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Corn prices have surged more than 70% since May and could rise even higher in coming weeks. Prices will remain elevated for at least the next year, perhaps even testing their 2008 record high of $7.65 a bushel. That will likely mean higher food prices across the board for at least the next year.
Money Morning predicted in May that after falling below $3.50 per bushel in March, corn prices would surge higher than $6 by the end of the year. That forecast has proven prescient, as corn rose to a two-year high earlier this month.
Increased demand from emerging markets and a smaller-than-anticipated U.S. harvest are the driving forces behind corn's resurgence.
Extreme heat followed by periods of too much rain in parts of the American Corn Belt severely damaged this year's crop. The United States Department of Agriculture (USDA) said in its monthly report that the 2010-2011 crop year that started in September would yield about 12.7 billion bushels of corn - 4% less than previously estimated and 3% below last year's production.
In the two weeks following the USDA report corn prices surged more than 25%. Analysts say the next USDA report - due Nov. 9 - could set off another spike, as the United States harvests two-fifths of the world's corn and accounts for nearly 60% of global exports.
"We're now hearing that reports from northern areas of Illinois where yields are falling short of what was expected. The government may have to make another revision," Kim Craig, merchandiser for Bell Enterprises Inc., the Deer Creek grain elevator, told the Peoria Journal Star. "That could make the market come even more alive."
Meanwhile, rising demand - particularly in emerging markets - has accompanied declining grain production.
Major gain-producing regions in Russia, Ukraine, Kazakhstan, and South America have been plagued by drought, reducing wheat and soybean production as well as the corn crop.
Russia may import more than 2 million metric tons of corn in the year that started July 1, mostly from Ukraine, Andrei Sizov Jr., SovEcon managing director, told Bloomberg. That's double the level of imports forecast for the country by the USDA.
Corn imports by Russia from the United States may be "several hundred thousand tons," with deliveries unlikely before the start of 2011, Sizov said. SovEcon forecast higher imports for Russia after it estimated on Oct. 15 that the nation's corn crop would fall 24% from the previous year to less than 3 million tons.
Ukraine, the world's fourth-largest corn exporter last year, last week set a 2 million-ton limit on shipments of the grain until end of the year, according to a resolution posted on the government's Web site.
China, the world's second largest corn producer, also has had an impact on the price of corn and other grains. The Asian giant this year could be a net importer of the crop for the first time in 14 years, as dry, cold weather slowed its plantings. Current climatic conditions could reduce China's 2010 corn production by 1%.
Chinese corn production plunged 13% last year because of drought. The country lost some 25 million tons of corn by some estimates, taking its production to a four-year low.
In April, the country shocked analysts by making its first significant purchase of U.S. corn since 2001, buying up 115,000 tons of U.S. corn.
China and other Asian countries may move quickly to lock up supplies soon before prices get carried away.
"The psychology is, you need corn or soybeans for your diets and let's just buy now rather than wait," Dermot J. Hayes, a finance and economics professor at Iowa State University, told the New York Times.
Of course, corn and soybeans aren't just staples of human diets. Along with wheat, they are often used interchangeably as animal feed. So if the production of any one of those grains is jeopardized, rising prices become contagious, spreading to meat and dairy products.
While the price of corn is up 42% from a year ago, the price of Texas steers is up 19%, the price of soft red wheat is up 82%, and the price of butter is up 74%.
The USDA forecasts U.S. retail food prices will rise 1.5% this year and then between 2% and 3% in 2011. But if the devaluation of the U.S. dollar persists, we could easily see prices top that range.
"The forecast for 2011, that remains unchanged, but it's moving to the higher part of that range," said Ephraim Leibtag, who serves as a senior economist for the USDA and put together the report. "The potential to go above that is more likely if current commodity price increases remain where they are or rise even more."
Food prices in the United States jumped 5.5% in 2008 as commodities prices boiled over. Meat prices are expected to rise up to 3.5% and dairy 5.5% next year, according to the USDA.
"The last few months, commodity prices like wheat, corn, soybeans, they are starting to have an impact on retail," Leibtag said.
The problem of rising food prices is even more acute in emerging markets.
The Russian Federal State Statistics Service (Rosstat) said yesterday (Tuesday) that food prices in the country grew by 9.2% in the January- September period, 6-times faster than the 1.5% increase seen in the European Union (EU).
In India, annual food price inflation was 15.53% in early October and has remained stubbornly high. The Reserve Bank of India (RBI) may be forced to raise interest rates in November to curtail soaring food prices in that country.
"Persistent price increases in commodities for which there are less effective substitutes, with other things remaining equal, will raise the potential rate of inflation over a period of time," the central bank's deputy governor, Subir Gokarn, said in a speech yesterday.
"This means that actual inflation or interest rates will be higher than they would be in the absence of such increases."
The RBI already has raised its key rate five times his year to 6%.
It may only be a matter of time before the United States is next. The U.S. Federal Reserve's low interest rates and bond purchases have severely undermined the dollar - opening the door to widespread inflation. And while retail food prices so far have been subdued, wholesale prices continue to increase, putting more pressure on consumer prices.
"Even though retail prices have not seen much upward movement, wholesale prices have been climbing much more," the Food Institute's Brian Todd wrote CNBC in an email. "Retailers have been absorbing these increases since late 2009, rather than pass them along to consumers."
Indeed, higher commodities prices and the disparity between wholesale and retail prices will continue to squeeze the margins of retail food outlets such as McDonald's Corp. (NYSE: MCD), The J.M. Smucker Co. (NYSE: SJM), and Kraft Foods Inc. (NYSE: KFT).
On the other hand, commodities producers and commodities-based exchange-traded funds will thrive.
Deere & Co. (NYSE: DE), the world's leading farm equipment manufacturer, has seen its stock rally more than 5% in the past month. Monsanto Corp. (NYSE: MON), which makes genetically modified seeds, is up more than 6% in that time, despite being dogged by government scrutiny. Monsanto was the feature of a recent "Buy, Sell or Hold," column in Money Morning.
Corn Products International Inc. (NYSE: CPO), Archer Daniels Midland Co. (NYSE: ADM), and Bunge Ltd. (NYSE: BG) also stand to benefit from rising food costs - particularly increases in the price of corn.
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