Corn Shortage: The Next Big Crisis

By now you know we're experiencing the worst drought in over 50 years which has sent corn prices soaring to record highs. With over 60% of the US in the midst of drought conditions, the USDA has said that 50% of America's corn crop will be in poor to very poor condition.

With corn supplies are at their lowest levels in 17 years and with corn being such a large part of the industrial food chain, we have the 'perfect storm' for serious food shortages.

Corn feeds the chickens that provide us with eggs. Corn feeds the cows that provide us with beef and dairy products. Nearly all soda contain high fructose corn syrup. Even beer is fermented from glucose that originated in corn.

Corn is in margarine, coffee sweetener, icing, gravy, hot sauce, mayonnaise, soups, cake mixes, snacks foods, salad dressings, frozen waffles, and on and on. If you eat produce in any form, it’s likely got corn in or on it: corn was in the pesticide, the cardboard in which it was shipped, even the wax applied to its surface to give it a sheen.

Corn is in toothpaste, disposable diapers, matches, trash bags, disposable batteries, make up, even magazines covers.

Corn in approximately 25% of all items located in your local grocery store. And of course, all the fuel for our cars and trucks contain ethanol which is made from, you guessed it, corn.

And the situation is equally bad for soybeans, the second largest produced crop in the US: today inventories are at their lowest levels in 32 years. And the current drought has resulted in 39% of this year’s soybean crop being in poor to very poor condition.

Forget about Europe and the imminent global financial collaspe, the corn (and soybean) shortages is the REAL CRISIS.

Drought 2012: Hot Weather and Hot Grain Markets

It's only August, but talk early harvest of corn and beans is under way. Louisiana is 11 percent harvested on the beans, Mississippi is 6 percent done.

USDA issued the first harvest report, saying that we were 4 percent done Sunday night.

The early harvest might be contributing to the old-crop/new crop spreads. Early in the rally, the nearby contracts led the markets. Recently, it has been the December corn contract.

With early harvest taking the pressure off the idea of running out of corn, we can now just worry about the new crop. At some point we will wonder if the carryout is still too high because we used some of the current crop up before the current crop year officially started.

The highs in corn prices have has a lot to do with ideas of limiting demand. Not much talked about by farmers, but noticed by the trade is the unusual importing of corn taking place right now.

Southeastern feeders have banded together to get Brazilian corn into Norfolk. Nine cargoes were booked more than a month ago. This month, the talk was of Brazilian corn coming into California for the dairy industry concentrated there, away from our mainstream supply.

It's sad to think that ocean freight from Brazil can be cheaper than rail freight from the Midwest.

The government has stopped just posturing about the ethanol mandate. The EPA has now officially opened a 30-day period for comment on whether the mandate should be waived. This would mean that refiners would not be required to put 10 percent ethanol in their gasoline blends. The consensus is that if the mandate is suspended, corn prices would drop as usage in gas would drop. 

If the mandate changes and the refiners go to less ethanol, the result would be the total stop to the rally and a retracement, looking for a demand-driven price.

Some time in the future we will look at the charts and have reasons why prices changed at a certain date. What we know is that the prices cannot just go up.

Drought 2012: Stokes the Food As Fuel Debate

The U.S. government requires about 13 billion gallons of ethanol to be used in the nation's gasoline. To achieve this, nearly half of the nation's corn crops go to not feeding people but to powering motor vehicles.

Since 2005, the U.S. government has mandated that gasoline contain ethanol, mostly derived from corn. The policy intent was to reduce dependency on foreign oil imports and improve air quality. It has also been a boon for corn farmers.

But in the midst of the worst drought since 1934, the faults of this policy that forces nearly half the U.S. corn harvest into fuel production. And with corn prices at record highs, the ethanol requirements are fueling increased food costs and spreading it to the price of gasoline, which is up almost 40 cents a gallon since early July.

Beef and pork ranchers are slaughtering their herds at a record rate to cut their corn feed costs which have gone up more than 30% in three months. As a result, U.S. cattle herds next year are projected to be the smallest since 1952, a guarantee of more expensive food in years to come.

Th drought exposes the notion of trying to expand an industry where the economics of it don't make sense. Based on its energy content, ethanol is approximately 50% more expensive than gasoline and the acreage required to produce it distorts land prices.

Tractors run on diesel fuel that plow the fields, plant seed, harvest the crop and haul it to refining plants. Ethanol is also highly corrosive and can’t be transported by pipeline, unlike oil. Trucks or trains must carry the finished product to gasoline blenders. In short, ethanol requires more energy to produce than it actually yields, negating the environmental benefits.

Earlier this month the United Nations Food and Agriculture Organization issued a statement urging "an immediate, temporary suspension" of America's use of corn to produce ethanol, in order to "allow more of the crop to be channelled toward food and feed uses."

Natural disasters can't be controlled, but ethanol is a man-made disaster that needs to be stopped.

Drought 2012: Food Prices to Surge Higher - USDA

The drought of 2012 has sent corn, wheat and other commodity prices soaring to record or near record levels in recent weeks as U.S. crops continue to dry out.

The record drought gripping half the US will help push food prices up by 3% to 4% next year, according to the Department of Agriculture.

"In 2013 as a result of this drought we are looking at above-normal food price inflation. Consumers are certainly going to feel it," USDA economist Richard Volpe said.

Milk, eggs, beef, poultry and pork prices will all be affected by the drought, which has pushed up prices for feed.

• Beef prices are expected to see the biggest jump at 5% to 7%.
• Dairy product prices are forecast to climb 5% to 6%.
• Poultry and egg prices are projected to rise 4% to 5%.
• Pork prices are expected to rise 4% to 5%.

With farmers and others warning that prices will rise, the drought has sent corn, soybean and other commodity prices soaring in recent weeks as fields wither under the heat across much of the Midwest.

The drought is not expected to affect prices for fruits and vegetables as most of those crops are irrigated. However, the USDA is forecasting a 2% to 3% for all fruits and vegetables in 2013.

Drought 2012: Global Impact of Wilting U.S. Crops - Video

 

At least 32 states are feeling the effects of the drought as the unrelenting heat has pushed grain prices to record levels.

Corn is the major U.S. crop and a bad year drives the price up on everything from beef to cereal to fuel. As crops continue to wilt, farmers and consumers around the world are looking towards the sky, hoping for rain.

Drought 2012: Biggest Natural Disaster in US History

No Relief for America's Heartland

More than half of America is in areas designated natural disaster sites by the USDA have been ravaged by a dry spell destroying crops in nearly 1,600 counties in 32 states.

Among those effected by damage, reports Bloomberg News, are approximately 1/3 of the nation’s farmers, which contributes in making this declaration the largest ever of its kind by the Department of Agriculture.

“Agriculture remains a bright spot in our nation’s economy,” Agriculture Secretary Tom Vilsack tells the country this week in an official statement. “We need to be cognizant of the fact that drought and weather conditions have severely impacted farmers around the country.”

The heartland of America's agriculture community, the Midwest, is suffering from moderate to extreme drought.

“Farmers and ranchers are at the mercy of Mother Nature,” Kansas Governor Sam Brownback says in a statement. Brownback’s state produced $8.2 billion in crops in 2010, but with historic dry weather whithering crops this year, Kansas expects a monumental drop.

Corn, the largest cash crop in the US, has been the hardest hit by the drought with only 35% of corn supply in good to excellent condition as of this past weekend, down from 48% percent only a few weeks ago. Soybean crops, America’s other top agriculture product, has also been largely destroyed.