USDA Cuts Corn Forecast; Higher Food Inflation Seen

Economists are raising their food price inflation forecasts after the U.S. Department of Agriculture unexpectedly cut its estimate for the fall corn harvest.

“It was a shocker,” said Paul Prentice, a private agribusiness consultant who just raised his estimate of grocery store prices for next year. “We’re already locked into higher food inflation next year, and a shorter crop just solidifies it.”

Prentice, head of Farm Sector Economics in Colorado Springs, Colo., estimates that food prices next year will rise 5.7%. He raised his estimate from 5.2% after the USDA earlier this week projected a smaller-than-expected corn crop of 8.7 billion bushels, 4.6% less than its previous estimate.

The University of Missouri’s Food and Agricultural Policy Research Institute, which advises Congress on the farm economy, said food prices could increase 4.3% in 1997 as higher livestock feed prices slash beef, pork, poultry and dairy production.

The institute, in its first-ever forecasts of food price inflation, said prices are likely to increase 3.9% this year.

The latest private forecasts are above official USDA figures, which estimated food price inflation this year at 2.5% to 3% and at 2.5% to 4% next year.

“If we continue to lower these corn crop forecasts, that’ll make us shoot up pretty rapidly” in higher food costs, said Missouri economist Scott Brown.

The price of corn, the biggest U.S. grain crop, reached a 119-year high of $5.54 1/2 a bushel on July 12 and is averaging $3.25 a bushel this year, up from $2.26 a bushel last year. That can affect the price of everything from meat to dairy products to soft drinks.

On Wednesday, corn prices on the contract closest to delivery closed at $3.77 3/4 a bushel, up 4.75 cents, on the Chicago Board of Trade. Corn prices are 34% higher than a year earlier.

Because corn is the main ingredient in cattle, hog and poultry feed, farmers and ranchers have been sending animals to the slaughterhouse to cut feeding costs. In the short term, that lowers food prices because it puts a glut of meat at supermarkets, but as herds and flocks are trimmed, grocery prices will shoot up later this fall and well into next year, economists said.

Some food prices have already gone up. The price of a half-gallon of milk reached $1.56 in June, up 10% from a year earlier. With farmers selling off cows to save on feed costs, milk production has been below 1995 levels every month this year, the USDA said.

Early this spring, grain analysts said a near-record 10-billion-bushel crop might be possible, but estimates sank toward the 8.7-billion-bushel harvest as farmers struggled with a wet spring that delayed plantings as much as two weeks.

Now grain traders and food company executives are concerned that a late crop is more vulnerable to an early freeze, which would cut yields and dash hopes of any significant buildup of reserves that are already projected to be at a 21-year low by August 1997.

“We’re in a race against time on a frost date,” Andrew Daniels, vice president of Linnco Futures Group in Chicago, said after the latest government crop outlook Monday. “We really can’t afford any problems.”

For now, the USDA is sticking with its more conservative food price forecasts because department analysts may increase their forecast for the corn harvest in their next estimate Sept. 12.

USDA chief economist Keith Collins said warm temperatures during the first two weeks of August helped development. The report Monday reflected conditions up to Aug. 1.

“I think the crop will end up bigger than we reported,” Collins said. “Just my guess. Who knows?”

So far, U.S. food inflation has been tame, averaging 2.9% annually during the 1990s. If forecasts hold, the increases predicted for 1997 would be the largest since the 1988 drought that boosted the consumer price index for food to 5.8%.