Prices rooted in which seeds U.S. farmers sow

AP

DES MOINES, Iowa — As spring planting nears, farmers are making a choice that could affect what Americans pay for a range of products from car fuel to chicken wings.

If they choose to plant as much corn as possible, prices that have soared to record highs above $5 a bushel could stabilize. But if many farmers rotate their plantings to other crops such as soybeans, or the season is disrupted by bad weather or drought, the price of this key ingredient could soar even further.

That would leave other food producers — especially poultry, beef and pork companies, where corn feed comprises up to three-quarters of their operating costs — with little choice but to raise their prices as well.

Livestock producers typically blame higher corn prices on demand for the crop from ethanol plants, saying the alternative fuel drives up costs for everyone. But ethanol makers say the rising corn prices hurt them as well.

Against all those factors is one fixed point: Farmers are running out of new land to plant crops.

How farmers choose to use the land this year is the focus of the planting report due March 31 from the U.S. Department of Agriculture, which will offer the first detailed look at farmer's planting intentions for 2008 and give the first indication of this year's corn crop.

"Everybody is looking to see what that report is going to look like," said Bob Dinneen, a spokesman for the Renewable Fuels Association. "Everybody is anxious, us included."

Last year, American farmers produced more corn than ever before, 13.1 billion bushels, as they put more land into corn production and most of the Corn Belt saw ideal weather.

"It's kind of hard to believe we'll even be able to hit that mark again," said Richard Lobb, a spokesman for the National Chicken Council. "The amount of land in this country is not infinite. ... Some people think it's entirely possible a bad drought is coming. It's all guesswork, but there are some ominous signs."

The surge in corn prices — which began in early 2007, when corn was trading for a little more than $3 per bushel — came despite the record production. If the values hold, the average yearly price per bushel in 2008 will be higher than ever before, according to statistics kept by the USDA.

Dave Moody, president of the Iowa Pork Producers Association, said the end result is obvious: "If corn prices stay high or increase, in the long term prices are definitely going to come up."

Even at current prices, meat producers are hurting.

Last month Pilgrim's Pride, the nation's largest poultry company, closed a processing plant in North Carolina and distribution centers in five other states, putting 1,100 people out of work. The company blamed its move on high corn prices caused by the heavily subsidized ethanol industry.

Corn prices are also affecting boutique products. Maple Leaf Farms, a leading U.S. producer of duck meat, recently announced it would close a meat processing plant in Wisconsin that employs about 200 people, because of increased feed costs.

"This is the single biggest issue we face," said Lobb. "The costs are very high, historically speaking, but what really bothers people is not so much that they're high but they're sort of locked in at a high level.

"We've had price spikes for corn because of drought or other short-term types of things, but in this case the high costs are locked" because of ethanol demand.

Ethanol plant owners acknowledge they've increased demand for corn. The number of plants has increased dramatically, from 50 in 1999 to 134 now, with more being built, according to the Renewable Fuels Association. Most rely completely on corn.

An average 100 million gallon-per-year ethanol plant consumes about 33 million bushels of corn, about the amount grown in some entire Iowa counties.

While ethanol is highly subsidized by the federal government, wiping out some of the industry's overhead, ethanol proponents say they, too, will have to pay more for corn, which could push the price of ethanol fuel higher.

There's a roundabout effect as well: Strong demand for corn to make ethanol has boosted those prices, enticing farmers to plant corn rather than soybeans. So some farmers could be swayed by soybean prices that have edged higher because of dwindling supplies and rising demand from foreign markets, especially in Asia.

Among the arguments some farmers see for soybeans are that corn requires more tending and fertilizer costs are generally higher, said Mark Schultz, chief analyst at Minneapolis-based commodity trading firm Northstar Commodity.

"It takes a lot of time to put in and harvest corn," Schultz said. "There's a lot to it physically and cost-wise."

Corn Belt farmers, who find themselves with strong incomes and plenty of options, are the clear winners. That income is a main reason Corn Belt states such as Iowa, Nebraska and South Dakota have largely avoided the national economic downturn, said Ernest Goss, an economics professor at Creighton University in Omaha, Neb.

Mindy Williamson, a spokeswoman for the Iowa Corn Growers Association, said the ethanol-fueled demand for corn has changed the dynamics.

"Before, we weren't in a demand-driven market," she said. "Now, it's all about demand, and you have a choice about where we want to sell (corn) and who you want to sell it to. There are still other things beyond farmers' control, like weather, but it's a good time."