U.S. Crop Surplus Shrinking as World Output Drops, Demand Rises

The U.S. Department of Agriculture probably will trim its forecast today for pre-harvest stockpiles, according to the average estimates of as many as 26 analysts. World output is projected to fall 2.1 percent after droughts in Russia, Ukraine and other parts of Europe and excessive rains in the U.S., Canada and Australia, just as the world economy rebounded from the worst recession in 70 years.

"There is not one crop you can point to that is without supply problems," said Steve Nicholson, a commodity procurement specialist for International Food Products Corp. in St. Louis. "Production is not keeping up with demand, exacerbating the global food crisis."

The price of corn, used to make livestock feed and ethanol, jumped 89 percent in the past year, reaching a 30-month high on Feb. 7. Soybeans are up 54 percent from a year ago, and wheat yesterday touched the highest since August 2008. Global food prices rose to a record in January as costs to buy dairy, sugar and cereals increased, and high prices may persist for the next several months, the United Nations reported Feb. 2.

The 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.

Last month, the USDA forecast global production of corn, soybeans and wheat would total 1.717 billion metric tons, down from 1.755 billion last year.

The USDA probably will cut its forecast today for domestic corn reserves on Aug. 31 by 2.1 percent to 729 million bushels, according to analysts in a Bloomberg survey. That would be the lowest since 1995 and down 57 percent from a year earlier for the U.S., the world's largest grower of the grain.

Rising biofuel production and increased overseas demand for corn in livestock feed and food production may prompt the USDA to raise its forecast for global consumption.

U.S. ethanol output rose 15 percent to a record 27.745 million barrels in November from a year earlier, the Department of Energy said last month. From Sept. 1 to Jan. 27, export sales of U.S. corn for delivery before Aug. 31 rose to 29.25 million tons, from 29.117 million a year earlier, USDA data show.

The government may cut its forecast of world corn inventories before the Northern Hemisphere harvests to 125.4 million tons, the lowest since 2007, the Bloomberg survey showed. In January, the estimate was 127 million tons, compared with 147.1 million a year earlier.

"The USDA is too low on both export and ethanol demand," said Alexander Bos, an analyst at Macquarie Bank Ltd. in London. "The market will get to a point where it becomes clear that demand rationing to date has been insufficient or marginal and that the window of opportunity to ration demand is closing quickly."

Corn futures for March delivery fell 1 cent to $6.7375 a bushel yesterday on the Chicago Board of Trade. On Feb. 7, it touched $6.825, the highest since July 2008.

The world faces a "real risk of a global food crisis" as commodity prices surge, French Agriculture Minister Bruno Le Maire said last week. "There is a risk of food riots the moment that the prices are too high for developing countries to buy the agricultural products they need."

Smaller inventories may lead to higher costs for hog processor Smithfield Foods Inc. and poultry producers Tyson Foods Inc. and Sanderson Farms Inc., which say corn-based animal feed is their biggest expense. Ethanol producers including Poet LLC and Archer Daniels Midland Co. and companies that turn soybeans into animal feed and cooking oil also may see higher expenses.

Soybean supplies will be reduced by rising overseas demand, especially from China, the world's largest consumer, analysts said. Smaller production in Argentina, the biggest exporter of soybean meal and soybean oil, may prompt the USDA to boost its forecast for shipments from the U.S.

Supplies of unsold soybeans in the U.S. may total 134.4 million bushels as of Aug. 31, analysts said in a Bloomberg survey. That's less than the 140 million forecast by the government in January and below the 151 million bushels on hand before last year's harvest.

As of Jan. 27, U.S. export sales of soybeans for the marketing year that began Sept. 1 were outpacing government forecasts, reaching 89 percent of the total projected for the entire 12-month period. The average for the past five years is 77 percent at this time in the season.

U.S. sales of soybean oil since Oct. 1 are more than double the pace of the past five years and up 10 percent from the same period a year earlier, USDA data show.

Soybean futures for March delivery rose 9.75 cents, or 0.7 percent, to $14.3425 a bushel yesterday on the CBOT. The most- active contract climbed to a 30-month peak of $14.525 on Feb. 3.

U.S. wheat reserves on May 31 probably will total 808.3 million bushels, compared with 818 million forecast in January and down from 976 million a year earlier, a Bloomberg survey showed.

World wheat inventories may decline to 177.2 million tons, a survey found, down from 178 million estimated by the government in January and 197.4 million a year earlier.

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

Wheat futures for March delivery rose 15.5 cents, or 1.8 percent, to $8.7425 a bushel yesterday in Chicago, after touching a 29-month high of $8.8075. Prices have surged 81 percent in the past year, partly on expectations that governments will boost purchases to quell civil unrest and curb inflation.

The increased costs for wheat prompted Kellogg Co., the largest U.S. cereal maker, to raise prices on some products, joining rivals such as General Mills Inc.

The USDA is scheduled to update its forecasts for reserve inventories at 8:30 a.m. in Washington.