Smaller corn surplus could push food prices higher

[September 13, 2011]  NEW YORK (AP) -- Food prices could rise next year because an unseasonably hot summer likely damaged much of this year's corn crop.

The U.S. Department of Agriculture estimated Monday that a surplus of 672 million bushels of corn will be left over at the end of next summer. The estimated surplus is down from last month's forecast and well below levels that are considered healthy.

This spring, farmers planted the second-largest crop since World War II. But high temperatures stunted the plants.

"We just didn't have a good growing year," said Jason Ward, an analyst with Northstar Commodity in Minneapolis. "It was too hot, too warm, too dry at the wrong time."

The price of corn was relatively unchanged at $7.33 a bushel on Monday. While that's down from its peak of $7.99 reached in June, it's still nearly twice the price paid last summer.

More expensive corn drives food prices higher because corn is an ingredient in everything from animal feed to cereal to soft drinks. It takes about six months for corn prices to trickle down to products at the grocery store.

But many food producers are already being squeezed by the higher prices. Chicken producer Sanderson Farms Inc. reported its third straight quarterly loss late last month, in part, because of increased costs for feed. Smithfield Foods Inc., the world's largest hog producer, said last week that high feed costs would remain a problem this year.

"Ingredient prices are going to stay high for a while," Ward said.

Traders also worry that grain shortages could return next year because of the damaged crops.

Farmers are expected to have a surplus of 920 million bushels when the harvest begins this month, the USDA said. That's roughly a 26-day supply of corn, slightly less than the previous month's estimate.

But the USDA said the corn surplus could dwindle next fall to about a 19-day supply. A 30-day supply is considered healthy.

When crop reserves are low, market prices can jump quickly, said Scott Irwin, an agriculture economics professor at the University of Illinois. When reserves are at adequate levels, a decline in grain supplies tends to cause prices to rise modestly. But when reserves are unusually low relative to demand, short-term supply disruptions can cause prices to jump exponentially, Irwin said.

In part, that's because unlike with other goods, rising food prices generally don't cause people to buy less food. Rather, they typically cut spending on other things so they can keep the diets they're accustomed to. Prices tend to stay high until demand finally slackens.

A smaller surplus drove corn prices higher earlier this year. Global demand for corn, soybeans and wheat has outstripped production for the last 10 years. Surpluses, vital to a stable food supply, have shrunk.

[Associated Press; By CHIP CUTTER and CHRISTOPHER LEONARD]

Cutter reported from New York. Leonard reported from St. Louis.

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