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Monday, June 23, 2008

PUNCH TO THE BREADBASKET

Punch to the breadbasket


Two uncontrollable forces - Mother Nature and the world oil market -- are about to give Americans more economic grief than they've seen in years.

Raging Midwest floodwaters that swallowed crops and sent corn and soybean costs soaring are sure to bring higher prices at the grocery store at a time when consumers already are trying to cope with record gas prices.

Meanwhile, there was some hope that a rare, hastily called summit in Saudi Arabia on Sunday between oil-producing and consumer nations would bring some relief at the pump. But when the meeting ended, Saudi Arabia had agreed only to a modest increase in oil production. Otherwise, there was no resolution on what other practical steps should be taken to ease the crisis.
Trouble in America's breadbasket is expected to bring a new bout of food inflation. Beef, pork, poultry and even eggs, cheese and milk likely will get more expensive as livestock owners go out of business or are forced to slaughter more cattle, hogs, turkeys and chickens to cope with rocketing costs for corn-based animal feed.

The floods engulfed an estimated 2 million or more acres of corn and soybean fields in Iowa, Indiana, Illinois and other key growing states, sending world grain prices skyward on fears of a substantially smaller corn crop. Before the end of the month, the government will give a partial idea of how many corn acres were lost, but experts say the trickle-down effect could be more dramatic later this year, affecting everything from Thanksgiving turkeys to Christmas hams.

Rod Brenneman, president and chief executive of Seaboard Foods, a pork supplier in Shawnee Mission, Kan., that produces 4 million hogs a year, said high corn costs were already forcing producers in his industry to cut back on the number of animals they raise.

"There's definitely liquidation of livestock happening," and that will cause meat prices to rise later this year and into 2009, said Brenneman, who is also vice chairman of the American Meat Institute.

Brenneman's cost for feeding a single hog has shot up $30 in the past year because of record-high prices for corn and soybeans, the main ingredients in animal feed. Passing that increase on to consumers would tack an extra 15 cents per pound onto a pork chop.

It's a similar story for U.S. beef producers, who now spend a whopping 60 percent to 70 percent of their production costs on animal feed and are seeing that number rise daily as corn prices hover near an unprecedented $8 a bushel, up from about $4 a year ago.

"This is not sustainable. The cattle industry is going to have to get smaller," said James Herring, president and CEO of Texas-based Friona Industries, which buys 20 million bushels of corn each year to feed 550,000 cattle.

Corn prices were already rising before the floods, driven up 80 percent over the past year. U.S. production of ethanol, an alternative fuel that can be made with corn, has also pushed prices higher.


Little relief from Saudis

But the pressure to produce alternative fuels will only grow, as the stalemate between oil-producing nations such as Saudi Arabia and consumer nations such as the United States lingers indefinitely.

The Saudis agreed Sunday to increase production by 200,000 barrels a day. But news of that increase was not expected to affect prices.

Rather than finding areas of agreement, participants in the one-day meeting in Jiddah, Saudi Arabia, illustrated the sharply diverging views on what has caused oil prices to double in the past year to the $130- to $140-per-barrel range.

The U.S. and other consumer nations see more supply as the answer to higher prices. But most producing nations say a big reason for the inflation is market speculation.

If anything, Sunday's summit made one thing clear: You'll see little or no significant easing of gas prices.

Source: http://www.orlandosentinel.com/services/newspaper/printedition/monday/orl-a3water2308jun23,0,4892436.story