Midwest Floods Cause Ag Washout

06/25/2008 12:00 am EST

Focus: COMMODITIES

Knight Kiplinger

Editor-in-Chief, The Kiplinger Letter, Kiplinger's Personal Finance, and Kiplinger.com

Knight Kiplinger, editor-in-chief of the Kiplinger Letter, says the Midwest floods will have a devastating impact on an already-tight food supply.

The Midwest’s relentless rains and floods are taking a huge toll, preventing the seeding of many acres and flooding fields already planted.

Expect the corn crop to be two billion bushels short of demand that would exist for feed, food, export and making ethanol if prices were normal. Corn’s spike to over $7.00 a bushel is already rationing that crop.

The soybean crop will fall 400 million bushels shy of needs for normal domestic uses and exports. Soybeans, planted later than corn, will suffer nearly as much from tardy growth and floods as the corn crop.

Meanwhile, planting windows are closing fast in rain-soaked areas of the Midwest. Farmers will file insurance claims for prevented planting on many tracts or seed fast-growing forage crops; some may take a chance with fast-maturing soybeans.

The losses will only fuel higher grocery bills as commodities get scarcer: Earlier estimates of a 5% to 6% rise in prices this year will be revised up a point or so. Still more weather damage to come for US corn and soybeans.

For wheat, [however,] the end of the phenomenal price rally is not far off. The outlook for both US and world production is on the mend, with weather favoring strong harvests in Russia, Ukraine, and China.

Rains have given US spring wheat a strong start and helped winter wheat to mature well. Winter wheat output will be up 20% this year over 2007. The harvest of soft red winter wheat will be up a whopping 60% this year, and prices will slip to under $6.00 a bushel.

Robust export sales will [also] ensure a firm cotton market into 2009. Despite a global economic slowdown and Asia’s dip in cotton consumption, US exports in the next year will exceed the US crop, slashing stocks. With farmers switching cotton acreage to more-profitable crops this year, the very limited crop is generating moderately strong, steady prices.       

[The US Department of Agriculture’s] seven-market average price will be about 70¢ a pound for the upcoming marketing year. It has already climbed to around 65¢, even though USDA added 300,000 bales to its stocks estimate this month.

Add the dollar’s exchange value to reasons for high crop prices. The buck is used to price crops worldwide. Economists studied the linkage between world prices for rice and the dollar’s exchange, using the price of gold as a benchmark (prices of the dollar and gold move inversely).

With 59 years of price data, the study found rice prices rose an average of 25% in years following jumps of over 10% for gold (a falling dollar), but barely moved or declined in the years after a drop in gold prices. Supply and demand fundamentals are surely driving crop prices, but the role of the dollar’s value will likely get more attention.

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