High feed prices not going away any time soon

Corn prices are what?

High commodity prices appear to be here to stay indefinitely despite a U.S. Department of Agriculture report last week projecting increased U.S. corn acreage this year, a Purdue University agricultural economist said.

The Prospective Plantings report, projects that corn farmers will plant more corn acres and fewer soybeans. Corinne Alexander said the report, coupled with lower-than-expected U.S. grain inventories, offers little hope for relief from high commodity prices.

“U.S. grain stocks, or inventories, are very tight, and whether that is because of lower production or higher use, we don’t know yet,” Alexander said. “What we do know is that we need to have at least an average crop production year in 2011 to keep up with the current rate of use.”

The report, issued annually and based on farmer surveys nationwide, projects a 5% increase in corn acres, at 92.2 million, and a 1% decrease in soybean acres, at 76.6 million.

At those acreage projections, even with average yields commodity prices are unlikely to decrease because of the tight world grain inventories. Any price relief would have to come in the form of an above-average yield; even still, Alexander said the price relief would be marginal.

If yields were abnormally poor, commodity prices would increase to the point of rationing use, she said.

“In the event of poor crop yields in 2011, prices would have to increase enough to reduce usage by 1 billion bushels for corn and 200 million bushels for soybeans,” Alexander said. “That would mean an average crop year corn price of $7.50 per bushel and $14.75 per bushel for soybeans.”

Higher grain prices mean higher consumer food costs and high feed costs for livestock producers.

“Feed is the biggest cost for livestock producers,” said Chris Hurt, a Purdue economist. “If grain prices continue upward, there could come a point when many livestock producers would start to liquidate.”

With current market livestock prices, some producers can afford up to $8 per bushel on corn. Anything higher would be enough to drive many operations toward financial losses.

Although high grain prices initially seem to benefit growers, Alexander cautioned that prices high enough to induce rationing eventually could lead to lower demand and lower prices.

“If we end up in a rationing scenario, it could lead to demand destruction for grain producers,” Alexander said. “Herd liquidations could ultimately translate into lower crop demand in subsequent years, which could reduce grain prices.”

Information for the Prospective Plantings report is gathered in early March, so Hurt cautioned that in any given year the difference between what farmers tell the USDA they intend to plant and what they actually plant can shift.

“If we get into a situation where planting is delayed and farmers are unable to get corn planted early enough, many will switch those acres to soybeans,” he said. “Some producers may also change their minds on what to plant based on what commodity markets are doing.”

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