Higher Food Prices On the Way

The USDA recently announced that corn reserves stood at 750 million bushels at the end of 2006 and are expected to decline to 519 million by the 2007. At this level the US has less than one month of corn in reserve.

The primary culprit is surging corn consumption by ethanol producers. During 2007 ethanol is expected to consume almost 23% of US corn consumption. The tight supply of corn is expected to drive up corn prices, bad for ethanol producers, and really bad for people who use corn for other things, like food.

Unfortunately corn yields are declining at the same time corn consumption is rising. yield per acre dropped from 151.2 bushels per acre to 149 bu/acre.

The one upside to rising corn prices is increased farm incomes, which should eventually lead to better machinery sales for companies like Deere and better fertilizer sales as farmers try to raise falling yields in the face of rising corn prices.