Food companies to be hit by higher grain prices

By Caroline Scott-Thomas

- Last updated on GMT

Related tags Wheat

Food companies are likely to struggle with high grain prices well into next year, according to the USDA’s first crop projection report of 2009.

Food manufacturers were hit hard by high grain prices during 2008, which spiked to record levels on the back of poor harvests and soaring global demand. But prices have fallen since then, following record harvests last year.

The US Department of Agriculture (USDA) has projected a swing back in the other direction, however, as harvests have dropped and demand has continued to rise.

Falling wheat production

US winter wheat production is expected to fall 20 percent in 2009/10, said the USDA, resulting in a season-average price of $4.70 to $5.70 a bushel – although this is still well below the record $6.85 seen in 2008/09.

Globally, the world wheat crop is expected to fall four percent on last year’s record harvest, although, if realized, it would still be the second largest ever, the USDA said.

Near-record corn prices

Likewise, the department projects a season-average corn price of around $4.10 a bushel: Although much lower than the record $7.50 a bushel seen last year, it is still only ten cents off the season-average price in 2007/08 which, at the time, was the highest ever seen.

“Most of the increase,”​ it said, is due to higher ethanol use, which “reflects the rising Federal biofuels mandate and improved blending incentives as higher gasoline prices increase demand for ethanol.”

Soy supply squeezed

US soybean prices have also risen on fears of tightening supply and look set to rise further as South America has suffered severe drought and US planting has been delayed due to unfavorable weather. USDA has projected a season-average soybean price of around $9.45 a bushel, close to the $9.85 a bushel seen last year.

Climbing grain prices in 2008 led to average food price rises in the US of 5.5 percent, according to USDA figures, but their subsequent fall has still not entirely trickled through to consumers.

‘Sticky’ food prices

According to Rabobank, a food and agribusiness lender, sharp falls in the cost of agricultural products during the last six months of 2008 were not reflected immediately in retail food prices. Indeed, prices continued to rise during the same period.

In its Australia & New Zealand Agribusiness Review Rabobank said: “This price ‘stickiness’ is a global phenomenon, with the retail costs of food remaining high or adjusting only slowly downwards in most countries around the world at present.”

USDA economists have estimated that higher grain prices will lead to a further 4 to 4.5 percent rise in food prices in the US over the next year.

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