Corn stokes food woes; relief in wheat

By Sam Nelson - Analysis

CHICAGO (Reuters) - Record-high corn prices spell more pain for consumers and meat companies, but a 40 percent slump in wheat since February could take some pressure off the wallet at a time when food price inflation is escalating.

Delays in seeding this year's corn crop due to rain pushed corn prices to an all-time high on Monday, while prospects of a surge in global production have pummeled wheat.

Rising food prices in the United States, breadbasket to the world, have raised criticism over government mandates requiring corn to make the renewable fuel ethanol. There are also concerns that surplus stocks would run low in coming years.

"I see small carryout (ending stocks) the next two years in corn with my yield projections," said Dan Cekander, analyst for trade house Newedge Trading. "But corn supplies will be at minimal levels where you're very subject to any minor adverse weather and you can send the market right back up to new highs," he said.

The Republican governor of Texas, Rick Perry, last week requested that the federal government cut in half the renewable fuel standard for ethanol made from corn. "We're diversifying our state's energy portfolio at a rapid rate, but this misguided mandate is significantly affecting Texans' family food bill."

The government has projected that nearly 25 percent of the U.S. corn crop will be used for ethanol this year, up from 20 percent last year and about 14 percent two years ago.

The current government mandate requires that 9 billion gallons of ethanol be added to gasoline this year and 15 billion gallons by 2015.

"Governor Perry is absolutely correct that ethanol demand is a major factor in increasing the cost of food production," said National Chicken Council President George Watts.

But grains analysts do not think the U.S. government will change its ethanol mandate so long as ethanol production is profitable and unless corn prices outrun soaring oil prices.

"If we see corn prices go up a couple more dollars then definitely we'll see changes to the ethanol mandate, but currently the ethanol plants are profitable, even at the current price levels for corn," said Terry Reilly, analyst for Citigroup.

Chicago Board of Trade corn prices for delivery in July next year reached a record high $6.51 per bushel on Monday, up 23-1/2 cents on the day. Prices have risen by about 50 percent over the past year.

Tyson Foods Inc (TSN.N), the largest U.S. producer of beef, pork and chicken, said on Monday its chicken and beef units posted operating losses for its fiscal second quarter due in part to higher feed costs.

SOME RELIEF FOR WHEAT-BASED FOODS

Though corn flakes, chicken, beef and pork may become more expensive, a rebound in global wheat output should help ease the cost of a bowl of cereal and bread.

Expected big wheat crops this year also should help cool corn prices a bit as wheat becomes competitive with corn and starts to displace corn in some livestock feeding rations.