Global Policy Forum

By Scott Kilman and Liam Plevan

U.S. Cuts Global Grain Supply Outlook; Higher Prices Expected at Grocery Stores

Evidence of tightening global food supplies grew as the U.S. Agriculture Department cut its estimates for global harvests of key crops and raised some demand forecasts, adding to worries about rising food prices.

Prices of corn and soybeans leapt 4% Wednesday and wheat gained 1%, continuing the broad rally in commodity prices that began in June. With yesterday's gains, prices of corn futures contracts are now up 94% from their June lows; soybeans are up 51% and wheat is up 80%

The USDA's revisions reflect the impact of dry weather in South America and floods in Australia, which have compounded supply constraints that first started to emerge in the middle of last year, when a drought in Russia ravaged that country's wheat fields. The agency also cut estimates for U.S. harvests of corn and soybeans.

At the same time, demand is increasing. The USDA said ethanol producers likely will increase their use of corn, and consumption by emerging market countries continues to be strong.

Prices of many agricultural commodities are still below the levels that sparked food riots in poor countries around the world in 2008. But economists see few signs that prices for grain, livestock and cotton will cool significantly anytime soon, signaling potential headaches for consumers and food companies.

"The markets are very, very tight," said Joseph Glauber, the USDA's chief economist. "There is concern, no doubt."

The strain on the world's food system is making policy makers nervous. The World Economic Forum cited rising demand for water, food and energy as a risk facing the world, in a separate report released Wednesday.

A rising global population and greater prosperity, said the report, "are putting unsustainable pressures on resources." The report also raised the specter of shortages, which could "cause social and political instability, geopolitical conflict and irreparable environmental damage."

In the U.S., the commodity-price rally could sting consumers in the short run. Michael Swanson, an agricultural economist at Wells Fargo & Co., said he expects retail food prices in the U.S. to rise between 3.5% and 4% this year, compared to about 1.5% in 2010.

Mr. Swanson said retail prices of beef and pork might jump as much as 10% this year. Many livestock farmers are losing money feeding high-priced grain to their herds, which could force them to shrink the size of their operations. While that could temporarily increase the availability of meat, supplies would eventually fall. "There is no way this beef is getting into the supermarket without a major increase in consumer prices," Mr. Swanson said.

Christine Sukalski, who helps run a family dairy farm in LeRoy, Minn., said prices of some rations for their roughly 300-cow herd have doubled over the past year. "It's driving our feed costs up," she said.

At the same time, the commodity boom is lifting the rural economy by fattening profits for U.S. grain farmers and exporters.

Cargill Inc., the closely held Minneapolis commodity processing giant and exporter, reported Wednesday that net earnings more than tripled in the quarter that ended Nov. 30, to $1.5 billion, compared to a year prior. Cargill said it capitalized on an "early and accurate read" of how weather problems earlier in the year were affecting markets.

The USDA, in its final estimate of the 2010 harvests, said the U.S. produced 12.4 billion bushels of corn, 93 million bushels less than it estimated in December, and down 7% from the record-large harvest the government forecast last spring. Analysts say the drop was a result of bad weather in parts of the Midwest last summer.

The USDA again raised its estimate of how much of that crop will be consumed by the ethanol fuel industry, which enjoys extensive government incentives, to 4.9 billion bushels, up 100 million bushels from its December estimate.

As a result, the government expects U.S. reserves of corn, the nation's biggest crop, to fall to their lowest level in 15 years by early September. The USDA forecast a reserve of 745 million bushels. That represents 5.5% of what is consumed annually, and would be a 56% drop from what was left over when the 2010 harvest began.

China's expanding appetite for U.S. soybeans to fatten livestock is largely behind shrinking reserves of America's second-largest crop. The USDA said Wednesday the U.S. supply of soybeans will decline by Aug. 31 to 140 million bushels, a reserve equal to 4.2% of annual consumption, which would be the tightest level in about three decades.

Grain traders expect China to buy about a third of all the soybeans harvested in the U.S. last fall.

Many food executives had hoped that southern hemisphere farmers would try to cash in on high grain prices by growing bigger crops over the next several months, but weather problems are plaguing growers in several countries.

The USDA lowered its forecast of Australia's wheat crop by 2% to 25 million metric tons to reflect recent flooding. Australia's weather woes, plus the collapse of wheat exports from the Black Sea since last summer, are expected to lift U.S. wheat exports to their highest level in 18 years.

The same La Niña weather pattern is drying out farm fields in South American countries that grow much of the world's soybeans and corn this time of year. The USDA cut its estimate of Argentina's corn crop by 6% to 23.5 million metric tons.

How long the grain rally lasts rests largely on what happens when U.S. farmers return to their fields this spring. Some grain analysts say U.S. farmers need to plant an additional eight million acres this year to bring supplies back to more comfortable levels, but it is far from clear where so much land would come from.

The U.S. has very little unused farm land to readily tap. What's more, prices of nearly all the major U.S. crops are unusually high, and growing more of one crop could curtail supplies of others.

David Taylor, a farmer in Como, Miss., said he planted 600 acres of winter wheat in November-an addition to his typical menu of cotton, corn and soybeans. Nationwide, the USDA said Wednesday that U.S. farmers planted 10% more acres of winter wheat in recent months than a year prior.

That could help boost wheat supplies, but also could have ripple effects in other markets. Mr. Taylor, for instance, will have to postpone planting some soybeans this spring until after the wheat is harvested, and that delay could cut into production.

"The soybean yields," he said, "could possibly be lower."