Food prices set to explode this winter

Some recent headlines from the Financial Times:
Corn price surges Oct-12
Soaring prices threaten new food crisis – Oct-08
Raw materials index soars to two-year high – Oct-08
Wheat and corn rise as Ukraine limits exports – Oct-07
Shortfall drives tin to record high – Oct-05

Food inflation is real, and it is here. A comment from a recent reader’s post: “Just yesterday I compared my receipt from a grocery run to prices I have from the same exact store from September 15, 2009. Bacon? Up 52% to $13.69 from $8.99 for 4 lbs. Butter? Up 73% to $9.99 from $5.79 for 4 lbs. Pure vanilla extract up 14% to $6.79 from $5.95. Chopped dried onions up a mere 2% but minced garlic (wet) was up 32%.”

Defensive buying by investors worried about the inflationary effects of quantitative easing (QE) is behind the latest rise in gold, metals and food commodities to near record levels this week. Analysts have the usual litany of explanations: Chinese demand; plans for more QE from the Fed; a billion bushels of grain a year going to make ethanol….as Agricultural commodities prices exploded again on Friday, threatening higher global food prices, US forecasters slashed grains production estimates after adverse weather damaged crops worldwide.

In Chicago, main agricultural commodities surged to daily fluctuation limits imposed by exchange rules, the FT reported. Traders, unable to use futures because of the daily limits, bid indicative corn prices to $5.60 a bushel in the options market, up 12.5 per cent. European wheat prices jumped by 10 per cent while the cost of other key commodities, including soyabean, sugar, cotton, barley and oats, also surged.

The agricultural rally, coupled with stronger oil and metals prices, propelled the Reuters-Jefferies CRB commodities index to a two-year high.

As livestock growers substitute one grain for another, a rise in feeds such as corn could trickle down to the staple grains relied on by the world’s poor. Chicago rice rose the maximum allowed to $13.295 per 100lb.

The US is the world’s largest corn grower and its exports make up the majority of global trade in the grain. The USDA had earlier forecast a record corn crop this year, but a combination of unfavourable heat and heavy rains forced a re-evaluation of yields.

Yet “every fiber in my body says yes there are adequate supplies if we allow the markets to work — we will position these supplies in a way that will take care of the demand,” U.S. Grains Council president Thomas Dorr told Reuters in an interview.

The U.S. Agriculture Department on Friday jolted the world grain trade by cutting its estimate of the U.S. corn crop by another 3 percent to 12.664 billion bushels. That reflected a cut in average harvest yields to 155.8 bushels per acre, far below trade expectations of around 160 bpa.

That is still a sizable crop; the all-time high is 13.11 billion bushels, harvested a year ago. But corn demand has risen 12 percent since 2008, largely due to a billion more bushels of corn now being used to produce ethanol for fuel.

“My biggest concern is that people are going to start again finger pointing at the ethanol industry,” Dorr said.

Grain prices skyrocketed in 2008 amid tight world grain supplies. Food riots broke out in developing countries and worried governments hoarded supplies. But in the United States, the ethanol industry took flak for the price spike as the new player competing for corn.

The ethanol industry now uses roughly a third of the annual corn crop to make fuel. Moreover, the Obama Administration as part of its push for renewable, non-oil energy may allow an ethanol blend of up to 15 percent in U.S. gasoline, from 10 percent now. That policy shift could come as early as next week.

Dorr said that assessing ethanol’s effect on food prices is complex. Removing corn from the feed chain for livestock is one thing, he said, but ethanol production produces millions of tonnes of feed in the frm of a byproduct called distiller’s dried grains (DDG).

“I hasten to point out that of that billion bushels that went into ethanol we got out of it the equivalent of a half a billion bushels of high quality feed and protein products.”

DDG production reached a record high of 33 million tonnes during the 2009/10 marketing year, with roughly 7.5 million to 8 million tonnes exported.

Dorr said that industry analysts now expect DDG exports will be at least 10 million tonnes in 2010/11 — exceeding U.S. soymeal exports which are seen at 8.26 million tonnes.

Dorr said the grain industry will keep pressing the USDA to start producing a weekly report on DDG export bookings and shipments, as the agency does now for major grain exports.

Regarding USDA’s latest assessment of U.S. corn production, Dorr noted that the U.S. crop and yield estimates have been trimmed back as harvest has progressed. But the old rubric of the grain trade that “big crops get bigger, small crops get smaller” may have now run its course, he added.

“There is some likelihood given the advance maturity of the crop that these numbers may be closer to the final than what people would typically expect in the context of small crops get smaller,” Dorr said.

As for prices, he said farmers would react to, and traders would adapt to, the market. Chicago Board of Trade corn prices were up the 30-cent-per-bushel trading limit on Friday, with the spot month at $5.28-1/4 — a two-year high.

“I would anticipate that we will go into next spring with the ability to produce a very, very strong crop,” Dorr said.