Rising grain prices will stoke US food prices

Forbes reports that resurgent grains may stoke US food prices.

(emphasis mine) [my comment]

ANALYSIS-Resurgent grains may stoke U.S. food prices
02.10.09, 01:38 PM EST
By Sam Nelson

CHICAGO (Reuters) - A resurgent U.S. grain market, stoked by drought in South America, spells more financial troubles for struggling meat producers and higher food prices for consumers already pinched by the recession.

The worst drought in decades in Argentina, and in neighboring Brazil, is helping to rally prices of corn and soybeans at the Chicago Board of Trade at a time when prices have slumped from record highs last summer.

Argentina is the world's second largest corn exporter and the third biggest shipper of soybeans. Brazil is the No. 2 soy exporter, behind the United States.

"People can lose their jobs and grumble a little but, if they lose their opportunity to eat, then there is a very serious problem," said Gavin Maguire, analyst for brokerage house Ehedger.

Corn and soybean prices have risen more than 25 percent since early December, adding financial pressure on meat producers, who already were trimming animal and chicken numbers because of shrinking credit and the inability to pass on the increased expenses to retail shoppers.

"If Economics 101 gets applied to the supermarket, then we're going to see a pretty standard procedure, which is: Fewer supplies of chicken breasts, shall we say, should lead to higher prices down the road," Maguire said.

The U.S. Department of Agriculture on Tuesday released a report confirming that the supply of soybeans and corn in South America had been slashed by drought.

But corn and soybean futures traded on the Chicago Board of Trade declined a bit early on Tuesday, rather than rising, because investors had already been buying futures and driving prices higher in anticipation of the cuts in South American output.

"I thought they (U.S. data) were fundamentally constructive, but not a surprise," said Anne Frick, oilseeds analyst for Prudential Bache Commodities.

The United States remains the largest exporter of soybeans, wheat and corn, the main feedgrain in the United States. U.S. corn supplies remain abundant, while soy supplies are dwindling.


"It's a difficult environment, because livestock and poultry producers have had a difficult time passing off their increase in production costs at the grocery store, and that's why they have reduced herd sizes," Maguire said.

"Now they've cut back the herd size to the point the supply is genuinely limited, and we certainly cannot expect lower food prices in this environment," he added.

Soybeans are processed into high-protein soymeal, a staple in the livestock and poultry industry, and into soyoil, a global competitor in the vegetable oils and fledgling biodiesel sectors.

USDA cut world soybean production estimates nearly 4 percent this month because of the South American drought, slashing Argentina's crop by 5.7 million tonnes, and cutting Brazil's output by 2 million and Paraguay's by 1.6 million tonnes, the USDA said.

"The main change to the report is the decline in Argentina and Brazil. That was expected, but maybe it is a little bit more (than estimated)," said Rich Nelson, economist for commodity research firm Allendale Inc.

Meanwhile, the firm floor under grain and soybean prices is giving no relief to cattle, hog and chicken producers, leading to worries about more cutbacks in meat output, which would add to price increases at the supermarket, and not only in the United States.

China has been aggressively buying soybeans from the United States as a precaution against rising food prices and potential food shortages. [Or because their official reserves don' t actually exist]

"Obviously, there is a lot of resistance to food price increases, and that's what the Chinese are trying to do with their bean consumption is try to keep their people fed," Maguire said.

My reaction:

1) The US Department of Agriculture has confirmed that the supply of soybeans and corn in South America has been slashed by drought. The USDA reduced production estimates for Argentina's crop by 5.7 million tonnes, and cutting Brazil's output by 2 million and Paraguay's by 1.6 million tones. With droughts around the world, we will be seeing a lot more estimates reductions in the future.

2) Droughts and decreases in agricultural production are increasing food prices, as demonstrated Corn and soybean which have risen more than 25 percent since early December.

3) Rising corn/soybean prices and shrinking credit has forced up costs for meat producers. However, with the inability to pass on these increased expenses to retail shoppers, meat producers have cut back the herd size, or gone out of business (like Pilgrim's Pride, the No. 1 US chicken producer, which declared bankruptcy on December 1).

4) Decreasing supply will soon allow meat producers to raise prices.

5) China has been aggressively buying soybeans from the United States. (Possibly because
its 60 million tons of grain reserves doesn't actually exists.)

Conclusion: This confirms much of what I have been saying:

A) Droughts worldwide are affecting food productions and driving up prices.
B) The inability to pass on rising costs to consumers is destroying the supply of goods (in this case meat), which will soon translate into some serious inflation.
C) Central banks are already using their reserves to buy food, as demonstrated by China.

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0 Responses to Rising grain prices will stoke US food prices

  1. Anonymous says:

    Hi Eric,

    re meat supply, Pilgrims' Pride / (Tyson), meat inflation.

    Meat inflation has to happen.
    We need to eat much less of it, it takes too much energy to produce.

    This is the market working.

    Farmer John

  2. Anonymous says:

    I'll second the previous comment. Furthermore, I'll add to it.

    Fat Americans, driving fat,gas-guzzling SUV's, consuming their high fat,meat centric diet.... need to change.

    And yes, I'm a native born American (and no crap from any foreign weenies saying I can't use the term "American" (what Mexican,Columbian,Canadian,etc. EVER refers to themselves as "American").

  3. marks said...
    Ultimately, commodity prices will depend on recovery in growth, consumption, housing markets, durable goods (especially motor cars) and stability in financial markets and resumption of more normal financing activity. None of this seems likely in the short term.

    Satyajit's analysis has two fundamental flaws:

    1) It assumes the dollar's value will remain strong. If China and the rest of the world start using their dollar reserves to buy food (China has already begun doing this), the dollar's value will crash, and the price of everything in dollars will soar.

    2) Food commodities are different other commodities like oil. People cut back 50% on the miles they drive, but they can't cut back 50% on the food they eat. World droughts are set to wipe out 20 to 40 percent of the world's food output in 2009, and there is no way, with current food prices, that demand will fall by the same margin.

  4. mac says:

    We're already seeing the effects of job losses and a bad economy on food consumption. There's a reason Mcdonald's is showing profits. We're going to see all low-quality, low-cost foods' consumption increase over the next couple years.

    So, people may not be cutting 50% of their diets yet, but they are definitely adjusting their diets with higher carb, higher fat foods.

    What happens, though, when the scenrios Eric describes in this article start accelerating?

    I think regardless of whether oil, natural gas or precious metals move down (or up), we're going to see prices for commodities, and subsequently retail foodstuffs, explode in price.

    So many factors working against low commodity prices, including droughts and falling supply, credit crunch on farmers, and a coming inflationary environment..


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