Demand for corn falls, could slow food inflation

The fast rise in food prices could begin to taper off later this year.

The fast rise in food prices could begin to taper off later this year.

The government's latest crop report estimates that the domestic supply of corn, which had been forecast to shrink, will grow in the months ahead. The Department of Agriculture report suggested the high price of corn is prompting ranchers and feed makers to use less and farmers to plant more.

Analysts expect these trends to push corn prices lower. And this could ultimately make everything from beef to cereal to soft drinks less expensive at the supermarket.

Corn prices fell sharply last week as part of a broader sell-off in commodities. On Wednesday, they dropped 30 cents, the maximum allowed in one day, to $6.77 a bushel.

The USDA estimates corn exports will drop by about 50 million bushels this summer. At the same time, farmers are planting more of it.

By late August, when the harvest begins, the USDA expects the nation's corn supply to be 730 million bushels, enough to satisfy demand for 20 days. That's an 8 percent increase from last month, when an 18-day supply was forecast by August. By 2012, the supply is forecast to grow to 900 million bushels, enough for 24 days. A 30-day supply is the level considered healthy by most investors.

The forecast doesn't guarantee an end to tight grain supplies. And it might not account for all the damage caused by a recent spate of extreme weather in the South.

Flooding along the Mississippi has already swamped more than 1.4 million acres of cropland in Tennessee and Arkansas alone, said John Sanow, a commodities analyst with Telvent DTN. Corn, cotton, soybeans and rice were among the crops destroyed.

Farmers will likely replant on the soggy soil, but they'll be behind their normal growing schedule. That could hurt yields. With Southern states bracing Wednesday for yet more flooding, the USDA projections for this year's crop could turn out to be too rosy, Sanow said.

"Every amount adds up this year, because we need every amount we can get to build (surplus) stocks," Sanow said.

Corn prices have more than doubled since last summer and hit an all-time high of $7.76 on April 11. The price had risen because demand from ethanol producers and overseas consumers has grown faster than supply.

Prices have fallen steeply over the last week as investors sold off their contracts for commodities from oil to copper, worried that demand for metals, grains and fuel will stay weak.

The government report suggests that the high prices are finally curbing demand, at least overseas. Corn exports are likely to decrease by about 3 million bushels a week until August. The bulk of U.S. corn exports go to the overseas livestock industry, where it is used as a feed. With corn getting so expensive, ranchers and feed suppliers cut back their orders and are substituting cheaper wheat rations for corn.

"The idea behind that is that prices are high enough to ration demand," said Jason Ward, an analyst with Northstar Commodity in Minneapolis.

Corn is used to feed cattle, pigs and chickens and is a major ingredient in cereals and soft drinks. But it can take months for high crop prices to work their way to grocery-store shelves. That's because food processors and grocers are slow to pass on the savings to consumers after to food industry swallowed higher costs for months.

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