Will A Grain Surplus Lower Prices?

From the WSJ:

Some traders and economists are speculating that if the U.S. and world economies don't heat up soon, surpluses could turn into price-depressing gluts. While cheap grain is good news for consumers and livestock producers, excessive supplies increase a government's cost for farm subsidies and tend to ignite trade fights between the big farming powers.

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World grain stocks—what's left by the time new harvests can replenish supplies—shrank as the growing middle-class in emerging nations such as China demanded more meat from livestock fattened on grain. Industrialized nations, stung by soaring oil prices, were increasing support for fuels made from crops. In the U.S., the ethanol industry began consuming one-third of the nation's biggest crop, corn.

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Grain prices skyrocketed as some panicked governments disrupted trade by husbanding domestic supplies, increasing the numbers of hungry people around the world by millions and fueling street protests and riots. It took a global recession to cool grain prices in late 2008.

Two years later, however, farmers world-wide are working harder than ever. Growers from Latin America to the former Soviet Union have expanded so quickly that the global acreage devoted to the 16 biggest grain and oilseed crops has climbed 82 million acres since 2006—akin to creating another U.S. corn belt, according to U.S. Department of Agriculture statistics.

Grain traders in Chicago expect U.S. farmers to produce record-large corn and soybean crops for the second straight year. Farmers in Brazil and Argentina are wrapping up record-large soybean harvests. Asian farmers are poised to produce a huge rice crop. According to forecasts by the United Nations' Food and Agriculture Organization, this year's global cereal reserves—the buffer against shortages—will probably be 24% bigger than just two years ago, and the largest in eight years.

With world grain production this year expected to exceed demand for a third consecutive year, many grain traders and farm economists are beginning to debate the prospects for two starkly different outlooks.

If an economic recovery doesn't gather steam soon, says one group, price-depressing grain gluts could materialize in a few years, dragging down farmers' profits and chilling farmers' demand for everything from tractors to genetically modified seed.

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Others, however, worry that the world's farmers won't be able to keep up with demand again once the economy does recover, which would increase costs for food manufacturers and create the environment for another food crisis. China's and India's appetites are expected to grow strongly.