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Reuters Edge

High U.S. corn prices fueling broader food inflation

CHICAGO (Reuters) - Rising U.S. food prices will outpace the general inflation rate for at least the next two years, and one of the main culprits is the steep climb in the price of corn.

A cornfield is seen in South Dakota in an undated photo from the Department of Agriculture. Rising U.S. food prices will outpace the general inflation rate for at least the next two years, and one of the main culprits is the steep climb in the price of corn. REUTERS/Handout

Corn prices rose above $4 a bushel in January and have doubled over the past two years. In February, prices hit 10-year highs due to surging demand from the U.S. ethanol industry, which uses the grain as its primary feedstock.

Growing competition for corn has raised costs by varying degrees for livestock and poultry producers and food makers in general, costs which consumers have only begun to realize.

“Food inflation, basically, in January and February is just kicking up a little bit above the general inflation rate. Our anticipation is that we are going to see that for all of 2007,” said Purdue University agricultural economist Chris Hurt.

“We’re going to see this food inflation rate be maybe 1 to 2 percent above the general inflation rate, in other words it’s pulling inflation up. That will continue in 2008,” he said.

Food prices could rise by 5 percent or more in those years, compared with 2 to 3 percent normally, he said.

More competition for farmland will also force prices of other food and feed commodities higher.

“Soybeans, wheat, alfalfa hay, anything that competes with corn for land, those have to get re-priced,” Hurt said.

“The food sector is still pricing their wholesale product values with maybe $2.50 (per bushel) corn. Corn is closer to $3.50 now, so there still is this lagging process of bringing those prices to where current markets are,” he said.

RETAIL PRICES TO REFLECT RISING FARM-LEVEL COSTS

Prices of food containing large percentages of corn and corn products will increase sooner than meat, poultry, and dairy products, which may rise significantly only within a year or two of the initial price spike in corn, economists said.

Losses at the farm level would eventually be passed on to the retail level as farmers liquidate herds and flocks to cope with losses from higher feed costs or market their meat-yielding animals at lighter weights, they said.

“So far the effects of the high price of corn have been pretty minimal,” said Darrel Good, a professor of agricultural economics at the University of Illinois.

“The big impact comes if corn prices are high enough that it forces substantial liquidation of livestock leading to a downward spiral of meat supplies, therefore higher prices.”

Soft drinks, which are sweetened with high-fructose corn syrup, and breakfast cereals that contain corn will rise by only a few cents at most as prices of processed foods include the cost of raw ingredients, processing, and packaging.

“A one-pound box of corn flakes, or one of these corn cereals, would have between 6 and 7 cents’ worth of corn,” said Robert Wisner, professor of agricultural economics at Iowa State University.

Similarly, prices of cosmetics, medicines, plastics, adhesives, or any of the other nonfood products made with small amounts of corn may see minimal price increases.

U.S. farmers were expected to plant more corn in 2007 than they have in 63 years, according to U.S. Agriculture Department projections. An average growing season would still yield the largest corn crop in U.S. history.

Ethanol producers could consume a quarter of the new crop, compared with 20 percent last year and 14 percent two years ago, according to some analysts.

Strong demand from ethanol producers may hold corn prices above $3 a bushel for the foreseeable future, but adverse growing conditions this summer could send prices much higher.

“The concern is from here on forward. We clearly need a pretty good growing season to make sure we have another big corn crop. Without that, I think all bets are off,” Good said.

“I don’t like to be an alarmist, but we’re only one hot, dry July away from a bit of a problem.”

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