Raindance begins now!
© Copyright 2012 The International Business Times Inc. All
Rights Reserved
By Angelo Young
July 13, 2012
Your corn flakes are going to be more expensive in six to 12
months' time. As will your ketchup, carbonated drinks and sweets. Your
hamburgers and chicken will also cost more, and cost more sooner, thanks to the
drought conditions that have parched the U.S. Corn Belt, forcing many farmers
to cut their losses, plow their fields under and sell what they can for
low-grade livestock feed. The U.S. Department of Agriculture reduced Wednesday
its forecast for this year's corn harvest thanks to a massive dry spell at an
important time in the plant's pollination process. The corn is smaller, the
kernels are underdeveloped and many farmers will be lucky to meet the latest
forecast of as little as 140 bushels per acre, down from a near-record high of
166 bushels predicted just a month ago.
"Without rain, I might be lucky to make 100 to 120
bushels," Scott Jorgensen, a farmer near Adair, Iowa, told the Des Moines
Register. The forecast calls for little or no rain in the near future in
regions that grow the country's No. 1 crop, which was valued last year at $76.5
billion. But this year's conditions are the worst seen in more than two
decades.
Food companies that depend on corn or corn-based sweetener,
such as Kellogg Company (NYSE: K), General Mills, Inc. (NYSE: GIS) and The
Coca-Cola Company (NYSE: KO), all opened modestly lower in Thursday trading, a
day after the USDA forecast was released.
Corn for December delivery was up Thursday above $7.26 a
bushel on the Chicago Board of Trade. On Monday the July-delivery price rose to
$7.77, coming close to last year's peak of $7.99. Barclays said in its
note Thursday that it expects corn to end the year at $6.80 per bushel, up from
$5.74, but that it would close the third quarter at $7.34.
Higher corn prices mean higher costs in livestock feed,
processed foods and ethanol, which means food price inflation. But the effect
is delayed because food and beverage companies hedge against unexpected price
spikes by locking in commodity prices with futures. "The key
question is just how hedged and protected these companies are," Jack
Russo, an analyst at Edward Jones & Co. in St. Louis, said in an interview
with Bloomberg. " The packaged-food companies would be the most
impacted."
It usually takes six to 12 months for grain prices to show
up on grocery store shelves, Kenrick Jordan, senior economist at BMO Capital
Markets in Toronto, told Bloomberg. Meat products, especially beef, tend
to be the first affected because ranchers, facing higher feed prices and
lower-grade feed, tend to cut their losses and send their stock to slaughter
earlier than they would like. Soon afterward, there is less fresh meat in the
market. "If you can't feed cattle because the price of corn is too high,
cattle go to slaughter," Scott Shellady of Trean Group, a Chicago-based
brokerage, told USA Today. "In six months' time, we won't have any cattle."
Beef prices have been increasing for months due to last
year's drought in Texas. The national average retail price for ground beef has
risen 12.6 percent to $2.99 a pound in the past 15 months, according to the
U.S. Department of Agriculture.
