Corn prices fall, groceries not yet

NEW YORK (CNNMoney.com) -- Corn prices have taken a tumble over the last month, but that doesn't mean that the cost of milk, beef and other food products will drop as quickly as they rose.

After a wild surge over the past 18 months or so due mostly to ethanol demand, corn futures have cooled, settling Wednesday at $3.25 a bushel, about a dollar below their mid-June peak. Economists cited record corn plantings this year coupled with recent much-needed rainfall in the Midwest.

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But Purdue University economist Corinne Alexander said corn's story remains to be told as the season progresses. Should drought conditions return to the Corn Belt, prices could jump again in a heartbeat.

"We're in a classic weather market right now," Alexander said. "There were very serious concerns about a potential drought in the Corn Belt. Over the last week, the Corn Belt has seen really great rains and alleviated some of those concerns.

"It will be a day-to-day look out the window and see what the weather is market."

Still, just a month ago many analysts predicted corn would stay above $4 a bushel and could push toward $6 a bushel. The thinking was that the $4 mark would be considered a symbolic threshold, and traders would push prices up another 50 percent or so.

One of those bullish analysts, Darin Newsom of Omaha, Neb.-based agriculture consulting firm DTN, said corn prices still could climb further but will level off, at least for the time being.

"What we're finding now is we're actually into liquidation mode," he said. "It's very seasonal in nature and could take us to the fall. We could drop maybe another 40 or 50 cents from where we are at this point. Longer term, I still can't help but think that higher prices are just sitting out there."

How the price of corn will hit consumer food prices is equally hazy.

While the Consumer Price Index has risen a fairly modest 2.2 percent over the past year, the run-up in corn prices has made feeding livestock more expensive and pushed up prices for milk, beef, pork, poultry and other food products.

A gallon of whole milk cost $3.80 a gallon on average this month, up 25 cents from June. Cheese has been trading around an all-time high and is now at a national average of $3.08 a pound at the supermarket, the highest since January 2006.

But consumers are unlikely to get much immediate relief from the recent drop in corn prices, Purdue's Alexander said. A primary reason is wheat prices, which have jumped on rising demand from Europe for U.S. wheat. European supplies have been hurt by widespread flooding.

"Food prices are more determined by long-term prices rather than short-term market fluctuations," she said. "One of the bigger factors [in supermarket prices] is higher wheat prices. They're not going to be affected by a pullback in corn prices at all."

There has been some dispute lately over how much impact ethanol is having on food prices, with supporters of the biofuel arguing that higher transportation costs due to the rise in gasoline prices are pushing up the cost of food and other goods more than corn. Ken Bailey, a dairy analyst at Penn State University who for months has been warning of significant milk price increases and in fact quoted a leveling off price of $3.80 a gallon last month, scoffed at that reasoning.

"When you come up with a government policy that subsidizes the production of anything, there's going to be market ramifications," Bailey said. "When you take corn away from the livestock producer and put it in a plant to make ethanol, in the short run the cost of the feed is going to go up and livestock producers are going to get squeezed. There's a direct correlation and anything else is just misinformation."

Analysts agree, though, that the big winner with lower corn prices is the ethanol industry. The $4 mark was considered a key in determining the economic viability of ethanol plants.

"Having this huge pullback in corn price is good news for anybody who is buying corn. That means livestock feeders, food processors and ethanol plants," said Alexander, who predicted that continuing high demand for ethanol will push corn higher for each of the next two years.

Arlan Suderman, an analyst who writes a daily newsletter called Farm Futures Daily, said corn could fall as low as $2.81, but said traders shouldn't panic.