How will the bailout effect food prices?

Cartoon By Lisa Benson


On Friday President Bush signed the 700 billion dollar bailout bill, with hopes that the money would unfreeze credit markets and keep the country out of a deep recession. Although the bill, or the add-ons places to pass the bill do not have anything that directly helps the food industry, the Telegraph Herald explains how, if the bailout works, it could keep the food chain from facing disaster:

"Without credit, the whole system just locks up. In Iowa, farmers borrow money to plant their crops. Then they sell their crops to pay the loan down. If we don't have that first step, then nothing happens."

The passing of the bailout did not amount to much for the commodity markets at the end of the week. Corn closed at $4.54 per bushel, even after a surge earlier in the morning. December wheat rose to $6.40 a bushel, and November soybeans fell to $9.92 a bushel. While declining prices may seem hopeful, the Des Moines Register reports that the prices have now dropped to a point where farmers will barely be breaking even:

......speculators have lost their desire for corn and soybeans. The financial turmoil on Wall Street and in Congress this week caused speculative money to stay away.

Accordingly, corn prices have done a graceful dive from $8 per bushel to $6 per bushel by early September and then falling 16 percent last week to $4.55 per bushel for the December contract on the Chicago Board of Trade, the lowest price in 10 months. Iowa elevator cash prices dipped below $4 per bushel at several locations last week, and the state cash average was $4.12 per bushel.

Those numbers are ominously close to farmers' break-even costs, driven higher this year by rising prices for diesel, fertilizer and rents.

"If the price of corn dips to less than $4, you'll see farmers just put the corn in their bins and let it sit there until prices improve," said Urbandale commodity broker Tomm Pfitzenmaier of Summit Commodity Brokerage.

Farmers who don't want to sell their crops immediately can store their grain either in their bins — or at elevators. Either option involves extra costs to the farmer, either in the cost of the bin or the potential for moisture or disease damage, or the payments to the elevator.

To punctuate the costs on farmers in recent times, the USDA Chief Economist Joseph Glauber spoke to how biofuel is effecting food prices. At the Agricultural Markets and Food Price Inflation conference in Chicago on Thursday, Glauber stated that while biofuel is only having a 10% impact on food inflation at a consumer level, the effect of biofules on raw commodities is much larger. AgWeb.com reports:

“The impact (of bio fuels) on the raw commodities is pretty large - corn on the order of 30%, soybeans on the order of 40%,” Glauber said. “However, the impact on food prices varies quite a lot.”

Glauber noted that the price of products such as vegetable oil and high fructose corn syrup are much higher due to higher corn and soybean prices.

Further Reading:

MSNBC on how the economy is helping and hurting therestuaunt industry.
MarketWatch on the wrap up of commodity markets for the week of 10/3/08
CNN on will the bailout work?