Crop report hints at volatile 2008

Expect high food prices and volatile markets ahead.

The U.S. Agriculture Department, in an eagerly anticipated report Monday, predicted the nation's farmers will plant 8% less corn this year than in 2007 while boosting soybean and wheat production.

The upshot is that corn prices, already at their highest in decades because of surging demand for food, feed and federally subsidized ethanol, could jump still more. That could pinch consumers, who buy a dizzying array of corn-containing products: from soft drinks made with high-fructose corn syrup to plastic containers made from the grain.

It could also hit the bottom line of ethanol refiners, despite their federal price supports.

At the same time, soybean prices are expected to dip a bit, though staying at historically elevated levels, analysts say. Wheat prices could decline substantially — though remaining well above longtime averages — as farmers here and in other nations boost output. Shoppers, who have been paying more for bread and pasta, could benefit.

But production and price predictions can be as variable as the weather. With worldwide demand high and grain stockpiles at their lowest in decades, any sort of weather shock this growing season would reverberate in already nervous futures markets.

"This report sets the stage for what seems to be a wildly gyrating market for the rest of 2008," says Jim Bower, president of Bower Trading. "Our (stockpiles) are down so dang low here in the U.S., we really don't have much margin for error."

The crop report comes amid the biggest agricultural boom since the 1970s. Grain prices have been boosted by growing appetites in surging economies such as China and India. The falling value of the dollar has made U.S. grain more attractive abroad, boosting exports. Demand has been so strong that U.S. wheat stockpiles hit their lowest levels since the late 1940s.

High energy prices have increased the cost of production. In addition, the U.S. and other nations have mandated increased use of biofuels, including corn-based ethanol. That has led to competition for acreage, contributed to a doubling of many grain prices and caused food riots in nations such as China and Pakistan.

With ethanol demand surging, U.S. farmers last year planted the largest corn crop since 1944. Even with the predicted decline in acreage, the 2008 crop could be one of the largest on record. Still, with the ethanol industry expected to claim about a third of the corn crop, and the USDA saying that stockpiles are lower than expected, there is the potential for shortages.

An ethanol industry official predicts there will be sufficient supply, though higher prices could hurt ethanol refiners. "We're going to be as sensitive as any other industry that relies on corn as an input. At a certain price, you're going to say, 'Does it make sense to keep doing it?' " says Bob Dineen, president of the Renewable Fuels Association. "Certainly, there's going to be some places where that occurs."

The USDA said U.S. farmers will plant 74.8 million acres of soybeans this spring, up 18% from last year. The increase is a response to healthy soybean prices and rising costs of producing corn. Wheat crops could hit 63.8 million acres, up 6% from 2007. Cotton crops could shrink 13% as farmers switch to more lucrative crops.

The report is based on a survey of 86,000 growers in March.

Corn prices, already at $5.67 a bushel, could jump to $7 to $7.50 if farmers plant as the report predicts, says Joe Victor, vice president of market research at research firm Allendale.

Soybean prices could average about $11 a bushel, down from recent highs of more than $12 but still well above last year. Soybean contracts for May delivery declined 70 cents a bushel, the maximum limit a contract can move in one day, to $11.97 on the Chicago Board of Trade Monday. Wheat prices could decline from recent highs of more than $13 a bushel to $6.50 to $7.

Higher prices have been a boon to many farmers but have hurt food processors and the livestock industry.

Pilgrim's Pride, the largest chicken company in the nation, said in March that it would close some facilities and eliminate 1,100 jobs in response to rising production costs and oversupply.

The company's feed costs rose $600 million last year and are expected to increase an additional $700 million this year.

"Basically, we're spending our tax dollars to raise the price of our food so we can subsidize the ethanol and big oil companies," says Ray Atkinson, Pilgrim's Pride director of communications.

U.S. consumer food inflation rate has hit about 4.4% seasonally adjusted in the six months ended in February. Prices for cereals and bakery products are up more than 9%, however.