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Commodity Concerns and Biofuels
Scott Kilman reported in today's Wall Street Journal that, "The Midwest floods are raising the inflationary tide rippling through the nation's supermarkets and restaurants - and meat prices may soon start rising along with prices for bread, eggs and breakfast cereals.
"Economists are again raising their forecasts of how much food prices will climb, and for how long, because heavy rains have washed out millions of acres of prime farmland at a time when soaring demand is draining U.S. grain supplies to low levels."
Mr. Kilman explained that, "[Fiona Boal, a food-industry analyst at the U.S. arm of Dutch financial firm Rabobank Group] said Monday she expects U.S. food prices to climb between 7% and 9% this year, and to continue rising in 2009. The government's Consumer Price Index for all food rose 4% in 2007 after increasing at a 2.4% annual rate during the two years before that.
"Paul Prentice, president of Farm Sector Economics in Colorado Springs, Colo., Monday raised his food CPI forecasts for 2008 and 2009 by 1.5 percentage points to 7% and 7.4%, respectively.
"Likewise, Michael Swanson, an economist at Wells Fargo & Co., said Monday he expects food prices to climb 5% to 7% next year, compared with his forecast for a 6% rise in food prices this year.
"U.S. consumers, who are feeling the sting of high grain prices in what they are paying for everything from breakfast cereal to milk and eggs, will probably next see increases in the retail prices of poultry, pork and beef."
Jerry Hirsch and P.J. Huffstutter, writing on Monday at the Los Angeles Times Online, noted that, "The flood tides enveloping the Midwest will crest across the nation in the form of higher prices in just the places where households have been hit the hardest - food and fuel.
"Floodwaters have spread across the Corn Belt, preventing farmers from planting soybeans and damaging a corn crop just starting to emerge from the ground. Analysts estimate that flooded Iowa and Illinois and the other corn states might produce 15% less of the grain than last year. Some believe the shortfall will be larger."
The L.A. Times article stated that, "Earlier this month, the U.S. Department of Agriculture estimated demand for corn in the coming year at 12.5 billion bushels.
"About 5 billion would be used for feed, 4 billion consumed by ethanol production, 2 billion sold overseas and the rest put to other food, seed and industrial uses. The nation was on schedule to produce just 11.7 billion. The shortfall would be made up by corn grown in previous years and stored.
"But because of the soggy plants near Boland's farm [Doug Boland, 53, a fourth-generation farmer who lives near Williamsburg, Iowa, about 35 miles southwest of flood-ravaged Cedar Rapids] and across the Midwest, analysts now think corn production could fall to about 11 billion bushels, draining supplies to precariously low levels."
The L.A. Times writers also pointed out that, "Some analysts believe the rapid increase in the use of corn to make ethanol has left the nation with little room to maneuver through weather-related disasters in the Midwest.
"'Our ethanol policy requires perfect weather, and not surprisingly, we aren't getting it,' said Michelle Perez, senior agriculture analyst with the Environmental Working Group in Washington.
"Perez said that in establishing federal mandates for the use of renewable fuels, the Bush administration and Congress ignored 'the impact this policy could have on food prices, relying entirely on good weather to make this roll-of-the dice decision a success.'"
(For a complete analysis on this issue from the Environmental Working Group, see, "America's Food-to-Fuel Gamble," by Michelle Perez.)
Dow Jones writer Ian Berry reported yesterday that, "At least 3.3 million acres of corn could be lost due to the heavy rains and flooding that has saturated the U.S. Midwest, a poll by Farm Futures suggests.
"The estimate, released Monday, was based on results from an online poll in which 584 producers responded. Of those, 11.6% said more than 20% of their intended crop would not be planted, Farm Futures said.
"The survey was conducted June 6-13, after the deadline to file for crop insurance based on prevented planting."
DTN writers Aine Gianoli and Anthony Greder reported yesterday that, "Weather-ravaged Midwestern grain production areas are still undergoing damage and assessment, making it tough for USDA's weekly Crop Progress report released Monday to provide a measurement of the U.S. corn crop's condition.
"Only 12 percent of U.S. corn acres were rated in very-poor-to-poor condition as of Sunday, compared to 9 percent a week earlier, according to the report. In Iowa 15 percent of the crop was classed in the very-poor-to-poor category Sunday vs. 10 percent last week."
The DTN article noted that, "The corn futures market has been hyper-vigilant of indications that flooding in the Midwest and the generally cool, wet weather this spring has damaged the U.S. corn crop's ability to produce something around 12 billion bushels this year.
"Nationwide, acres ranking in the good-to-excellent category dropped from to 57 percent on Sunday from the previous week's 60 percent - again, not a dramatic change, considering the stark reports from the fields."
A University of Illinois Extension article from yesterday ("Rationing the 2008 U.S. Corn Crop," by Darrel Good) noted in part that, "Corn prices have moved sharply higher as production expectations have been scaled back. It is still not clear how much rationing will be required during the 2008-09 marketing year. The USDA will release its annual Acreage report on June 30 which may provide some insight into potential crop size. However, some acreage had not yet been planted or replanted at the time of data collection. The report, then, will still reflect a fair amount of planting intentions. Harvested acreage for grain may also be difficult to anticipate with the recent widespread flooding. The USDA's quarterly Hogs and Pigs report will be released on June 27 and may give some hint of how livestock producers are responding to higher feed prices. Responses, however, may not completely reflect the recent surge in feed prices.
"A fair amount of crop loss and demand rationing are already priced into the corn market with December 2008 futures approaching $8. The worst of the crop stress may have passed and more favorable growing conditions are forecast. Corn prices may now moderate somewhat, at least until more is known about crop size."
Steve Young, writing today at the Argus Leader Online (South Dakota), reported that, "Through Sunday, 98 percent of the state's corn was planted, but its average height was only six inches, compared to a five-year average of 10 inches, according to the National Agricultural Statistics Service in Sioux Falls.
"Eighty-seven percent of soybeans have been planted, though only 60 percent of those plants have emerged, compared to a five-year average of 80 percent, the ag service said."
However, the article did indicate that, "Should the weather warm dramatically and the rains stop, corn growth still can take off, said Craig Rosenberg, an extension educator in Minnehaha County.
"The problem, he said, is that when farmers start out with a wet spring, plants don't always put down roots like they would during a normal growing season.
"'If it's wet, and plant roots don't have to work very hard to go looking for moisture, it can be a problem when it turns dry later in the summer,' Rosenberg said.
"'They don't develop deep roots, and that can reduce yields.'
"Corn that is delayed in being planted also can be a lot wetter at harvest time, Rosenberg said, which means additional costs to farmers to dry it."
Chris Serres reported yesterday at the Minneapolis Star Tribune Online that, "The heavy rains and storms that have devastated much of the Midwest may have one unlikely beneficiary: Minnesota corn farmers.
"In pockets of Iowa, Indiana and Illinois, monsoon-like rains have washed out newly planted fields and delayed the planting of millions of acres. But the devastation has also pushed corn to its highest price ever - and that's been unmitigated good news for farmers in Minnesota, which has thus far largely escaped the crop damage to the south."
Meanwhile, Leslie Reed reported in today's Omaha World Herald that, "Nebraska farmers and irrigation suppliers are racing the clock to replace hundreds of storm-battered center pivots before the weather turns hot and dry.
"Tom Mercer, who raises corn, soybeans, sweet corn and organic beef east of Kearney, said two of his three center pivots were a total loss as a result of a May 29 storm that brought tornadoes to his area, including one that hit his farm.
"'It flipped them so hard, it broke a lot of stuff. I just totaled them out,' he said. Mercer said his suppliers aren't even telling him when he might expect replacements."
Excess precipitation levels in some parts of the Midwest are also having an impact on transportation.
Alex Roth and Thomas M. Burton reported in yesterday's Wall Street Journal that, "Flooding in the Midwest is causing a host of problems for U.S. freight carriers, forcing railroads to divert or delay shipments and docking tugboats and barges that use the Mississippi River to transport a range of goods including grain, coal, fertilizer and scrap metal."
Yesterday's Journal article explained that, "Railroads are encountering problems, too, with floods washing out major rail lines in Iowa, Wisconsin, Minnesota, Missouri and Illinois. Customers have been told to expect delays in their shipments ranging from a few days to indefinitely.
"Diana Klemme, a vice president with Grain Service Corp. in Atlanta, a futures brokerage and agricultural consulting company, predicted 'rail disruptions will be long-lasting and more severe than barge disruptions,' mainly because of damage to bridges and other infrastructure. Truck transportation could also be slowed because portions of Interstate 80, Iowa's main east-west artery, have been shut, she said.
"The disruptions are putting stress on a national shipping system already groaning under the weight of record-high gasoline prices and tight capacity. Any delays could further push up prices of consumer products ranging from food to autos."
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Increases in the price of food could have positive impacts for some farmers in the developed world.
