By Sam Nelson - Analysis
CHICAGO (Reuters) - Record-high U.S. corn prices are on a bullish path that could heighten tensions over global food inflation woes and give further ammunition to critics of using grain to make the renewable fuel ethanol.
High food prices have sparked riots in several African countries, as well as Indonesia and the Philippines. The food situation toppled the government in Haiti last week when senators fired the prime minister after a week of riots.
The pace of seeding the corn crop in the United States is off to a slow start due to rains and soggy fields, and farmers have scaled back the number of acres to be planted with corn this spring as they switch more land to high-priced soybeans.
There is also the weak dollar, which has bolstered U.S. exports, and a three-week Argentina farm strike which has tarnished that country’s reputation as a reliable supplier.
Chicago Board of Trade corn futures for the spot month, May, were around $6.03 per bushel on Wednesday morning, up more than 50 percent from a year ago.
“It will be much easier to get out to the $7.00 to $8.00 (a bushel) level than back down to the $4.00 or $5.00 level,” said Bill Nelson, grain analyst for Wachovia Securities.
“By miracle if we started reversing, and the dollar started rallying, then maybe it would be a little easier to talk about the lower levels. In our trading plans we’re bullish on corn.”
Further gains in corn prices could hurt the bottom line of poultry and livestock producers, and raise meat prices.
Chicken producer Pilgrim’s Pride Corp on Monday said it was cutting production for the second time in a month due to high feed costs. Its share prices rose as investors were pleased that reduced supply would drive up meat prices.
U.S. farmers are projected to plant roughly 7 million fewer acres of corn this year than in 2007 when soaring prices prompted the largest corn area in more than 60 years, at 93 million acres.
A key reason for the surge in corn acres last year was demand from the ethanol sector, which will consume about 25 percent of this year’s estimated 13.1 billion-bushel corn crop.
U.S. Agriculture Secretary Ed Schafer on Tuesday addressed criticism that the use of corn for biofuel was fueling global food inflation, telling CNBC that “energy is the big issue as we look at those food prices.”
He later told Reuters during a visit to the CBOT that he expected no shift in the current biofuels policy.
“I think the capacity right now is such to where changes in the target gallons (of ethanol) isn’t going to make any difference in the marketplace,” Schafer said.
Grain analysts said there will be no margin for error when it comes to crop weather this year, with a continued wet spring or hot and dry summer during the key crop development stage likely to lift prices.
“With bad weather you could have $8.00 per bushel new-crop December corn ... it’s pretty much weather right now,” said Paul Haugens, vice-president for Newedge Trading.
A veteran of the cash grains and futures markets, Haugens saw little reason for the corn markets to weaken as global demand for feed, food and fuel remains on the boil.
CBOT corn futures soared to a record high $6.43 per bushel this week and the bellwether new-crop December contract leaped to a contract high of $6.29 per bushel.
Farmers in the United States plant the corn crop in the spring and begin harvesting the grain roughly in late October and November. A big portion of the crop is sold or hedged on the CBOT December corn futures contract.
A wet spring has led to concerns about reduced plantings and/or lower corn yields per acre, and more rain is expected. This season, high soy prices are stealing acres from corn.
“The ratio of new-crop beans to corn had dropped below 2, so I think the corn market was kind of frantic to buy back a couple million acres; I really think we need more acres than that,” Nelson said.
Usage of corn in the United States remains strong as livestock and poultry feeders compete with the energy sector for supply, which is now large at more than a billion bushels.
But domestic demand, coupled with exports, could quickly drain supplies to critically low levels by summer of 2009 summer.
“If you benchmark on the 86 million acres, it basically runs you out of corn by the summer of 2009. Of course it won’t go to zero, but basically you have to ration demand to correspond with the limited supply,” Nelson said.
“The food-versus-fuel battle is going to get bigger and it’s a political year in the United States so I don’t see anyone making any changes (to ethanol policy),” Haugens said.
(For more stories on food price inflation, please click on this link: here)
Reporting by Sam Nelson, editing by Matthew Lewis