Shrinking U.S. crops pose inflation challenge for countries

CHICAGO Tue Aug 7, 2012 1:11am EDT

A drought-damaged corn field is pictured near Emery, Iowa July 27, 2012. REUTERS/Karl Plume

A drought-damaged corn field is pictured near Emery, Iowa July 27, 2012.

Credit: Reuters/Karl Plume

CHICAGO (Reuters) - For nations like China and India fighting to tamp down inflation while spurring growth, even as the global economy faces headwinds from Europe's debt crisis, shrinking U.S. crops could be an additional headache as food prices creep higher.

Add to that, dry weather in eastern Europe dimming crop prospects in key grains exporting countries like Russia and Kazakhstan, and a less-than-stellar monsoon in India, the troubles for policy makers could escalate into major challenges.

These nations could get a heads up on the severity of the problems they might face when the U.S. Department of Agriculture on Friday unveils its supply-demand report that will feature crop estimates for the United States, the top grain exporter.

"If the USDA's corn and soybean estimates are much below trade expectations, there could be negative implications for China and their inflation rate," said veteran grains analyst Rich Feltes of RJ O'Brien in Chicago.

There are good grounds to be concerned. Chicago Board of Trade corn futures have soared more than 50 percent in the past two months and soybeans by nearly 30 percent as the worst drought in 56 years had devastated the crops.

The USDA slashed its estimate of the U.S. corn crop -- the world's largest -- by 12 percent in July and analysts polled by Reuters are expecting it to cut that by another 15 percent on Friday to 11.026 billion bushels.

That would trim the ending stocks in the United States to the smallest in 17 years, leaving the country vulnerable to any further production shocks in other parts of the world.

The analysts expect USDA to reduce its estimate of U.S. soybean production by nearly 8 percent from its July estimate of 3.050 billion bushels and they expect soybean stocks to be the smallest since 1980 at 112 million bushels.

MEAT PRICES TO DIP BEFORE THEY RISE?

Global soybean supplies were dealt a heavy blow by a drought decimating the crop in Argentina and Brazil.

If the trade expectations materialize, it would be unwelcome news for China as the world's largest importer of the oilseed, which accounts for about two-thirds of total global imports.

Up until recently, price gains have largely been fueled by the shortfall in U.S. production of the corn and soy crops.

But now, dry weather in Europe is dimming crop prospects in the Black Sea region.

A below-average monsoon in India caused the United Nations' Food and Agriculture Organization to cut its 2012 global forecast of rice paddy production by 7.8 million metric tons (8.6 million tons) to 724.5 million metric tons.

A combination of short crops for rice and wheat, and production problems for corn and soybeans led to the food crisis in 2008 that sparked food riots in about 30 countries.

"Eggs and poultry prices will go up followed by milk, pork and beef," said Scott Irwin, professor of agricultural economics at the University of Illinois at Urbana-Champaign.

Analysts said that pork and beef prices might actually decline in the short term as ranchers and farmers cull their cattle and hog herds due to high feed costs. Next year, consumers could feel the pinch when fewer cattle and hogs drive up meat prices.

Analysts said that while the USDA's yield and production numbers on Friday will grab the headlines, they will also be paying close attention to data showing how many acres of corn and soybeans will be harvested -- due to large swaths of crops being decimated by the drought.

Closely-watched crop forecaster Michael Cordonnier estimated that 83 million acres of corn will be harvested, nearly 6 million below the USDA's July estimate of 88.9 million acres as he expects farmers to abandon fields and to harvest more acres than usual for silage due to drought-reduced yields.

'HARVESTED ACRES' IN FOCUS

"The biggest number on Friday will be production and the next big number will be 'harvested acres'," said grains analyst Dax Wedemeyer of U.S. Commodities in West Des Moines, Iowa.

"Because 'harvested acres' will give us a better indication of overall production," he added.

The number of harvested acres has come into close focus after the USDA reduced its corn yield estimate by an unprecedented 20 bushels per acre in July and by some analysts' account might not make another sharp reduction on Friday. It could instead cut its estimate of the acres to be harvested.

Analysts like Wedemeyer expect USDA to trim its estimate of corn used to produce ethanol, for feed and for exports as it hammers down demand to balance out the reduced supply.

If the USDA's demand number is considered to be above those of private analysts, the market could go higher to reduce buying interest known in market parlance as 'demand rationing."

Grain analyst Robert Bresnahan of Trilateral Inc said he was of the view that the corn market's next big move would be a downward correction, possibly to the $7 level.

CBOT December corn futures closed on Monday at $8.05 per bushel, while November soybeans finished at $15.84-1/4. Spot contracts set record highs of $8.28-3/4 and $17.77-3/4, respectively, on July 20.

"If we get a bullish report, we'll get an upside but that will fail," he said, citing a technical retracement in prices and also because of the harvest getting underway in the South.

"We might have one more rally, which will fail quick," he added.

(Additional reporting by Julie Ingwersen, Sam Nelson, and Mark Weinraub; Editing by Bob Burgdorfer)

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