August 11/St. Louis/Businessweek -- Food prices could level off at the end of the year because farmers are seeing less demand for corn and are expecting a big crop.

The U.S. Department of Agriculture said farmers expect 940 million bushels to be left over when the harvest begins this fall. That is up from last month's estimate of 880 million bushels.

Record-high corn prices forced many ranchers to seek cheaper alternatives for feeding their livestock, such as wheat. The drop in demand, combined with the big corn crop, is likely to force prices down.

Corn is used in everything from beef to cereal to soft drinks. It typically takes six months for a change in corn prices to affect products on supermarket shelves. For all of 2011, the USDA predicts food prices will rise 3-4%.

Worries over the size of the corn surplus pushed corn prices sharply higher this year. They reached a record price of $7.99 a bushel in early June.

Hoping to capitalize on that high price, farmers planted the second-largest corn crop since World War II. However, less demand and a huge harvest in August could lead to greater corn surpluses, which would ultimately slow food inflation.

The key factor that drove corn prices higher was a historically low surplus level. Global demand for corn, soybeans and wheat has outstripped production for the last 10 years, drawing down surplus levels that are key to a stable food supply.

Earlier this year, the USDA estimated that there would be fewer than 700 million bushels of corn left over at the end of this year. That is less than enough to satisfy demand for 20 days. A 30-day supply is the level considered healthy by most investors.

A surplus of 940 million bushels is enough to satisfy demand for 27 days. While not ideal, that level should calm worries of an imminent global food shortage.

When surpluses get as low as they are now, even relatively small supply shocks can send crop prices sharply higher on global commodities markets. Traders have been nervously watching every USDA crop report this summer, looking for any sign that the crop harvested this fall will be smaller than expected.

Those worries have been stoked by a hot summer. Overnight temperatures in key corn states like Iowa and Illinois were stubbornly high through July. That can stunt corn plants at a crucial phase -- when they pollinate and set their kernels.

However, it appears that high production will overcome demand this year. The latest USDA estimate did not forecast that the hot weather will significantly cut the size of this year's harvest, which projected to be 12.45 billion bushels.

 

From the August 15, 2011, Prepared Foods' Daily News.