Good Dirt Gone Dry, Wilting Corn Crop As Food Costs Rally
Comment of the Day

July 17 2012

Commentary by David Fuller

Good Dirt Gone Dry, Wilting Corn Crop As Food Costs Rally

The sad picture of baked-dry corn stalks on an Illinois farm conveys the damage better than any words, but here is the opening for Bloomberg's latest drought report:
Tom Flora walked into one of his corn fields in Delphi, Indiana, last week to survey land that until last month he expected would yield a bigger-than-average harvest. Eight rows in, he declared the crop a total loss.

"I've never seen this," 63-year-old Flora said as he fingered the wilted brown leaves on a four-foot corn stalk that was half the normal height for this time of year and had cobs almost devoid of kernels. "This is good dirt here, but not this year. It's too dry. I doubt this will produce anything."

The worst Midwest drought since 1988 is baking farms fromArkansas to Ohio and threatening corn output that the U.S. said last week will be the second-largest ever. The price of the grain used in food for people and livestock is surging at a time when retail-meat costs already are near record highs. Global food prices are poised to rebound from a 21-month low in June because of weaker-than-expected supply in the U.S., the world's largest corn exporter, the United Nations said July 5.


Federal crop-insurance programs covered 265.7 million acres in 2011, and companies including Wells Fargo & Co. and Ace Ltd. paid out more than $10.8 billion last year, double the $4.25 billion in 2010, after drought on the Great Plains, Mississippi River floods and frosts in the South.

This year, insurers will see "the largest claim that they've probably ever had," said John Cory, the chief executive officer of Prairie Mills Products LLC, a grain processor in Rochester, Indiana.

Even with the drought, farmers are expected to boost corn output by 5 percent this year to 12.97 billion bushels, second only to the record in 2010, after planting the most acres since 1937, the USDA said July 11. The higher output will help boost inventories before next year's harvest by 31 percent from a 16- year low on Sept. 1 of 903 million bushels, the USDA said.

Rising feed costs are reducing livestock supplies. Beef production will drop 2.4 percent to 24.656 billion pounds next year, the lowest since 1993, and the U.S. cattle herd on Jan. 1 was the smallest since 1952, USDA data show. The agency cut its forecast for poultry output on July 12 by 1.1 percent from its June estimate, to 43.07 billion pounds.


"It's a bigger picture than: Woe is the farmer because he has a drought," said Wes Stockdale, whose family has been farming in Indiana for 150 years. "Soon, it's going to be: Woe is the consumer. There'll be food on the shelves, but it's going to cost more."

Retail ground-beef in the U.S. averaged $3.016 a pound in March, the highest since at least 1984, according to the Bureau of Labor Statistics. Grocers sold whole chickens at a record $1.401 a pound on average in April, and bone-in breasts rose 12 percent this year, government data show. The Iowa Corn Growers Association estimates one bushel of the grain converts to 5.6 pounds of retail beef.

An index of 55 food items tracked by the UN's Rome-based FAO may advance through to September or October as the grain rally boosts prices for oilseeds and cereal products,Abdolreza Abbassian, an FAO economist, said July 5. The gauge fell 15 percent since reaching a record in February 2011.

Sanderson Farms, based in Laurel, Mississippi, told analysts during a presentation last month that it used 22.1 million bushels of corn in the three months through April 30.

While the company is using mostly cheaper inventories to feed its flocks now, costs probably will start rising in September, during its fiscal fourth quarter, when Sanderson plans to expand output, Chief Financial Officer Mike Cockrell said in a telephone interview yesterday.

"Over time, the high price of grain leads to the higher price of chicken," Cockrell said. "The industry has to have a margin and be profitable, so it will adjust production. When we get to the fall and we're facing higher grain costs, chicken prices will have to move accordingly."

David Fuller's view No one likes to read this but it is important to understand the full ramifications of this drought, which has yet to end.

It is certainly tough on farmers who were expecting record yields only five weeks ago. They will suffer but in the US, at least, federal crop insurance programmes will prevent the dust bowl bankruptcies and farm repossessions that John Steinbeck wrote about in his 1939 classic: The Grapes of Wrath.

Restaurant chains will face higher costs, but as Eoin pointed out in his extensive review yesterday, less so for the multinational companies such as McDonald's and Yum Brands which are able to source produce locally in the many different countries where they operate.

It is households which will be most affected in the months and possibly years ahead as prices for most everyday foods, from bakery products to soups and especially meat and chicken increase.

With bond yields at record lows in many OECD countries and wages largely stagnant, we often hear that "there is no inflation." Well, consumers have already experienced food price inflation in recent years and are certain to experience higher grocery prices in future. There will be some respite where successful crops are sourced locally, but unfortunately, adverse weather and increased demand are only half of the story. Our governments continue to debase our fiat currencies as never before.

Inflation is insidious because it usually occurs incrementally and is sometimes disguised by food retailers who reduce the weight of items provided but not the price. Inflation also compounds because the 10% price increase you may be paying today is a bigger cash outlay than a 10% price increase a year or two ago. To see the long-term consequences of this compounding look at these prices for three US grains currently in the news recently in both nominal terms and also adjusted for CPI inflation since 1962: corn (nominal & inflation adjusted), soybeans (N & I-A) wheat (N & I-A). And remember, many of us maintain that CPI is understated.

Old timers corner - For further insight regarding this loss of purchasing power, younger readers should ask any older relatives or friends about prices during their youth. I can still remember paying a dime for a cop of coffee in the early 1960s and that included unlimited refills at no extra charge. The table or counter seat and conversation were thrown in for free. This morning I spent £2.50 for my takeaway latte.

Here are some other articles on the drought which may be of interest:

From The Sunday Times: Corn crisis highlights the end of cheap food. Note also Jeremy Grantham's comments on food prices in this article, his personal investments and the outlook for fertilisers (see also Eoin's comments below).

As an agricultural commodity powerhouse, Cargill will be a very interesting share if it is ever publicly floated.

Bloomberg: Soybean Area In India To Climb As Record Prices Boost Sowing.

Agriculture production in India remains woefully backward. However, with the right governance, reform and infrastructure, India could become one of the world's biggest agricultural producers.

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