ANALYSIS: Don't look for cheaper food yet, even as grain prices drop

By Veronica Brown and Tom Polansek

LONDON/CHICAGO (Reuters) - Consumers can't yet bank on a year of cheaper food, despite predictions for bulging grain crops in the United States and other major global producers that have dragged futures prices back from last year's record highs.

The forecasts, analysts say, are just that - with seeds not yet in the ground for the all-important U.S. corn crop that is used to feed cows and produce cereal products and other foods.

The next few months will be crucial in determining prices, as weather conditions will ultimately determine the size of the harvest.

"There's not enough assurance here yet of lower grain prices in the long run to start marking down those food items," said Steve Meyer, president of Paragon Economics.

After a bruising 2012, which featured a historic U.S. drought, dryness in Eastern Europe and the third spike in global food prices in four years, farmers have dusted themselves off to start a new growing season.

Grain prices, which touched record highs late last summer, have been under pressure recently as some livestock producers have cut herd sizes due to high feed costs. Meanwhile, the acreage dedicated to key crops has increased and reserves look fatter than previously thought.

The U.S. Department of Agriculture (USDA), in a report issued on March 28, forecast that U.S. growers will harvest a record 14.6 billion bushels of corn and a record 3.4 billion bushels of soybeans - bumper crops that would help replenish razor-tight supplies.

The USDA also said corn inventories as of March 1 were 8 percent higher than traders expected, sparking the biggest weekly loss in corn prices in 21 months last week at the Chicago Board of Trade.

Prices are down 25 percent since reaching a record high in August.

Investors have been turning their backs on commodity index funds, which take long positions in a range of commodities including grains, due to higher returns offered by equity markets.

The Thomson Reuters/Jefferies CRB index, which tracks a range of commodities, has fallen around 8 percent in the last six months while the Dow Jones Industrial Average index has risen about 10 percent over the same period.

USDA's planting intentions survey fulfilled expectations flagged by the United Nations Food and Agriculture Organization (FAO), whose food price index has stabilised from historically high levels.

OVERLY OPTIMISTIC?

Still, the markets may have run ahead of themselves, FAO chief economist Abdolreza Abbassian said.

"There has been a price correction, but that probably tended to give too much credit to optimism over very favourable growing conditions in the coming months," Abbassian told Reuters.

"Right now we're in a situation of a generally good and favourable outlook for 13/14 for nearly all the crops, but it all depends on the next few months' growing conditions and nobody today can predict what those will be," he added.

"We're not out of the woods yet."

A steep decline in nearby grain futures, compared to deferred contract months that represent the crops that will be harvested in the autumn, reflects USDA's larger-than-expected stocks estimate and lingering uncertainty over the size of the upcoming U.S. harvests.

Front-month July corn has tumbled almost 14 percent since the USDA issued its report, compared to a roughly 6 percent drop for December corn.

MEAT AND BREAD

Wariness on the final outcome for crops cannot be ignored, given the drama of recent years and resulting food emergencies.

Early predictions for a record-breaking 2012 U.S. corn crop proved wrong after the worst drought in more than half a century drove yields to a 17-year low, while the Black Sea breadbasket saw poor weather slash its collective wheat crop by more than one-third.

A resulting surge in food prices last year revived memories of the 2007/08 food crisis, which the UN estimated added 75 million to the number of chronically hungry people in the world.

If the United States produces a large corn crop in 2013, sending grain prices lower, it will take two years before cheaper feed prices impact beef prices, Meyer said. The lag is the time needed to produce a new cow for slaughter.

Chicken prices could weaken in late 2013 and pork prices could drop in 2014 due to shorter turnaround times, he said.

"Until we see that this crop has been made, I don't think you're going to see a response from the protein sectors," Meyer said.

Goods like bread and breakfast cereal won't cheapen much either, said Bill Tierney, chief economist for AgResource Co and a former principal grains economist for USDA. The cost of corn and wheat is "inconsequential" in many bakery products, overshadowed by packaging, transportation and marketing costs, he said.

"The cost of a plastic wrapper is more than the cost of wheat that goes into a loaf of bread," he said.

TIGHTER BELTS

U.S. shoppers paid about 2 percent more for a basket of food at grocery stores in the first quarter of 2013 than they did in the last quarter of 2012, according to a study issued last week by the American Farm Bureau Federation.

Food prices will likely rise by 3 percent to 4 percent during 2013 because of tight meat supplies, slightly exceeding the average rate of inflation over the past decade, said John Anderson, the Farm Bureau's deputy chief economist.

A drop of $1 in the corn market "is probably not even going to be a blip at the retail level," he said.

"Right now we're focused on planting, and we're having a late spring," Anderson said, referring to concerns about cold weather slowing the start of U.S. planting.

"There are million things that can happen between now and when we know what the size of this crop will be."

Source: http://news.yahoo.com/analysis-dont-look-cheaper-food-yet-even-grain-075902262.html

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