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Unexpected bumper crops unlikely to give much relief

CHICAGO -- As recently as 10 years ago, a bumper crop of corn was welcome news for farmers and consumers alike. The farmers would have more bushels to sell, which would drop prices for those buying eggs, steak and turkey at the grocery store.

CHICAGO -- As recently as 10 years ago, a bumper crop of corn was welcome news for farmers and consumers alike. The farmers would have more bushels to sell, which would drop prices for those buying eggs, steak and turkey at the grocery store.

But in the era of ethanol, even the extraordinary harvest predicted Tuesday by the gov-ernment will likely provide little relief from the pressure of high prices, which hang over growers, food producers and consumers like a scarecrow.

The Agriculture Department projected this year's corn crop has withstood rains and flood-ing to deliver a harvest of 12.3 billion bushels -- 573 million more than it expected last month and second in size only to last year's harvest.

With ethanol expected to consume more than 30 percent of that harvest, the economy has embarked on a new cycle in which bumper yields instantly find new buyers, the prices stay higher and farmers face greater expenses for land and fertilizer, causing them to respond by continuing to plant more corn.

"We're going to be caught in that price squeeze again," said Art Bunting, president of the Illinois Corn Growers Association. "We either have to increase yields or increase the price and we don't have power over either one of those things."

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Bunting is an ethanol proponent, quick to claim that diverting corn to the gasoline additive does not explain the inflation that has struck in supermarket aisles. Agriculture interests blame high oil prices.

Yet food industry analysts note that consumers are also trapped by prices they cannot con-trol.

An ideal mix of sunshine and rain has brought December corn futures down 33 percent from recent highs to $5.28 a bushel on Tuesday. The immediate impact of the agriculture report is that prices are not expected to shoot through the roof again.

But few see prices for commodities or food trending downward.

"You should be expecting to see higher prices in 2009 on the grocery shelves, but the good news is it might not be as severe because the weather has been so good," said Robert Moskow, an analyst for Credit Suisse.

A decline in corn prices does not necessarily translate into savings in the check-out line, since many food companies would be reluctant to slash costs. They see a broader trend over the next year of rising costs because of fundamental changes to the agricultural sector.

"I think they are telling investors that in the long term, the days of $2 a bushel corn are be-hind us," said Matt Arnold, an analyst for Edward Jones.

When flooding washed out swaths of Iowa in June, some market analysts feared that the damages could send corn to $9 a bushel. That possibility emboldened meat processors who were lobbying for the suspension of federal ethanol mandates.

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But the doomsday scenarios that flowed out of the flood started to evaporate as the clouds parted and farmers checked prices at the Chicago Board of Trade.

With September futures shooting past $7.60 a bushel, the farmers had an incentive to re-plant their fields, explained Alan Brugler, president of Brugler Marketing and Management LLC, a commodities trading advisor in Nebraska.

"Price makes an excellent fertilizer," Brugler said.

The cooperative weather during the past month then improved the average yield, which the Agriculture Department said would be 155 bushels an acre, 6.6 bushels better than the previous prediction.

Ethanol supporters such as the Renewable Fuels Association greeted those numbers by praising the American farmer for overcoming "historic obstacles."

Ethanol producers blame record crude oil prices for food inflation, routinely saying that only a nickel worth of corn is contained in a box of cornflakes.

The Agriculture Department report marked the second straight victory for the ethanol in-dustry, after the Environmental Protection Agency last week rejected a request last week by Texas Gov. Rick Perry that the mandates be waved.

But the livestock and poultry industries are warning that their own prices will continue adjusting to expensive corn. These companies largely favor the suspension of ethanol man-dates, saying that the corn feed used for cattle, chickens, hogs and turkeys has become unaf-fordable.

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"If the harvest turns out to be what the USDA predicted, the government will have dodged a bullet," said Joel Brandenberger, president of the National Turkey Federation.

The potential for a poultry shortfall could be on the horizon, a consequence of the same summer flooding that led corn prices to spike.

Moroni Feed, a turkey processor in Utah, plans to temporarily shut down operations for three months after Thanksgiving, a decision the company, which has $125 million in annual revenues, reached because of the cost of corn.

Its last set of eggs hatched on Thursday, said Moroni spokesman Kent Barton, describing the process involving the company's breeder farms and processing division as a "series of roving blackouts." Poultry producers intend to limit the supplies of chicken and turkey, so that prices rise and profit margins can improve.

Barton said the ethanol mandate creates an "unlevel playing field" between meat proces-sors and the fuel refiners.

"In the end, it's the consumer who pays," Ken said.

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