Corn price rises as drought hits hard

THE US Department of Agriculture has assessed the effects of the drought, forecasting US corn production will be 10.8 billion bushels in 2012-13, down 13 per cent from 2011 and the lowest since 2006-07.

THE US Department of Agriculture has assessed the effects of the drought, forecasting US corn production will be 10.8 billion bushels in 2012-13, down 13 per cent from 2011 and the lowest since 2006-07.

The drought that has hit the Corn Belt is considered to be the worst since 1956.

Analysts knew lower projections were coming but "this is a substantial drop", said Harry Kaiser, head of the Food and Agricultural Economics Program at Cornell University in Ithaca, New York.

The USDA report said corn prices, which reached record levels above $US8 a bushel in the past month, could go as high as $US8.90 a bushel, well above the $US6.40 a bushel projected in July and the $US4.80 a bushel projected in April at planting time.

On the Chicago Board of Trade, corn futures sold for $US8.43 a bushel shortly after the report was issued, as traders had already factored in lower production to their numbers.

About 40 per cent of the US corn crop is used to make ethanol, under federal mandate. Another 40 per cent is used as animal feed, both in the US and abroad. The remaining 20 per cent is eaten in mostly processed foods in the US such as high-fructose corn syrup and items like corn flakes.

US food prices are forecast to rise 3-4 per cent because of the sky-high corn prices, and will probably go higher with the new, lower corn numbers. But overall high prices don't hit consumers too hard because so little of what we pay at the supermarket is actually for food. The corn in a box of corn flakes is worth about US7?-US8?. What we pay for is processing and transportation.

The USDA has warned that the 2.5 per cent to 3 per cent increase in food prices this year will rise to as much as 5 per cent next year.

Based on conditions as at August 1, yields are expected to average 305 bushels a hectare, down 58.8 bushels a hectare from 2011. If realised, this will be the lowest average yield since 1995.

Surplus corn stocks in the US, looking beyond the upcoming harvest into 2013, are projected to be 650 million bushels, 533 million lower, down from the 1.18 billion bushels forecast a month ago and the smallest yield since 1995-96.

The USDA said global corn "ending stocks" were 123.33 million tonnes (1 tonne equals 39.4 bushels), down from the 134.09 tonnes forecast by the USDA last month.

The ending stocks figure, a key determinant of corn prices, was "about what the trade had been expecting, at 650 million bushels", said Des Moines commodity broker Tomm Pfitzenmaier.

By contrast, at the time of the last major drought, in 1988, the US's surplus stocks of corn stood at more than 4 billion bushels.

The impact of high corn prices already has made itself felt around the world. Last week, the United Nations Food and Agriculture Organisation said that world food prices soared 6 per cent last month, ending a streak of three consecutive months of declines. Grain and sugar prices also sharply increased.

The rising prices for corn will have an enormous impact on people in developing countries, where people spend 30 per cent to 40 per cent of their income on food.

"They're the ones that are hardest hit," and hunger would rise, said Colin Carter, a professor of agricultural economics at the University of California-Davis.

The drought also has entered into the debates in Congress over the new Farm Bill, which would replace the current version, which expires on September 30. Proponents of emergency measures to help livestock producers, who, unlike their crop-producing brethren, are not insured against losses, have argued for emergency assistance. USA TODAY

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles