Corn is making sure food costs continue to creep back into the centre of economic policy worries, thanks to those floods in the US Midwest and worried commodity markets.
Corn is higher and now news of a fall in the estimated size of the 2008-09 Australian wheat crop will put upward pressure on prices (see below).
Food and energy costs jumped in May, pushing the US producer Price Index higher.
The US Labor Department said the Producer Price Index, which measures the costs of goods before they reach store shelves, jumped 1.4% last month; up from a modest 0.2% rise in April and was the biggest increase since last November.
Stripping out volatile energy and food prices the "core" rate of inflation rose just 0.2% in May, half April’s 0.4% increase and an indication that the near recessed state of the US economy is keeping a lid on prices.
The headline PPI of 1.4% was higher than the 1% increase forecast in the market.rise many economists were forecasting.
Energy prices jumped 4.9% in May, also the biggest rise since November while food prices also rose sharply, up 0.8%, after being flat in April. Food rpices were up 6.5% in the year.
That will obviously change with the nine days of record futures prices for corn this month, plus higher prices for wheat, sugar, soybeans and cattle, which will continue to push up food costs in coming months as well.
Meanwhile, a report from the Federal Reserve showed that US industrial production unexpectedly dropped in May. Output at US factories, mines and utilities fell 0.2% in May, following a 0.7% decline in April.
Economists had forecast a rise of 0.1%, meaning that the US economy is not as strong as retail sales figures had suggested.
And, the US Commerce Department reported that the number of new housing projects started in May fell by 3.3% as builders pulled back further given the market’s deep slump. New house permits also fell and the new starts figure is the lowest for 17 years.
And, the US current account deficit increased to $US176.4 billion in the first quarter, up from $US167.2 billion in the final quarter of last year.The culprit: the sharp rise in oil prices which boosted imports and offset the strong rise in exports.
But the problems withe corn, soybean and wheat harvests add up to more food inflation for not just US consumers of the food industry, feed lotting and ethanol industries, but also the dozens of countries that buy US grain, especially Japan which is the largest single buyer of US corn.
The United States exports 54% of the world’s corn, 36% of soybeans and 23% of wheat according to figures compiled from US Government data.
With corn dragging soybeans higher and wheat edging up, there’s the growing possibility that the surge in corn prices will effectively export food cost inflation to large swathes of the world economy in coming months.
Foreign buyers are already scrambling on the Chicago Board Of Trade to try and secure enough corn from the new harvest from December onwards. Analysts reckon corn could rise $US1 to $US2 a bushell (i.e. reaching close to $US10 a bushell) later in the year if the damage suspected to the corn crop in and around Iowa is as bad as feared, and there’s problems with the soybean and wheat harvests from continuing poor weather in the Midwest.
Estimates now show up to 3 million acres of corn under water and probably 2 million didn’t get planted. That 5 million acres could result in the size of the crop falling by some 700 million bushells, according to forecasts being mentioned in trade media in the US.
That means the carryover stocks from the recent harvest to the new year will be chewed up meeting the shortfall in supply.
On Monday, the price of corn for delivery in July before next year’s harvest jumped to a record $US8.07 a bushel before retreating to close at $US7.87, the eighth consecutive day of record prices.
Monday, the far December corn contract, which is after the harvest, hit a high of $US7.91 before finishing unchanged around $US7.63. Yesterday this contract rose 11 cents to close at $US7.76, a high.
Soybeans for July delivery neared the record of $US15.96 before closing at $US15.34. They finished at $US15.53. The all time high is $US15.86 a bushell.Wheat and sugar also rose.
It’s now very apparent that after oil, food costs are a big concern in many economies and the fallout from the US floods stands to intensify those pressures, possibly to a point where they overtake oil later in the year.
US cattle futures though were hit by the strong rise in corn (and soybeans) and they jumped to a 22 year high in Chicago.
European food-price inflation accelerated to 6.4% in May from 6% in April, or nearly twice the overall level of consumer price inflation of 3.7%. In the US food price inflation rose 5.1% compared to the CPI for May of 4.2% annual rate in the year to May.
With those sorts of pressures already in official; inflation figures, its no wonder that the flood-driven surge in corn price sin the US is starting to worry more and more people around the world.
Corn is of course the main ingredient in cattle feed, cattle futures are up 18% since the end of March on speculation mounting losses will force feedlot owners to shrink herds and sell more animals at lighter weights.
US analysts say some of the biggest impact might be seen in the cost of meat and dairy products in coming month, since nearly half the nation’s corn crop is used for animal feed.
Corn is also used in a wide variety of other foods: high fructose corn syrup is a sweetener used in soft drinks (as a ‘cheaper a
