Just as growing concern about “Agflation,” or the steep rise in prices for many agricultural products, is starting to peak, word comes that an expected bumper corn crop may dampen prices by creating a supply cushion.

Commodity prices in many categories have been surging over the past two years, including agriculture, where demand for corn to feed the growing corn-based ethanol market has been a bounty to farmers (see Commodity Buyers under Pressure on Many Fronts, as Economy now Confronts "Agflation"). This has in turn put cost pressure on manufacturers and other buyers of agricultural products, as the price for raw agricultural commodities and derivative products such as corn syrup hit record levels.

But as typically happens in agriculture, the good times for farmers may lead to over planting, which will increase supply and ultimately reduce prices again. Last week, the US Agriculture Department issued a report estimating the amount of corn planted this year will grow even more than expected. It said farmers will sow almost 93 million acres of corn in 2007 – an increase of 3% over the estimate for the year made in the first quarter, and up almost 19% over 2006 planting levels.

The pressure that ethanol is putting on the corn market is significant. Last year, ethanol production took about 14% of the US corn crop. That is expected to grow to 30% by 2010.

The likelihood of abundant supplies as a result of the growth in corn acreage has sent prices down of late. Corn for December delivery is now being priced at about $3.50 per bushel in the futures markets, down from $4.00 in mid-June, though still up sharply against the same period a year ago.

Weather-related issues, such an extreme drought this summer in the Midwest, could also hurt farm yields and mitigate the favorable price impact of the growth in corn acreage.