Food Fight: Crop Failures Mean Higher Food Prices Worldwide

Last Updated Oct 12, 2010 11:19 AM EDT

The prices of grains, such as corn, wheat and barley, have already gone through the roof this year due to adverse weather in some of the main producing countries, and a closely-watched report from the U.S. Department of Agriculture has sent the markets even higher in the last few days. It means higher prices for food, of course, since corn, up 20 percent this year, is the basic raw material, but it's also disrupting the markets for beef, pork and chicken. In an economy that is based on consumer spending, and in a time where people are already economizing, we don't need higher food prices. And I'm still checking on this, but because the inventories will be so low, I figure there is probably not an opportunity for U.S. producers to take advantage of the higher prices by rushing more grain to the short world markets.

Source: USDA
Weather conditions have been all wrong for this year's harvest -- droughts and Brazil and Russia, and heavy rains in Canada and Europe. In the U.S., the summer was especially dry in many places. From the recent USDA report:

In the United States, lower-than-expected corn yields have sharply reduced crop prospects. In the EU, where barley accounts for 40 percent of coarse grain production, lower area and yields have reduced the crop by 15 percent to the smallest level in over 10 years.

Source: USDA
The pace of the commodities markets has quickened in the last few days, setting price records:
Corn soared the 45-cent maximum limit allowed by the Chicago Board of Trade today to $5.7325 a bushel, the highest price since September 2008, after the U.S. Department of Agriculture on Oct. 8 cut its harvest forecast for the second time in two months. The December corn futures contract was up 43.25 cents, or 8.2 percent, at $5.715 a bushel at 10:51 a.m. in London. Wheat, soybean, rice and oat futures also rose.
The tofu fans in the audience won't get off easy, as soybean production is also forecast to be off, by four percent.

Of course, the shortages and price increases don't stop with the grain, Bloomberg points out. We'll have to cut back on meat, or pay up for it:

U.S. per-capita beef supplies next year will be the lowest since 1952 and pork the smallest since 1976, industry researcher CattleFax said. Hog futures will rise 14 percent by July and cattle may gain 3.6 percent by April, according to a Bloomberg survey of analysts. Wendy's/Arby's Group Inc., the maker of the 1,360-calorie Baconator Triple burger, and CKE Restaurants Inc., owner of the Hardee's chain, have warned investors they are contending with higher commodity costs.
The wholesale price of U.S. pork bellies, used to make bacon, surged to a record $1.5725 a pound on Sept. 16, government data show. In August, retail bacon reached $4.353 a pound, the highest since at least 1980. Retail ground beef sold for $2.502 a pound, the most in a quarter century.
Here's a glimpse of the Baconator Triple, from the Wendy's web site -- I guess it's like an eclipse of the sun, so overwhelming you're not supposed to look at it directly.

Prices can adjust in under a year on grains, because farmers can plant more, and the weather can get back to normal, but it takes several years for the meat markets to adjust to these shorts of shocks, because of the long lead time in building up the herd. Cattlemen are still trying to adjust to sharp rises in grain prices in 2007 and 2008.

The higher food prices could be yet another setback for retail sales, in a period when people are already cutting back, and 41 million Americans are relying on food stamps (an average benefit of $130 a month). (Here's a post from about a month ago on food stamps.)

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