 83 cents, or 5.2 percent, to $15.22, heading for the largest slump since July 16.

The cost of meat and dairy products will rise faster than the overall pace of food inflation next year, the USDA said on Sept. 24. Meat costs will rise 2.5 percent to 3.5 percent, while dairy gains 3.5 percent to 4.5 percent. Total food costs will increase 2 percent to 3 percent, up from 0.5 percent to 1.5 percent this year, the USDA said.

Higher fuel prices and government subsidies will help ethanol producers cope with the higher cost of corn. Ethanol futures surged as much as 9.3 percent today, the most in five years. Gasoline prices have risen 13 percent since the end of August, while corn rallied 20 percent.

Price Limit

Corn futures for December delivery rose the 30-cent trading limit, or 6 percent, to $5.2825 a bushel as of the 1:15 p.m. close on the Chicago Board of Trade. The price reached a two-year high of $5.2875 on Sept. 27.

“Corn-demand rationing will occur for most sectors between $5.50 and $5.75 a bushel,” Alexander Bos, a grain analyst for Macquarie Bank Ltd. in London, said in a report to clients today. “Corn prices may “trade above $6 bushel within the next few weeks,” he said.

U.S. farmers will harvest 12.664 billion bushels of corn, down from 13.16 billion projected a month ago and less than last year’s record 13.11 billion, the USDA said today in a report. The average estimate of 26 analysts surveyed by Bloomberg News was for 12.977 billion bushels. Flooding in June and hot, dry weather in August cut Midwest yields.

“The government has shocked the grain industry with the huge cut in U.S. production,” said David Smoldt, the vice president of operations for FCStone LLC in West Des Moines, Iowa. “There will be some scrambling for supplies today.”

Smaller Inventories

Unsold U.S. supplies on Sept. 1, before next year’s harvest, will total 902 million bushels, compared with the month-ago forecast of 1.116 billion and 1.708 billion this year, the USDA said. Supplies will be the lowest since 1997.

“We will not produce enough to meet demand from domestic livestock producers, ethanol makers and overseas buyers,” Alan Brugler, the president of Brugler Marketing & Management Inc. in Omaha, Nebraska, said before the report. “We are going to run up the price to slow demand and encourage farmers to plant more next year.”

The U.S. soybean crop will be a record 3.408 billion bushels (92.8 million metric tons), compared with 3.483 billion projected in September and 3.359 billion gathered last year, the USDA said. August rains failed to boost yields, and the government reduced its acreage estimates. Analysts in the Bloomberg survey expected 3.501 billion bushels.

Soybean Prices

Soybean futures for November delivery soared the 70-cent trading limit, or 6.6 percent, to $11.35 a bushel in Chicago. The oilseed, used to make livestock feed and vegetable oil, has gained 26 percent since the end of June.

“The USDA surprised the trade with a cut in U.S. soybean yields and an unexpectedly large cut in planted acreage,” FCStone’s Smoldt said. “There are just too many uncertainties about global supplies” with dry weather already delaying planting in parts of South America, he said.

Global wheat stockpiles will total 174.66 million metric tons on May 31, down 1.8 percent from 177.79 million estimated last month, the USDA said. The average estimate of 13 analysts in a Bloomberg News survey was 177.43 million tons.

Unsold supplies in the U.S., the world’s largest exporter, may fall 5.4 percent to 853 million bushels (23.22 million tons), from 902 million bushels estimated in September, the department said. U.S. production was projected at 2.224 billion bushels, down 1.8 percent from the September estimate while up 0.3 percent from last year. The USDA also lowered its inventory estimates for the European Union and Canada.

Wheat Surges

Wheat futures for December gained the 60-cent limit, or 9.1 percent, to $7.1925 a bushel on the CBOT and are up 52 percent the past year, after drought ruined fields in Russia and too much rain diminished supplies from Canada.

“Possibly, there will be some switching from corn to wheat” in feed rations, said Tom Leffler, the owner of Leffler Commodities LLC in Augusta, Kansas. “The biggest thing is, end-users beware, because quite honestly, they’re screwed. Talk of $6 corn is very, very possible now.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE