Tuesday, March 8, 2011

Crop Prices Feed Inflation Of Food Bills

EAST ST. LOUIS • A steady line of trucks rumbles under the Eads Bridge, winding its way to Cargill's hulking grain elevator across the Mississippi River from downtown.

Rising grain prices have farmers unloading crops here at a solid clip. "There was a long wait this morning," said trucker Troy Agney, stepping out of his black Peterbilt last week. "Trucks were stacking up."

Even Agney, who doesn't usually truck grain, has found himself in middle of the grain price frenzy, hauling multiple loads of corn a day.

And it's not just corn prices that are soaring. Soybeans are moving along with them. Wheat is climbing, too. So is sugar. And coffee. And cocoa. Some experts say they have never seen so many commodity prices so high at once.

"Everything's high," Agney says, in a booming twang. "Watch the grocery store."

Indeed, analysts and recently released government estimates predict food prices will rise this year, thanks to a tangle of factors, from rising grain prices to monetary policy to oil costs. Prices for U.S. consumers could surpass the spikes of 2008, while the United Nations said Thursday that its global food prices index has reached an all-time high. Food prices, many believe, ignited the pro-democracy unrest rippling through the Middle East and Africa.

For American grain producers, the situation could translate into a few boom years — what Sunset Hills-based investment manager Joe Terril calls "a golden age for Midwestern farmers." For Missouri, where crops brought $4.7 billion to the state's economy in 2009, and Illinois, where they delivered $12.6 billion, the current grain climate will boost revenue. Nationally, farm income this year could hit a record $99 billion, University of Missouri economists predicted in a report to Congress on Monday.

But for American consumers struggling out of a recession — and those in developing countries who spend the bulk of their income on food — the price spikes will sting. "If you go back to 2008, it was gas prices going to $4 that killed the economy. It left the average person with no discretionary income," Terril said. "I'm very concerned food prices are getting ready to do the same thing."

Perhaps more importantly, analysts say, soaring food costs will stir debate over what, exactly, is driving food prices in a complex and changing global food economy, one that's expected to remain turbulent for years.

Analysts disagree on the extent to which certain factors are affecting grain prices, but most point to:
• Rising demand for grain from developing countries, primarily China, where a growing middle class has money to spend on meat from livestock that dines on grain.

• A poor 2010 wheat crop in some of the world's biggest wheat-producing countries.

• U.S. ethanol mandates, which divert roughly 40 percent of the country's corn crop away from feeding troughs and into gas tanks.

Another factor, analysts say, is a smaller-than-expected 2010 U.S. corn crop that has translated to smaller inventories.

"Even given the late economic unpleasantness, people in China and India are increasing their incomes and eating more food, more meat, more dairy," said Blake Hurst, a soybean and corn farmer and president of the Missouri Farm Bureau. "But all these things are driving prices."

Demand and production problems have shrunk the world's corn and soy stocks, which are at precariously low levels, driving up prices.

"The situation will continue to get tighter as we get into the 2011 crop," said Rich Pottorff, chief economist for St. Louis-based Doane Advisory Services. "Clearly we need to have big crops this year to ease the upward pressure on prices. At least so far, traders are concerned that that won't happen."

Tight supplies could be a consequence of investors taking grain off the market. That, in turn, could be a consequence of U.S. monetary policy that has lowered the value of the dollar, some analysts say.
"Investors are hanging on to grain because they don't want U.S. dollars," Terril said. "That's limiting the grain supply."

"The rest of the world is screaming: Stop with your monetary policy," Terril added. "I remind people that what happened in Egypt started with wheat prices."

Unrest in the Africa and the Middle East also has prompted some countries to store grain.

"Leaders see there's a lot of unrest. They know it's fueled by food prices," Pottorff said. "They want to go out and buy more grain to keep their people satisfied. It isn't just the dollar."

Other analysts agree the dollar isn't entirely to blame.

"I don't see how policy affects the weather," said Darrel Good, an agricultural economist at the University of Illinois Urbana-Champaign, referring to drought conditions in prime wheat-growing regions. "It can be argued that our renewable-fuels policies is supporting corn demand at very high levels. ... But those policies alone wouldn't have pushed prices to where they are."

In recent days oil prices have hit $100 a barrel, another factor driving up food prices.

"Everybody's anxious to blame these food costs on higher cash grain prices," said Greg Guenther, a corn and soy farmer in Belleville. "But overall fuel is the biggest variable."

Regardless of the causes, many analysts say investors are taking advantage of the turbulence.

"These grain markets are driven by the people who trade these markets," said John Graverson, the grain department manager at Roy Carroll County Grain Growers, east of Kansas City. "When Wall Street gets a whiff of it, the investor crowd starts buying futures. There's no doubt you have tight markets, so any little move and the market goes fast and furious."

'UP, UP, UP'
For the American shopper, all this will translate to higher prices. The U.S. Department of Agriculture predicts prices will rise by as much as 4 percent this year, and some believe that's conservative. University of Missouri economists said Monday that the rise will be slightly higher, at 4.2 percent.

"If the pressure mounts, it's hard to speculate," said Rich Wallace, director of grocery procurement for Dierbergs, referring to the store's pricing. "But all the commodities are going to keep going up, up, up."
Both Dierbergs and Schnucks say they have tried to hold the line on prices but in some cases have passed costs along to customers.

"In St. Louis, we're in a very competitive environment," Wallace said. "Everybody's looking at each other, and nobody wants to be the first to raise prices. ... As a retailer, we're the last line of defense."

But as grain prices drive up food prices, farmers will be converting crops into more cash.

The Department of Agriculture recently announced that agricultural trade will hit record levels this year, helping boost net farm income to record levels, despite rises in production costs. Farmland values are rising, too — in some areas they are reaching $10,000 an acre.

"It's good times," said Hurst, the Missouri Farm Bureau president.

But farmers and analysts underscore that higher consumer prices don't equate directly to the cash that ends up in a farmers' pocket. On average, just under 16 percent of the price of a grocery item goes to the farmer, according to Agriculture Department data.

"I hate to see people thinking this is about farmers doing well and consumers not," said Rick Tolman, head of the Chesterfield-based National Corn Growers Association. "It's not the farmers' faults they're making money. They're responding to the circumstances."

Grain growers are enjoying the good times while they can — as are farm-related businesses. Equipment dealerships are seeing an increase in customers as cash-flush producers buy new implements and fix up old ones.

"There's been a lot of interest in upgrading equipment," said Keith Reichman, an owner of Okawville-based Reichman Bros., a farm implement dealership. "We're very busy."

That kind of news sounds pretty sweet to farmers. According to the recent census, rural Missouri counties lost more population over the last decade and are struggling financially because of it.

"We've suffered in my part of the world for decades," said Hurst, who lives in rural Atchison County. "If the good times last, there are some parts of Missouri that will benefit from high farm prices."

Grain farmers are hoping for a good year, which will help replenish stocks and eventually bring grain prices down. But in the meantime, the bins are looking pretty thin.

At the Cargill terminal last week, trucks idled just a few hundred feet from the Casino Queen, hauling payloads that are sure bets, at least for now.

"Come August, there won't be any grain around," Agney said. "That's what the elevators are telling us."