Grain Prices Rally Toward 2008 Records on Shrinking World Supply

By Jeff Wilson and Whitney McFerron

(Bloomberg) — Corn, wheat and soybean futures jumped to the highest since 2008 after a U.S. government report showed smaller crops and rising demand are eroding global inventories as food prices surge.

The U.S. Department of Agriculture cut its forecasts for inventories held before this year’s harvests and said world supplies of the crops will slump 2.2 percent. Droughts in Russia, Ukraine and other parts of Europe and adverse weather in the U.S., Canada and Australia slashed output as the world economy rebounded from the most-severe recession in 70 years.

“There is not one crop you can point to that is without supply problems,” Steve Nicholson, a commodity procurement specialist at International Food Products Corp. in St. Louis, said before today’s USDA report. “Production is not keeping up with demand, exacerbating the global food crisis.”

The price of corn, used to make livestock feed and ethanol, has soared 95 percent in the past year, wheat has surged 84 percent and soybeans are up 57 percent. Today, rice futures reached a 27-month high.

An index of global food rose to a record in January as dairy, sugar and cereal costs increased, and high prices may persist for the next several months, the United Nations said on Feb. 2.

Corn futures for March delivery rose 24.25 cents, or 3.6 percent, to close at $6.98 a bushel at 1:15 p.m. on the Chicago Board of Trade. Earlier, the price reached $7.0075, the highest for a most-active contract since July 2008.

‘Enough Corn’

“There is going to be enough corn for food, for feed, for fuel and for export opportunities,” Tom Vilsack, the agriculture secretary, said today at a press conference in Washington.

Wheat futures for March delivery advanced 11.75 cents, or 1.3 percent, to $8.86 a bushel. Earlier, the price reached $8.9325, the highest since August 2008.

Soybean futures for March delivery rose 16.75 cents, or 1.2 percent, to $14.51 a bushel. Earlier, the oilseed reached $14.5575, the highest since July 2008.

Rice futures for March delivery gained 38 cents, or 2.4 percent, to $16.295 per 100 pounds. Earlier, the commodity reached $16.335, the highest since Nov. 5, 2008. The price has climbed 68 percent since the end of June.

Record agricultural exports have provided a boost for President Barrack Obama. The U.S. is the world’s leading shipper of corn, soybeans and wheat and the third-biggest for rice.

Record Prices

The record highs for the commodities were $7.9925 for corn on June 27, 2008; $16.3675 for soybeans on July 3, 2008; $13.495 for wheat on Feb. 27, 2008; and $25.07 for rice on April 24, 2008.

The Standard & Poor’s GSCI Agriculture Index, which tracks eight commodities including grains, sugar, cotton, coffee and cocoa, surged 72 percent in the past year, reaching record 567.7 today.

Reducing poverty and improving access to affordable food can help ease civil unrest in the world, Catherine Bertini, the former executive director of the UN World Food Programme, said today in an interview on Bloomberg Television.

A U.S. government program is seeking to improve food security in parts of Africa, Latin America and Asia, where people live on less than $1.25 a day, Gregory Gottlieb, the senior deputy assistant to the administrator for the Bureau of Food Security at the U.S. Agency for International Development, said today on Bloomberg TV.

Tyson, Valero

Lower grain supplies may increase livestock-feed expenses for meat companies such as Tyson Foods Inc. and Smithfield Foods Inc. Makers of corn-based ethanol including Valero Energy Corp. and Archer Daniels Midland Co. may face narrowing margins.

Fertilizer producers such as CF Industries Holdings Inc., Mosaic Co. and Potash Corp of Saskatchewan Inc. may boost sales of plant nutrients.

The agriculture rally has bolstered the financial health of U.S. farmers, sending Midwest cropland to record values and boosting profits for rural banks and equipment makers, according to a report yesterday by the Federal Reserve Bank of Kansas City.

Higher incomes allowed farmers to repay debt in the fourth quarter, reducing delinquencies and increasing profit for agriculture lenders, the Fed said.

The USDA forecast global production of corn, soybeans and wheat would total 1.716 billion metric tons, down from 1.755 billion last year.

The U.S. is the leading producer of corn and soybeans.

U.S. Corn Supplies

Stockpiles of corn on Aug. 31 in the U.S. will plunge 60 percent from a year earlier to 675 million bushels, down from a January forecast of 745 million, the USDA said. That represents 5 percent of projected usage and on par with the record low in 1995.

World inventories are forecast to fall 16 percent to 122.51 million tons from a year earlier, the USDA said. Reserves as a percentage of global use will fall to 14.6 percent, down from 15.2 percent forecast last month and the lowest since 1974.

U.S. ethanol production will consume an estimated 4.95 billion bushels of corn this year, up from 4.9 billion estimated in January and up 8.4 percent from a record 4.568 billion last year.

Reduced inventories means farmers would need to plant at least 93 million acres of corn this year, up from 88.2 million sown last year, to return domestic supply to more comfortable levels, said Jerry Gidel, a market analyst at North American Risk Management Services Inc. in Chicago.

‘Incentives to Plant’

“We have to raise prices to slow down demand and provide more incentives to plant corn this spring,” Gidel said. “All the markets will be pushing prices higher to attract more acres.”

World soybean inventories before the next Northern Hemisphere harvest will be smaller than forecast in January because of reduced production from Argentina, the USDA said.

Stockpiles will total 58.21 million tons of Sept. 30, compared with 58.28 million forecast a month ago, the USDA said. Argentina will harvest 49.5 million tons, less than the 50.5 million projected in January.

U.S. wheat reserves on May 31 will drop to 818 million bushels (22.26 million tons), unchanged from a forecast in January and down from 976 million a year earlier, the government said.

The USDA cut its estimate of global wheat inventories to 177.77 million tons as of May 31, down 0.1 percent the January projection.

“Increased consumption around the world eroded stockpiles,” Roy Huckabay, an executive vice president at the Linn Group in Chicago, said before the report. “The current supply-and-demand imbalance looks to last for multiple years and has emboldened new investment money to flow into agricultural futures.”

–Editors: Patrick McKiernan, Steve Stroth

To contact the reporters on this story: Jeff Wilson in Chicago at jwilson29@bloomberg.net; Whitney McFerron in Washington at wmcferron1@bloomberg.net

To contact the editor responsible for this story: Steve Stroth at sstroth@bloomberg.net