Corn prices as high as elephant's eye

For a "shocking" document that sent corn prices "crazy," the October world supply-and-demand estimates from the U.S. Department of Agriculture is a dry read.

But not as dry as America's corn belt this summer. The relentless summer sun (after earlier floods) led to the report's conclusion: "Corn production is forecast 496 million bushels lower as a 258,000-acre increase in harvested area is more than offset by a 6.7-bushel-per-acre reduction in yield."

The sober language contrasted sharply with the mayhem it provoked. On Oct. 8, the Friday of the report's publication, news that America's production of corn would be 4 percent lower in 2010 than previously estimated sent prices surging by 6 percent, enough to stop trading on the Chicago Board of Trade. Corn triggered limits again on the next trading day, Oct. 11., after rocketing by 8.5 percent, the biggest one-day rise in 37 years. By the middle of last week, corn was changing hands for $5.88 a bushel.

There are two reasons for this dramatic response. First, the news from the USDA was unexpected, though whispers from independent sources using sophisticated satellite analysis had hinted at trouble. The second is the importance of America for a crop eaten by people and livestock and also used to produce ethanol for fuel.

The country harvests two-fifths of the world's corn and provides nearly 60 percent of global exports. Even a small revision in forecasts corresponds to a huge volume of corn.

Any abrupt jump in agricultural commodity prices, like the spike in wheat prices in August, prompts gloomy pundits to proclaim that the next food crisis is at hand. Corn's rapid ascent has been no different. The doom-mongering is premature. This year's harvest will be the third-largest yet seen, and although stocks will run down, supplies are adequate for the 2010-11 season.

Still, as Abdolreza Abbassian of the U.N. Food and Agriculture Organization says, such talk can add to upward price momentum.

American regulators have authorized raising the proportion of ethanol in automobile fuel to 15 percent, which may buttress prices. The fact that prices for other crops such as soybeans and wheat also are bubbling makes it difficult for farmers to judge which will be the most profitable crop to sow for next season, which may hamper an immediate supply response.

Price volatility could become a permanent feature of global agriculture. The concentration of farming in a few big countries means that a hungry world is dependent for its food on stable production patterns in a small number of places.