NEWS from Feedstuffs.com

Higher food prices ahead

- Flood damage fuels significant corn futures price increase.

- Consumer meat prices to spike later this year.

- RFS debate heats up with recent wide price swings.

By JACQUI FATKA

Monday, June 23, 2008

FOOD prices are on their way up, and analysts are expecting higher increases ahead.

Recent flooding in the Midwest has exasperated already tight domestic corn and soybean supplies, limiting U.S. farmers' ability to produce enough to meet growing domestic needs.

The U.S. Department of Agriculture estimated corn demand at 12.5 billion bushels. About 5 billion would be used to feed livestock, 4 billion for ethanol production, 2 billion overseas and the rest for other food, seed and industrial uses.

Earlier this month, USDA's latest projections estimated this year's corn crop at 11.7 billion bushels, but this does not account for recent flood damage. Previous years' corn stocks provided a small cushion for the shortfall, but tight supplies will require market prices to go higher to reduce demand.

The government's Consumer Price Index for all food rose 4% in 2007 after increasing at a rate of 2.4% annually during the previous two years.

Last week, several analysts increased food price estimates, calling for 5-9% increases this year.

Bill Lapp, president of Advanced Economic Solutions, projects a 9% increase from 2009 to 2012 as corn reigns as king in the marketplace and drives up other commodity prices with it.

Dave Miller, director of research and commodity services with the Iowa Farm Bureau Federation, said while the price of corn has gone up $1.50 in the last two weeks in Chicago, Ill., it should not directly affect the price of most of the food at the grocery store.

Wheat production is up in the U.S. and globally, and that has a larger impact on bread and cereals than corn, he said. However, since nearly half of Iowa's corn (and all of the byproduct of ethanol production) is used to feed livestock, consumers can expect meat prices to fluctuate.

"In the short term, pork and beef prices may initially drop as livestock farmers liquidate herds because feed costs are too high for them to hold out, but expect those prices to climb at the meat counter in about six months," Miller said.

Several livestock representatives last week said the industry is in "round two" of liquidation because feed prices continue to climb.

James Herring, president and chief executive officer of Friona Industries, the fourth-largest U.S. cattle feeding operation, said the public will need to pick up an additional 20% increase in beef prices by the fourth quarter. If producers can't pass on that cost, production will have to be curtailed more.

Rod Brenneman, president and CEO of Seaboard Foods, the third-largest pork producer, expects significantly higher prices at the consumer level in late 2008 and early 2009 as fewer supplies of pork are available due to ongoing liquidation efforts.

Revisiting mandates

Food and livestock groups continued their call for the government to re-evaluate ethanol policies -- especially the renewable fuels standard (RFS) mandate -- in light of the recent flooding.

Last week, the Environmental Working Group released a report, "Biofuels & Bad Weather: America's Food-to-Fuel Gamble," which said the increased corn production needed to meet larger corn ethanol production banks on good weather, which has not occurred this year.

Earlier this spring, Texas requested a waiver of the 9 billion-gallon corn-based ethanol mandate of the RFS. Environmental Protection Agency Administrator Stephen Johnson can grant the request if he sees that the mandate poses "severe economic harm" to a state, region or the nation.

EPA's public comment period regarding the waiver request closed June 23. A final decision on the request should be known by the end of July.

The true impact of reducing the mandate on food prices remains unknown, explained Paul Hill, chairman of West Liberty Foods and National Turkey Federation chairman, "but we haven't seen the full price increases. If we can stabilize the upward spiral, we can move these price increases through the system in a proper manner. This has the whole industry caught off balance."

Livestock group representatives said the reduction in corn for ethanol won't bring prices back down to $3-4. Hill said the mandate reduction might lead Chicago Board of Trade prices to back off $1-2 from their current highs of $7-8. Previous studies have indicated that prices would drop potentially not even 50 cents.

In support of the RFS, the American Farm Bureau Federation wrote in its letter to EPA that although Texas officials assert that the state's livestock sector is experiencing severe harm from increased corn prices caused by the RFS, no data linking the two are provided.

Higher corn prices are caused by numerous factors, the bureau wrote. These include record export demand fueled by a weak dollar, record domestic feed use, a flood of speculative money into the commodity markets and dramatic price increases for crude oil and energy.

Food price investigation

A coalition of farm and commodity organizations urged congressional leaders to promptly initiate comprehensive hearings to examine all of the reasons for increased retail food prices. The coalition urged the hearings to focus on the underlying causes of higher food prices, which sectors of the economy are responsible for the increase and whether any of them have benefited unduly from such price hikes.

In a letter to House and Senate leaders, the coalition noted that recent media reports have attributed higher commodity costs paid to farmers as the cause of higher costs passed on to consumers.

"Such a perspective is a great disservice to the general public because it ignores the facts behind higher prices. Equally important, however, is the concern that, left unchallenged, such reports will help to shape public opinion and public policies in ways that are detrimental to U.S. agriculture," coalition members wrote in a letter.

While recognizing that higher retail food prices are affecting many people at home and abroad, the coalition told members of Congress that pointing the finger only at farmers, whose share of the food dollar is small compared to other entities, is wrong and does not provide the true picture of what is driving up food costs.

The American Farm Bureau Federation, National Farmers Union, National Corn Growers Assn., American Soybean Assn., National Sorghum Assn. and National Association of Wheat Growers signed the letter to congressional leaders.

JACQUI FATKA is a reporter for Feedstuffs.