In an editorial item published in yesterday's Washington Post, Vinod Khosla noted in part that, "Rising food prices are of course a concern, but principally blaming ethanol production is illogical. 'On the international level . . . only 3 percent of the more than 40 percent increase we have seen in world food prices this year is due to the increased demand on corn for ethanol,' Agriculture Secretary Ed Schafer said last month. Oil prices affect the U.S. consumer price index for food two to three times as much as corn prices, the global analysis firm LECG has found. If biofuels were taken off the market, Merrill Lynch estimates, oil prices would climb 15 percent, putting further upward pressure on food prices.
"For the urban poor, rising food prices are disastrous, but for the developing world's rural poor (about 67 percent of those who live on less than a dollar a day), food price increases can boost incomes as subsistence farms become more economic. That's why developing countries such as India and Brazil have pressed to reduce Western food subsidies and increase food prices - so their farmers can generate income. Cellulosic biofuels, because of biomass's potential for raising rural incomes, may be among the most valuable poverty alleviation tools we have for Africa."
And Edmund Sanders reported in Saturday's Los Angeles Times that, "In Africa, a place all too familiar with chronic malnutrition and recurring famines, the international food crisis is playing out in some surprising ways.
"Soaring prices are pummeling urban dwellers who rely on imported food and often earn less than $2 a day. Riots have already rocked Somalia and Cameroon.
"But in rural areas, home to most Africans, small farmers live largely on what they grow. The food crisis could be a boon for such farmers, who depend far more on last season's rainfall and the condition of local roads than on crude oil prices.
"As governments focus on reducing their dependency on imports, small farmers are poised to receive some overdue assistance. And rising prices will mean farmers have incentives to plant more after decades of productivity declining under the weight of poverty, foreign competition and a marketplace flooded with subsidized food.
"'This might be one of the best opportunities that poor subsistence-level farmers will ever have to claw their way out of poverty,' said Josh Ruxin, founder of Access Project Rwanda, an anti-poverty advocacy group. 'For the first time in years, they might be able to make some money.'"
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With respect to another global food production issue, William J. Broad reported in today's New York Times ("Food Revolution That Starts With Rice") that, "Many a professor dreams of revolution. But Norman T. Uphoff, working in a leafy corner of the Cornell University campus, is leading an inconspicuous one centered on solving the global food crisis. The secret, he says, is a new way of growing rice.
"Rejecting old customs as well as the modern reliance on genetic engineering, Dr. Uphoff, 67, an emeritus professor of government and international agriculture with a trim white beard and a tidy office, advocates a management revolt.
"Harvests typically double, he says, if farmers plant early, give seedlings more room to grow and stop flooding fields. That cuts water and seed costs while promoting root and leaf growth.
"The method, called the System of Rice Intensification, or S.R.I., emphasizes the quality of individual plants over the quantity. It applies a less-is-more ethic to rice cultivation."
Biofuels
In other commodity news, Gregory Meyer reported in today's Wall Street Journal that, "Crude-oil futures lost ground, failing to hold a rally that took prices to a record high early in the day as traders puzzled over the size and impact of a potential increase in supply.
"Light, sweet crude for July delivery fell 25 cents, or 0.2%, at $134.61 a barrel on the New York Mercantile Exchange" (related graph from article available here).
The "Washington Insider" section of DTN indicated yesterday (link requires subscription) that, "The Senate Energy and Natural Resources Committee held hearings last week on the effects of the renewable fuels standards on food prices. They featured expert witnesses from the Department of Energy, USDA and Texas A&M University, among others. A barrage of details about supportive and competing trends emerged, but the message was clear - there is more inflation in the economy these days, from many sources but changing the new RFS could make things worse, not better.
"Representing DOE, Alexander Karsner, assistant energy secretary for energy efficiency and renewable energy, said it would be 'devastating to have an erratic switch' in policy on ethanol production and investment or to alter the federal renewable fuel standard. He indicated that support of ethanol production through federal policy is important for continued and sustained investment in the industry and cautioned against 'hasty judgments.'"
The DTN item noted that, "Joe Glauber, USDA's chief economist, offered similar comments, citing figures that showed that although food prices have risen, the effect of biofuel production on food prices has been minimal. 'At this time, the expansion in biofuel production in the United States would appear to be a relatively modest contributor to food price inflation globally and in the United States,' he said."
And after more detailed analysis, the "Washington Insider" item concluded by stating that, "While last week's hearings suggest no energy policy changes for now, they also suggest that the issue is far from settled, and that the odds of future changes, even changes this year, may be growing rather than declining."
