Ripple Effect | The Collateral Damage Of Rising Corn Prices

The worst drought to hit the Midwest in more than 50 years will impact more than the farmers who are looking at shriveled up ears of corn that are 1/3 their normal size, dry as a bone and a horrific color that no one is accustomed to seeing. Actually, those farmers will make it through this difficult summer—it’s the American consumer, food commodity prices(and perhaps the very poor abroad) that will pay the highest price for Mother Nature not yielding her usual abundant rains.

Impact will hurt those who can least afford it!

The primary debate over the impact of the measly corn crop centers around its effect on the world outside of the U.S. Due to the U.S. government’s agreement with farmers to turn a huge portion of the corn crop (up to 40%) over to the producers of ethanol, the crisis is being exacerbated, unnecessarily in the opinion of many economists. Those thinkers believe that with less corn being available to the world markets (the U.S. is the world’s largest producer), then food commodity prices will spike in countries where the citizens can least afford them to. The result? Social chaos on the order of the Arab Spring last year, in the view of some. If rising corn prices in some of these foreign markets rises by 60%, as some predict, those pessimists could be right.

Despite calls for more corn for humans and less for fuel production, it is unlikely that politicians will alter what was a major coup for Midwestern farmers, especially as many of them face re-election. It’s the old question of sacrificing a bit in America for the good of the world, or keeping the rising food prices on our own plates as cheap as possible and letting the rest of the world figure out how to do it in their countries. Those other nations will need to be quite creative again in 2012, because droughts in other parts of the world last summer already drove food prices to record levels. The U.S. drought only augments this problem.

Did you Know?

Corn is actually found in many products other than on the cob, in cans and in ethanol. Corn as a food commodity is used in the production of about ¾ of the products found in stores. It is used to sweeten many of the foods that we love, used in the manufacture of some types of clothing, included in the lotions we use to soften our skin and in some of the medicines we take to feel better, among other items. Many of these items will rise in price, but not immediately. Likewise, the rising food prices will not spike as quickly or as much as some people are claiming.

The same cannot be said for items like certain plastics that draw heavily on corn as they are made. Other products that will rise significantly in price either this year or next include corn syrup and corn starch. Estimates of the rise in overall food prices vary from 1-5%, which could draw scant notice from you or alter your entire budget, depending on the percentage you spend on food each month.

One research economist with the U.S. Department of Agriculture says that a 50% increase in rising corn prices translates to shopping bills rising by 1%. Thus far in 2012, corn has risen 45% in price, although that could go up as the full effect of the drought is realized when all harvests are in.

The slight bump up in price also includes items like the fuel you use to drive to the store (gas prices have increased slightly this summer), the price of beef that is corn-fed, and other ancillary effects. Thus, beef is expected to rise 4-5%, eggs 1-2% (chickens eat corn, too), and a 2-3% increase is foreseen for dairy products. Those jumps should show up in the next month or two as dairy and eggs are hit first as products of corn-eaters, rather than the corn-eaters themselves.

As cattle and chickens that feed off corn are slaughtered and processed, another wave of an increased rising food prices will hit American shoppers later in the fall. Whether such multi-spikes will more adversely affect citizens in countries that spend a much higher portion of their income on food remains to be seen.

 

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