High corn prices are creating misery for meat processing companies that are getting squeezed on profits and consumers who are getting squeezed in their wallets.
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Just about the only group to benefit from high corn prices will be agribusiness companies that make the equipment and supplies farmers will need to grow more corn.
Persistently high corn prices have put the pork, beef and poultry industries under tremendous pressure. Companies like Pilgrim's Pride Corp. (NYSE: PPC), Smithfield Foods Inc. (NYSE: SFD), Hormel Foods Corp. (NYSE: HOR) and Archer Daniels Midland Co. (NYSE: ADM) unable to pass on the full price increases to customers.
And with demand for corn growing at a pace faster than farmers can match, there's no relief in sight. Corn harvests fell short of demand by 5.8% for the year ending in August, and analysts don't expect much improvement next year.
In fact, the U.S. Department of Agriculture (USDA) expects America's corn stockpiles to hit a 16-year low for the 2011-2012 marketing year.
"Last year, corn and soybean crop harvests were not adequate to fulfill the needs for ethanol, for feed and for export," Bill Roenigk, vice president of the National Chicken Council, told Gannett. "It's been difficult, if not impossible, to pass on those higher feed costs to the consumer."
And yet consumers have still struggled with food costs inflated by high corn prices. According to the USDA, beef prices were up 10.1% in September from a year earlier, pork prices up 7.5% and poultry up 3%. The price of eggs zoomed 6% in September alone.
Why Corn Prices Are HighSeveral factors are at work keeping corn prices high.
On the supply side of the equation, the corn crop in the United States - the world's leading corn grower - got slammed by floods and drought earlier this year. This resulted in the USDA lowering its forecast for the 2011 harvest three consecutive months to about 12.433 billion bushels, similar to last year's.
Meanwhile, demand for corn has never been greater. Production of fuel additive ethanol, for example, now consumes 40% of the U.S. corn crop.
And global demand for corn is rising rapidly in emerging nations, particularly China. Morgan Stanley (NYSE: MS) estimates that China will quadruple its imports of corn to 4 million tons this year, and further increase to 9.4 million tons by 2014.
The United States Department of Agriculture (USDA) recently reduced its forecast for the fall corn crop to 12.9 billion bushels from 13.5 billion based on damage from spring flooding and summer drought in several key corn-producing states.
Midwest temperatures averaged eight degrees higher than normal in July, while some areas got less than a third of their normal rainfall.
"Corn is dead on some of the sandiest ground and looks more like the middle of October than mid-August. The corn crop is pretty much a done deal," Mike Mawdsley of broker Market 1 told Agrimoney.com.
In addition to lowering its estimate for the fall harvest, the USDA has also lowered its quality rating of the U.S. corn crop. The USDA had rated 70% of the corn crop "good to excellent" as of June 26; that number fell to 60% on Aug. 14 and was revised down to 57% on Monday. Last year, 70% of the corn crop was rated good to excellent.
Many experts believe the USDA has only just begun to downgrade.
"The USDA crop forecast should ...still prove too optimistic, despite the downward revision already made in August,"Commerzbank analysts said.
Another group, MDA Information Systems Inc., has already undercut the USDA's harvest estimate. MDA forecasts a corn crop of just 12.23 billion bushels.
Price PressureThe ever-worsening harvest forecasts have steadily pushed corn market prices higher.
The price of corn has soared 70% in the past 12 months, with futures for September and December delivery well north of $7 a bushel. September futures on the Chicago Board of Trade (CBOT) rose to $7.29 on Tuesday, while December futures rose to $7.42.
That's bad for consumers. Corn is the single-biggest cause of increases in food prices, which are expected to rise 4% for 2011. Analysts expect higher corn market prices to help push retail food prices up another 4% next year.
Worldwide demand for corn has surged, and shrinking stockpiles are unlikely to be replaced due to extreme weather conditions that have destroyed millions of acres of farmland.
Even as corn production rises to record levels this year, it won't be enough to keep up with demand, and prices will climb.
"There is a storm developing in agriculture," Jean Bourlot, global head of commodities at UBS AG (NYSE: UBS), told Bloomberg News. "If we have the slightest disruption in any part of the world, the effect on the price will be considerable."
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.
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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.