Businessweek Archives

Gloom In The Fields, Smiles In The Supermarket


Top of the News

GLOOM IN THE FIELDS, SMILES IN THE SUPERMARKET

Across Harold McQueen's parched 1,100 acres of corn in central Illinois, the winds of early August were very nearly the last straw. Hot and dry, they blew for a week straight, sucking the life out of his crops. Down the road, a neighbor parked his combine and tractored into his fields to plow under his worthless corn crop. But not McQueen--not yet.

Good for him. Across the Midwest, four days of rains followed those dry winds, salvaging some corn and saving soybean crops from Minnesota through Iowa and across to Indiana. "Droughts end a lot faster than they start," cheered Daniel Basse, director of research for AgResource of Chicago. "There is no drought of 1991."

The U. S. Agriculture Dept. on Aug. 12 underlined the point by forecasting that harvests, while below last year's levels, still figure to be healthy (chart). Combine that with a decline in agricultural exports, and you've got some good news for consumers.

STEADY PRICES. It's a different story for food processors and farmers. The food companies have tried and failed to push grocery prices upward all year long. For farmers, the hot, dry weather this summer has been severe enough to hurt the harvest, yet not enough to send prices skyward. Indeed, the returns will be spotty because of the vicissitudes of weather. The parched fields of Illinois and Indiana will yield harvests down about 10% from last year, while Iowa, Missouri, and Minnesota actually could see production rise--as much as 12% in Minnesota. The net effect: Even though many farmers face unproductive fields for the fourth time in 11 years, prices likely will hold steady.

Recent futures prices for September delivery of a bushel of corn have run around $2.50, right about where they ran at this time last year. The same goes for soybeans. A bushel of September beans recently has traded on the futures market for around $5.60, not far off the $6.15 a year ago. Add it up, and because of lower yields, higher costs, and reduced government subsidies, farm income this year will probably drop below $40 billion, down from $47 billion in 1990, estimates Neil Harl, an Iowa State University agricultural economist. "We don't want a handout, we don't want charity," McQueen says. "We just want a fair price for our crops, and we're not getting it."

This time, food companies could end up with the same complaint as farmers. Even though commodity prices are only about 8% of the cost of any packaged product, food companies will normally match any commodity increase penny for penny. "The food companies are normally not bashful about transferring price increases to the consumer," observes Harl. "This year, consumers will not accept price increases."These challenges on the pricing front come at a time when food companies are facing an increasingly finicky consumer. Indeed, food companies more and more are seeing consumers choose private label or discount-priced merchandise. "Many consumers have become quickly trained to look for a deal," notes John Bierbusse, food analyst with A. G. Edwards & Co. in St. Louis. "Purchases are heavily skewed toward people with coupons in their fists." Items most affected by the budget shopping? Cereals, jellies, breads, and other basic items.

Anticipating the low prices for farm commodities, traders in the futures pits in Chicago sent prices sharply downward when the rain first fell in early August. Then, the Agriculture Dept.'s forecast of low exports--the projected 1.65 billion bushels of corn was down 100 million bushels from July's outlook--was a second boost to the bears.

Don't count the weather completely out yet. Heavy spring rains delayed planting in the key corn states of Iowa and Minnesota. Late planting means late harvest, and late harvest means vulnerability to an early frost. More than half of Minnesota's corn crop won't mature until after the normal first frost date; in Iowa, the figure is 12%. "That's just the average," says William Biedermann, an analyst with Allendale Inc., a research firm in Crystal Lake, Ill. "If we get an early frost, it could be trouble." But for consumers, the midsummer outlook couldn't get much better.David Greising in Chicago


Ebola Rising
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus