What is the price of corn? What…don’t you mean the price of gold or the Euro, or the Dow Jones? On this roller coaster ride of financial assets and markets where prices unpredictablytravel up and down at warped speed, one can easily fail to notice the impact that volatile food commodity prices have on the economies and people of the world.
The worst U.S. drought in a quarter of a century is cutting corn production across the Midwest propelling prices to record high levels. Crops in July are at their worst condition since 1988 as a Midwest heat wave last week set or tied over 1,060 high temperature records. Prices surged up close to 40% in just three weeks. Plunging crop production, along with the largest ever growing global demand leaves estimated U.S. stockpiles at levels 35% below initially forecasted in the middle of June. According to the Department of Agriculture, that is the biggest reduction since at least 1973. The drought and its effect are giving rise to a food shortage and price escalation collision. The USDA initially forecasted a corn yield of 166 bushels per acre for 2012. Last week, corn yields were falling by five bushels a day and the latest trade forecasts are at 140 bushels per acre. Fields are dehydratedjust as corn plants begin to pollinate. At the beginning of July, just 40% of the crop in the U.S., the world’s largest grower and exporter, was in good or excellent condition, down from 77% in May.
Corn is vital because of its extensive use as a base ingredient in so many foods and for its use in feed for livestock. Higher feed prices will generally depress U.S meat production, meaning less meat available at elevated costs. Retail prices of beef, ham, chicken, and cheese are close to all time highs. Due to increased prices of corn, the cost of hamburger, butter, eggs, and other protein sources are climbing. When the cost of corn rises, the higher price tag of wheat and soybean, raw components in a variety of foods, are right behind.
Soaring food prices influence politics and economics. Last year, rising food costs helped fuel the Arab Spring uprisings in the Middle East and North Africa. The lack of food provisions increase price for rations that are available and encourage discontent and action. The early view is that crop producers will carry the major burden of financial losses, but financial damage in the meat and animal industries will be massive in the coming year. The U.S. economy is 70% determined by consumer spending. This year, rising gas prices put a crimp in the U.S. economic recovery. More money being spent on filling up the gas tanks means less discretionary funds are available to support the purchase of other merchandise, thus, generating a slowdown in the economy. If you add the rising cost of food staples to the mix, the cost of living deteriorates and consumer confidence falls, consequently exacerbating the slowdown.
What is the price of corn? Well, while it doesn’t attract as much attention in the world headlines as the price of gold, at least you can eat it….if you can afford it.