Prices of wheat, corn and soybeans have moved higher since mid-September - partly a result of a slight decrease in global cereal output and a significant growth in demand.
And according to Darrel Good of the University of Illinois, "one of the questions generated by high prices is: how will US and world producers respond? A second question is: how will Congress respond?"
Indeed, a recent UN Food and Agriculture Organisation (FAO) report warned of sharp declines in world cereal stocks, which could foreshadow a potential supply problem - and increased costs - for food processors.
According to the latest Crop Prospects and Food Situation report, international prices of many cereals have risen further in recent months, supported by strong demand and tighter supply prospects.
Current futures prices for the 2007 corn and soybean crops favor corn production over soybean production in parts of the Corn Belt, according to Good. He added that the prospect of ample US and world soybean stocks in contrast to small corn stocks and rapidly growing corn consumption suggests that corn acreage needs to increase at the expense of soybeans and other crops in 2007.
And world wheat stocks as a percentage of use is expected to decline to a record low level this year. The US Department of Agriculture (USDA) projects the US average farm price of all classes of wheat during the current marketing year in a range of $4.10 to $4.70. The record high average price was $4.55 in 1995-96,
This situation could well have an impact on planting decisions.
"In the United States, available crop land is generally fully utilized so there is little opportunity to expand total acres planted. The expectation is that acreage devoted to wheat and corn will increase and that acreage of most other crops will decline in 2007, but the magnitude of change can still be influenced by changes in price levels, with the exception of winter wheat," said Good.
The USDA is due to survey winter wheat producers in December and report planted acreage on January 12, 2007. At this point, a significant increase in acreage is expected.
"It will be up to the market to give the appropriate signals, avoiding the mistake of a year ago when the market incorrectly signaled more soybean and fewer corn acres. On a world level, wheat acreage will likely expand in response to current high prices. If US soybean acreage declines in 2007, prices may have to move to a level that will encourage more acres in South America a year from now."
December 2006 corn futures reached a contract high of $3.17 on October 13, 81 cents above the mid-September low. The 2006 US corn crop is forecast at 10.905 billion bushels, 209 million below the September forecast.
And with consumption of US corn during the current marketing year forecast at 11.89 billion bushels, year-ending stocks are forecast at a meager 996 million bushels. The USDA projects the marketing year US average farm price in a range of $2.40 to $2.80. At the close of trade on October 13, futures prices translated to a marketing year average farm price of about $3.10 per bushel.
November 2006 soybean futures traded to $5.945 on October 13, about 58 cents above the mid-September low. The USDA now projects the 2006 US soybean crop at a record 3.189 billion bushels, 96 million larger than the September forecast.
According to Good, even with consumption of US soybeans forecast at a record 3.086 billion bushels, US stocks are expected to grow from 449 million bushels on September 1, 2006 to 555 million on September 1, 2007.
The USDA projects the marketing year average farm price in a range of $4.90 to $5.90. At the close of trade on October 13, the futures market projected an average farm price of about $5.90.
And December 2006 wheat futures at Chicago traded to a contract high of $5.51 on October 12 and closed at $5.255 on October 13, $1.34 above the mid-September low. July 2007 futures settled at $4.625, 40 cents above the mid-September low, but $.255 below the contract high established on October 4, 2006.
Good said that old-crop wheat prices are being driven by prospects for a 2006-07 world wheat crop that is 5.4 percent smaller than last year's crop and 4.8 percent less than projected consumption. "Among the major wheat producers, only China is expected to have a larger harvest than last year. The largest drop in production, 55 percent, is expected in Australia," he said.
And how will Congress respond?
"Projected prices are well above current support prices so that producers may receive only direct payments for the 2006 crops. The main issue is whether these higher prices are expected to persist. If so, Congress could respond by keeping commodity programs generally intact in order to minimize budget exposure," Good said.
"Alternatively, Congress could view this as an opportunity to move the focus of policy away from price supports. A related issue is whether Congress will reduce or eliminate current domestic and trade policies that prevent the market from directing production and consumption decisions."