Crop Cutbacks by Farmers Spell Higher Food Prices

Daily News Article   —   Posted on April 1, 2009

(by Scott Kilman, WSJ.com) – The Agriculture Department said farmers intend to idle millions of acres of land this spring as they cut production of most of the nation’s major crops, including corn, wheat and cotton, and plant far fewer acres of soybeans than widely anticipated.

The retreat by recession-battered farmers — the broadest in two decades — is helping to set the stage for more volatility in prices of the crops used for everything from packaged food and biofuels to fattening livestock. The nation’s major food brands were battered last year by gyrating crop prices in part because several companies made bad hedging decisions.

In a sign of what food executives fear is to come, crop futures prices leapt Tuesday on worries that any weather problems this summer could result in supply disruptions next year. In trading at the Chicago Board of Trade on Tuesday, the soybean futures contract for May delivery soared 47.50 cents to settle at $9.52 a bushel. The corn contract for May delivery jumped 18.5 cents a bushel to settle at $4.0475 and the May wheat contract rose 20.25 cents a bushel to settle at $5.3275.

“Volatility is back,” said Michael Swanson, a Wells Fargo & Co. agricultural economist.

For consumers, the cutbacks mean the food inflation rate isn’t likely to fall back to the benign levels of earlier this decade. The USDA is forecasting food inflation of 3% to 4% this year. While down from last year’s 5.5%, it is higher than the 2.4% of 2005 and 2006.

Based on its survey of 86,000 farmers in early March, the USDA said it expects growers to plant 58.6 million acres of wheat, down 7% from last year, and 85 million acres of corn, down 1% from last year. Cotton acreage is expected to fall 7% to 8.81 million acres, the lowest level since 1983.

Commodity analysts had expected the report to show farmers moving away from these high-cost crops to make room in their fields for soybeans, which don’t require expensive nitrogen fertilizer. According to the government’s Prospective Plantings report, farmers intend to plant a record 76 million acres of soybeans this year, but that is up only 0.4% from last year, not the 5% increase expected by analysts.

Many U.S. crop farmers had the most profitable years of their careers in 2007 and 2008. But they are retrenching because of soaring costs of fertilizer and seed as well as signs that the recession is slowing demand for their crops and land.

The USDA said farmers intend to plant the nation’s 21 biggest crops on 7.8 million fewer acres than last year, the biggest one-year drop since 1987, when the farm belt was mired in a debt crisis. The retreat is most dramatic in states like North Dakota, where farmers intend to plant 1.4 million fewer acres, and in Texas, where farmers could idle one million acres.

Many growers still have time to change their plans for the growing season, which begins in mid-April across much of the farm belt. The USDA will survey farmers about actual plantings in June.

Write to Scott Kilman at scott.kilman@wsj.com.

Copyright 2009 Dow Jones & Company, Inc.  All Rights Reserved.  Reprinted here for educational purposes only.  Visit the website at wsj.com

Questions

1. Define the following words as used in the article:
-volatility, hedging (from para. 2)
-[crop] futures (from para. 3)
-inflation, benign (para. 5)
-retrenching (para. 8)
-idle (para. 9)

2. Name the major crops American farmers intend to cut production of this spring.

3. Why are farmers planning on reducing the amount of crops they grow this year?

4. How will this reduction in crops grown affect the average American?

5. Who does the grocery shopping for your family? Ask how increased food prices this year affected your family budget. The USDA is forecasting food inflation of 3-4% this year. Ask your parents how they handle increased food prices within your family’s budget.


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