As the nation’s farmers head into their fields for spring planting, economists are paying more attention than usual to how the work is going.
Bad weather, dwindling stocks of grain and strong demand at home and abroad sent corn and wheat to record high prices last month. And while the ultimate impact of the spike - on consumers and the broader economy - depends on such unknowns as the coming season’s weather, the price instability has spawned anxious talk of inflation from the Farm Belt to Wall Street.
Already, many economists are saying it is likely that food inflation rates, which have hovered between 2 and 3 percent in recent years, will double by next year as the impact of current prices filters through the food pipeline.
Should that happen, the average family with children, which by government estimates spends approximately $6,500 a year on food, could end up spending $400 more next year.
Economists say that a repeat of last year’s experience - when planting was delayed, summer heat disrupted corn pollination and an early frost crimped yields - could drive those costs still higher, sending food inflation over 10 percent, a level last seen in the 1970s.
For now, the real impact is on agriculture itself. Many farmers are scrambling to cash in on the price increases by planting more acreage, while cattle producers are starting to kill off cows they can no longer afford to feed with expensive grain.
But what has economists and the financial markets edgy as they look ahead is that food prices are not the only ones going up this spring.
Heavy demand has also driven energy prices upward, to their highest level since the Gulf War.
Many bond traders, in particular, have already decided that broader inflation and higher interest rates are on the way, judging from how bond prices tumbled in recent weeks.
“Commodity prices are clearly spooking the bond market,” said David Wyss, director of research at DRI/McGraw-Hill, an economic forecasting service in Lexington, Mass.
Most economists say that Wall Street has been overly anxious about inflation’s return. Price shocks to the agricultural sector are certainly nothing new, and energy prices move in a volatile manner, both up and down.
“It is a temporary distortion as things stand now,” said Diane Swonk, deputy chief economist at First Chicago NBD Corp.
Indeed, futures prices indicate the market is expecting some balance to be restored. While corn prices for delivery in May hit a high last Thursday of $4.99 a bushel, traders are willing to bid only $3.35 a bushel for corn from next fall’s harvest.
One reason for optimism: farmers are projected to plant 79.9 million acres of corn this year by the Agriculture Department and as much as 84 million acres by some private forecasters, up from 71 million acres last year.
But analysts say the risk is real that inflation could be uncorked, as much by market psychology as by supply and demand.
David Hale, chief economist for Zurich Kemper Investments Inc., warned in his most recent economic survey that the commodity price increases posed a serious challenge to the economic policy-makers of the Federal Reserve Board.
The Fed, he said, must “pursue a policy which prevents higher food prices from encouraging a general acceleration of inflation expectations, which influences wage bargaining.”
Hale said that a combination of low grain reserves and depressed output could cause food prices to rise by 8 to 10 percent during 1997.
Normally, grain demand falls relatively quickly as prices climb. This time around, though, all of the world’s major grain purchasers kept buying long after economists expected them to curb spending.
In part, that reflects the rise in agriculture of deep-pocketed enterprises that have the means to ride out increases in feed prices. And unlike the 1970s, when the Soviet Union bought huge amounts of grain on credit, China and other importers are flush with dollars to pay for American grain and meat.
“What’s different is that this is a demand-driven market,” said Terry Francl, chief economist for the American Farm Bureau Federation, a trade group in Chicago representing more than four million farmers.
Consumers are likely to get mixed signals for many months about what the low stocks and high grain prices mean to them.
The single biggest user of grain is the cattle business. Once it starts killing large numbers of cows, the price of hamburger and other lower-grade meats could fall for many months if retailers pass through the savings.
Low beef prices will force pork and poultry producers to keep their prices low to compete.
Eventually, though, there will be less meat around than consumers want, and prices for meat products could rise sharply, economists say.
“We are headed for a shock to consumers,” said Paul Prentice, president of Farm Sector Economics Inc., a Colorado Springs consulting firm.