Ethanol mandates driving up food prices

WASHINGTON — American consumers should get used to the idea of paying more for food, thanks to the surge in demand for corn and soybeans as an energy source.

That was one of the messages at the U.S. Department of Agriculture's annual agricultural outlook conference this week, where farm experts and food company executives tempered their enthusiasm for corn and soybeans with warnings about food prices at the supermarket.

Corn prices, which used to hover around $3 a bushel, seemed remarkably high at $4 not long ago and have since hit $5. Soybeans, which only a few years ago appeared pricey at $8 a bushel, are trading around $13.

High prices for those commodities mean higher prices for the foods they are used in, but also higher costs to dairy farmers and others who feed them to livestock. In turn, meat and milk are costlier in the stores — and may become more expensive.

"I think food inflation has got to go up," said C. Larry Pope, chief executive officer of Smithfield Foods, one of the country's biggest producers of pork, turkey and other meat. "There's going to be real food inflation, in my opinion, in this country. It has to come."

Mr. Pope, speaking to hundreds of agriculture experts, said his company has already begun trimming animals, particularly sows, in response to high feed costs and expectations of lower consumer demand.

The danger signs are not just in the United States, Mr. Pope said, citing $9-per-bushel corn prices in Europe, an important export market where Smithfield and other U.S. food companies do business.

Mr. Pope did not question the use of corn or soybeans as fuel, a trend driven by government ethanol mandates and the high price of oil. Indeed, the overarching message at the two-day conference was that the competition between food and fuel has been overplayed.

"I don't think we have to choose, and I don't think we should choose," said Bob Dinneen, president and chief executive officer of the Renewable Fuels Association.

Experts said that the United States has plenty of opportunity to use those crops for both, and that improvements in yield per acre, as well as total acres planted, will help boost the supply.

The high feed costs have offset much of the gain north country dairy farmers saw in 2007 from record-high milk prices. And this year, higher feed costs will eat further into farmers' returns, said Kenneth W. Bailey, a Pennsylvania State University dairy economist, on his dairy outlook Web site.

Last year, dairy farmers pushed their herds to produce more milk despite the higher cost of feeding them, Mr. Bailey said. Dairy farms continue to expand in response to the higher prices. New York has seen growth as well, with milk production climbing faster than in neighboring states from a year ago, the USDA reported.

Milk will not be immune from higher consumer prices, Mr. Bailey and other economists said. But as milk production continues to climb in response to higher prices, supplies will grow enough that prices will likely edge downward toward the end of the year.

Prices for dairy products will generally average higher than in 2007, even as milk prices paid to farmers average lower, said Shayle D. Shagam, a livestock analyst with the USDA's World Agricultural Outlook Board, at the annual conference.

Mr. Bailey and Mr. Shagram each predicted that milk production will grow 2.7 percent from 2007, but Mr. Bailey said his prediction was a reduction from his earlier projection of growth in excess of 3 percent.