Paying a price for prosperity

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Grain farmers stand to post windfall profits this year if everything goes their way. But there's a lot of "ifs•bCrLf in this scenario, and some of them would make your grandfather's head spin.

Even if this growing season goes well, we could pay a long-term price for prosperity. In the end, expensive corn could lead to food price hikes, disgruntled consumers, a voter backlash, and political moves to shut off grain exports or dismantle biofuel mandates.

I'm not trying to be a pessimist. Just hear me out. 

By now you've seen Monday's report from USDA, which predicts U.S. farmers will plant significantly less corn this year compared to last year.  While the prediction of 86 million acres is second highest in history, it's still well below pre-report estimates, including our own estimate two weeks ago of 87.7 million acres.

In any case, that's at least 7 million acres less than last year's 93 million acres.

And it could be LOT less if we have a weather problem. Most of the Corn Belt right now is soaked through. There's no doubt corn planting will be delayed.

Part of the wet spring can be blamed on La Nina, which, if it continues, could lead to a hot, dry summer. Noted Climatologist Elwynn Taylor says the chance of below-trend yields this year is upwards of 75%.

Let's throw in some demand factors. Those of you who watched the webinar we held Monday night (you can watch it again by clicking here) heard marketing experts Bryce Knorr and Arlan Suderman talk about exports, prices and biofuel demand. Just look at what's pushing corn prices:

Biofuel: Up to 32% of the 2008 corn crop will go toward ethanol. The Energy Bill passed last December will kick renewable fuel up to 15 billion gallons a year by 2015. Practically all of that right now comes from food crops.

Global supplies: Global wheat stocks in July 2008 are expected to drop to a 30-year low as world consumption has exceeded production for seven of the past eight years. Australia suffered a nasty drought last year. Northern China's crops have been hit hard by the drought this year. Up to 11% of the region's 5.3 million acres of crops will suffer heavy losses.

Asia's new affluence: China and India are adding millions of middle class consumers each day. They can afford to buy value-added items like pork, which needs corn to grow. If just 15% of Asia attains our middle class income level, that's 300 million more middle class consumers who can and will pay for corn-based food products like pork.

Weak dollar/exports:  The dollar is at all-time lows. That makes it easier for foreign buyers to buy practically anything that is priced in dollars. That's why USDA predicted earlier this year that U.S. farm exports would hit a record $100 billion this year.

So what happens if China buys more of our corn, and drought hits the U.S. this year? What happens if corn hits $10 per bushel — or more? Will housewives revolt? Will biofuel mandates vanish? Will exports get a knockout punch?

Other grain-exporting countries have already put the clamps down on overseas sales.

Argentina is one of the world's top suppliers of soy, wheat, corn and beef. But instead of cashing in now on record high global commodity prices, the country's government is more worried about higher prices for every day staples and has instituted a new round of export bans, price controls and export tax increases.

As a result, angry farmers have staged protests and are expected to plant thousands fewer acres to wheat when planting begins in May.

You think it can't happen here? The American Baker's Association recently asked USDA to review its export guidelines. It wants Congress to review biofuel mandates. It wants the White House to review policies on international food donations and export incentives. The bakers want to build up domestic wheat supplies and encourage USDA to open up million conservation acres for added wheat plantings.

In other words, the grumbling has started, even here, where the very idea of capping exports might seem, well, Anti-American.

A history lesson The U.S. did impose export controls on soybean shipments to Japan in 1973 during a similar time of strong international demand and rising consumer food prices caused by an inflationary monetary policy, says Ross Korves, an economic analyst with Truth about Trade and Technology.

As a result, Japanese companies invested in soybean production in Brazil to insure alternative supplies. Voila! A few years ago South America became the world's leading soybean producer.

The U.S. also embargoed grain to the Soviet Union in 1980 as a political response to the Soviet's invasion of Afghanistan. It solved nothing and only reinforced the notion that the U.S. was an inconsistent international supplier of commodities.

Restricting shipments of grain would send the wrong signal to both producers and consumers — here and around the world. But it wouldn't be the first time Congress has made a foolish decision on behalf of an ill-informed, frustrated electorate.

Our best hope is for perfect growing conditions. Is Mother Nature on our side in 2008?

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