Wednesday, July 11, 2012

Food Price Spike Ahead

Zero Hedge warns of a spike in food prices due to a disasterous drop in corn production:
Who knew the next black swan would be deep fried? The biggest piece of imminent food inflation news over the past months, coupled with what is shaping up to be another record hot summer (for the best tracking of real-time electricity consumption primarily for cooling news we recommend the following PJM RT tracker of power load), has been the collapse in the corn harvest due to the worst drought since 1988 as 56% of America is in drought conditions. Today, the US just added some burning oil to the popcorn by cutting the corn-crop forecast by 12% to 13 billion bushels on expectations of a 13.5 billion harvest.
Of course, its not just corn, and its not just in the U.S. This article from Bloomberg a couple weeks ago notes:
Droughts withering wheat crops from the U.S. to Russia to Australia will probably spur the biggest reduction in global supply estimates since 2003 and drive prices to the highest in almost a year.

Kansas, the top U.S. grower of winter wheat, is poised for its driest May on record, the state’s climatologist estimates. Ukraine and Russia, accounting for 11 percent of world output, have endured drought conditions for three months, University College London data show. The U.S. Department of Agriculture may cut its global crop estimate by 1.2 percent next month, the biggest drop in a June report since 2003, according to the average of 18 analyst estimates compiled by Bloomberg.
The price increases are not just limited to the U.S. The Examiner reports:
The economic consequences of this drought are just emerging. The top story today is the possibility of our country's corn and soybean crop drying up. The extreme heat and dry conditions are driving corn and soybean prices to record, or near-record highs.

World food prices are predicted to rise in the coming months. The spike in food prices will be the third time in the past five years that this has happened.

Previously, in 2007-2008, and in 2010-2011, food prices spiked due to bad weather conditions affecting food crops. The earlier food spikes triggered riots and social unrest in dozens of countries worldwide.

America is the worlds leading exporter of corn and soybeans. What happens here can and will affect world food prices, the price of meat, and the price of livestock feed.

Mexico and Central America are dependent on corn as a staple in their diets, and will be affected directly. In North Africa, the price of a loaf of bread could become exorbitant.

In industrialized countries, where meat is a staple of the diet, the cost of feeding livestock, chickens, pork and beef, will be affected. After all, corn and soybeans are used in livestock feed.
There is also this from USA Today:

The Department of Agriculture on Wednesday dropped the estimated average U.S. corn yield by 20 bushels per acre, from 166 to 146, and blamed "scarce rainfall coupled with record-breaking temperatures." It said conditions are the worst since 1988. Lower soybean yields also were predicted.

Smaller harvests mean higher prices. The forecast sent December prices for corn up as much as 30 cents to $7.48 a bushel at the Chicago Board of Trade. The USDA predicted the corn harvest will total 12.97 billion bushels, down 12% from a month ago. It still would be the third-largest on record.

Besides increasing costs for manufacturing the thousands of products that contain corn — everything from cereal to soft drinks — higher grain costs have a ripple effect, says Scott Shellady of Trean Group, a Chicago-based brokerage.

"If you can't feed cattle because the price of corn is too high, cattle go to slaughter," he says. That translates into ample meat availability and lower prices this year, but "in six months time, we won't have any cattle."

That could mean higher prices for meat and dairy products next year, says Corinne Alexander, an agricultural economist at Indiana's Purdue University. "We're seeing multiple years where price levels are increasing," she says. "It puts a lot of pressure on consumers' budgets."

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