Harvest Shocker Rattles Wall Street(zt)

Paul

CHICAGO—The U.S. Department of Agriculture sliced its harvest projections for corn, soybeans and wheat, throwing fuel on a three-month-old commodity rally and deepening worries about rising food prices.
The agency's decision to cut its month-old corn projection by 3.8% startled traders, who had expected a far smaller reduction. Prices of corn-futures contracts at the Chicago Board of Trade soared Friday by their daily permissible limit of 30 cents. The corn contract for December delivery settled at $5.2825 a bushel, up 6%.

The USDA reduction was the largest in percentage terms since a similar-size cut in 1995, and the largest in bushel terms since at least the 1970s, according to Rich Feltes, vice president for research at broker R.J. O'Brien.

The USDA still expects U.S. corn farmers to harvest what by historical standards is a huge crop: 12.7 billion bushels, the third biggest ever.

The report sent ripples across Wall Street, where prices of stocks of food companies that buy large amounts of grain fell. Chicken giant Tyson Foods Inc. slipped 7.7% Friday. Meanwhile, the stocks of companies that supply farmers, such as tractor maker Deere & Co. and fertilizer maker Mosaic Co., rose 4.8% and 6.6%, respectively.

Economists expect farmers to respond to high grain prices by planting millions more acres of corn and wheat, which should benefit sellers of seed and chemicals to farmers such as Monsanto Co. and DuPont Co. But so much of U.S. farmland is already in production that some acres might have to be cannibalized from other crops, potentially tightening supplies of other commodities.
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Unusually rainy and hot weather in August and September combined to dent the yield potential of many farm fields after what had been an unusually good start to the growing season.

Ron Warfield, a Gibson City, Ill., farmer, said Friday that his fields produced 200 bushels of corn an acre on average last year, but about 50 bushels less on average this year. Mr. Warfield, who said he usually makes his planting decisions by early December, might wait until February or March to decide how many acres of corn and soybeans to plant. "We're going to see some extremely volatile markets, based on this report."

The government's cut in its harvest projection is having such a big impact on markets because demand for grain is red hot, thanks in part to the accelerating economies of emerging nations such as China, which is expected to consume roughly a quarter of all the soybeans grown in the U.S. this year, and perhaps a third of all U.S. cotton. The drought that stopped Russia's wheat exports this summer also is lifting U.S. grain exports.

Corn consumption is so high that the corn harvest now foreseen by USDA economists could leave the U.S. with the tightest reserves since the mid-1990s by this time next year. Unlike then, the U.S. doesn't have nearly as much idled farmland to shove into production.

The USDA projected Friday that the U.S. will have 902 million bushels of corn left over before the 2011 harvest begins to replenish supplies, which would be down a whopping 47% from this year's reserve.

"The U.S. will have had its four biggest corn crops in the past four years, but supplies are still tight," said Luke Chandler, director of agricultural commodity research in the London offices of Rabobank, a large agricultural lender. "It's almost becoming a precarious situation."

The USDA on Friday also cut its projection of the U.S. soybean crop by 2% to 3.41 billion bushels, which would still be a record-large crop, and sliced 1.8% from its wheat-production estimate to 2.22 billion bushels.

Nearby soybean futures prices jumped their daily permissible limit of 70 cents a bushel, or about 6.6%, while nearby CBOT wheat futures contracts jumped their daily permissible limit of 60 cents a bushel, or 9.1%.

Year-to-date, corn futures are up 27.4%, wheat 32.8% and soybeans 9.2%.

The commodity-price surge couldn't come at a worse time for the U.S. food companies, which are leery of passing along price increases to consumers worried about the high unemployment rate.

While retail food prices are climbing this year at the slowest rate since 1992, some economists said Friday that rising commodity prices will likely cause the food inflation rate to accelerate next year.

Grain prices could have enough momentum to stay high into next year, making it hard for companies to dodge higher costs. CBOT corn futures prices are trading near or above the $5-a-bushel level into July 2013.

Michael Swanson, an economist at banking giant Wells Fargo & Co., said he expects retail food prices to climb 3% to 4% next year, and he said he might revise that forecast higher.

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