Trickle-down Food Inflation

Trickle-down Food Inflation

MU-FAPRI report shows higher commodity prices as volatile oil price hits farms and food processors.

Food prices could increase by more than 4% in 2011 as the farm sector recovers from a sharp downturn in the recession, University of Missouri Food and Agricultural Policy Research Institute FAPRI economists reported to Congress.

An annual MU baseline shows net farm income may reach a record $99 billion in 2011. The report from MU-FAPRI will be used to study options for the coming farm bill. After two years of very subdued U.S. food price inflation, prices may go up 4.2%, says Pat Westhoff, director of MU-FAPRI. Food inflation drops to 2%, a level matching overall inflation, after 2012. Food prices rise from higher prices paid at the farm level for grains and livestock, topped with sharp increases in oil prices.

Energy affects farm costs, but also transportation and processing up the supply chain, Westhoff says. Oil prices started climbing from what was a manageable $88 per barrel while the baseline was being calculated.

Higher prices for grain, oilseed and cotton led the farm economic recovery. U.S. corn, soybeans and cotton stocks are very low relative to use in 2010-11, Westhoff says. "Tight supplies have contributed to higher prices. U.S. wheat supplies are not as low, but wheat prices are supported by corn prices and strong export demand."

Use of ethanol from corn has increased rapidly, but may dip if fuel tax credits expire as scheduled at the end of 2011.

Higher feed and other input costs along with lower prices during the recession lowered output of meat and milk. At the same time, domestic and international demand remained strong.

"Reduced production, growing exports and population growth combine to limit supplies of meat and milk for domestic consumers," says Scott Brown, FAPRI livestock economist. "Tight supplies and improving demand initiated price increases in 2010.

"Prices will strengthen for fed steers, feeder calves and hogs," Brown says. Higher prices at the farm lead to higher costs of meat and dairy for consumers. High oil prices add to the costs of moving from farm to feedlots to supermarkets.

MU-FAPRI warns that tight supplies could lead to volatility in commodity prices. "For example, an unexpected drop in U.S. corn yields in 2010 led to the rapid increase in world corn prices," Westhoff says. "With stocks limited, a lot depends on the 2011 corn yields. Prices could be much higher-or lower-than our projections."

MU FAPRI projects corn prices at $5.32 per bushel for the 2010-11 crop and $5.03 in 2011-12. The previous record was $4.20 per bushel for the crop harvested in 2007.

For the baseline FAPRI assumes present farm policies remain in place and that normal weather produces trend-line yields. However, biofuel tax credits and tariffs are assumed to expire on schedule. The current credit to ethanol blenders of 45 cents per gallon would be gone by January.

For soybean prices, China remains the driving force. In the past, China's imports grew at the same rate as Brazilian exports. Now, Chinese imports are growing faster. This boosts U.S soybean demand and world prices. MU FAPRI projects soybean average prices at $11.70 per bushel for 2010-11 and $12.53 for 2011-12. Prices are expected to remain strong through the 10-year baseline.

With strong prices, more land will be drawn into crop production. FAPRI reports the area for the 13 major crops will increase almost 8 million acres to top 258 million acres in 2011.

FYI

To view the complete 68-page report, visit www.fapri.missouri.edu

Source: MU Cooperative Media Group

TAGS: Soybean
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