Corn and wheat prices fell sharply Monday after the government said farmers planted larger crops than expected this year, helping to offset recent losses from widespread Midwest floods.
Analysts cautioned that U.S. grain supplies remain extremely tight due to strong world demand and increased production of corn-based ethanol. The Agriculture Department also said soybean harvests may be hurt by wet weather.
Overall, the report did little to dispel the threat of higher consumer food prices ahead. Retail food prices rose 4.9% during 2007 and have jumped at a 6.2% annual rate in the past three months. Corn and soybean prices are nearly double the level of last summer, and wheat prices have also soared.
The report temporarily dampened corn prices, with the July contract falling 30 cents — the maximum allowed — to $7.25 a bushel on the Chicago Board of Trade.
"We may have survived a bullet, but if the weather turns bad" supplies could deteriorate and prices climb again, says Jim Bower of Bower Trading.
Bower says the corn crop is fragile because bad weather has stunted plant development.
Farmers planted 87.3 million acres of corn this year, about 7% less than last year's historic crop, the Agriculture Department said. Still that's up 1.3 million acres from earlier forecasts — and would be the second-largest acreage since 1946. Soybean acreage is 17% higher than 2007, a year when many farmers shifted from soybeans to corn due to high corn prices. But the Agriculture Department expects farmers will actually have a smaller soybean harvest less than usual. Wheat area is up 5% from 2007.
The Agriculture Department tried to gauge the effect of bad weather by interviewing about 1,200 farmers in flood-affected areas. Planting is only part of the picture. Yield — production per acre — is a huge question.
Gail Martell, senior agriculture analyst at Storm Exchange, which provides weather-related risk and assessment services to businesses, says corn yields could be 10% to 12% below last year.
Farmers with waterlogged fields who replant "need absolutely ideal weather from here on out … a lot of sunshine and a lot of heat, and that is contrary to the typical scenario in July," Martell says. Her firm estimates about a third of the corn crop and 30% of the soybean crop were hit by the Midwest floods.
More than 75% of U.S. processed foods contain corn in some form. Corn and soybeans are feed for cattle, chickens and hogs. Smithfield Foods, a major meat processor, in early June said the cost of raising hogs jumped more than 17% in the past year on high grain prices.
"Much of the (corn) crop is in a vulnerable position being two weeks behind normal development," says Terry Francl, senior economist at the American Farm Bureau Federation. "This almost assures further market fireworks when normal hot and dry (summer) weather sets in."
Francl says a number of farmers were planning on planting soybeans as a second crop after harvesting wheat. With wheat behind schedule, some plantings may not materialize.