Two Sides of the Corn Story

MarketWatch published an article last Friday which highlights a controversial new report coming out of Canada: high corn prices over the summer were directly linked to speculation, not ethanol. While most critics were quick to blame ethanol for the high jump in corn prices, an independent company called Global Insight has issued a report stating that commodities speculation rather than ethanol production was the cause of the spike in corn prices.

MarketWatch goes on to point out that while the US corn rose to above $8.00 per bushel, Canadian corn prices stayed under $4.00:

Ethanol production in Canada is up, and yet the price of corn is now at a more moderate levels. Ethanol cannot now stand as the cause of food prices increases - the facts don't support it," said Gordon Quaiattini, President of the Canadian Renewable Fuels Association. "We have always maintained that record oil prices and speculators were to blame for the increase in the price of food this summer.

While most of America waits for the lower corn prices to translate into lower grocery prices, the drop in price per bushel does not mean things are getting easier for American farmers. USA Today reports:

Schnitkey says it will cost corn farmers in central Illinois about $4.02 on average next year to produce a bushel of corn. Fertilizer, seed, energy and land prices have risen sharply, though lower oil and diesel prices could ease the pain a bit.

David Kappelman, senior vice president of the Premier Community Bank in Marion, Wis., says farmers are holding off buying fertilizer for next year in hope that prices will come down. That may not happen, given that suppliers were forced to lock in inventories early. He expects the credit outlook to come into focus early next year as suppliers start pressing farmers for commitments.

"Agriculture is cyclical. We've had a pretty good run, and that run might be behind us," Kappelman says.

Speaking of that credit outlook, MSNBC has a report on the agricultural sector and the credit crunch:

Everyone from crop farmers to livestock producers will be paying more for money they borrow on top of production costs which have been climbing in the past few years.

"I would say that everybody's pretty cautiously concerned," said Don Langston, a longtime cotton producer in Texas, the nation's leading producer of the fluffy fiber and the nation's No. 2 agricultural state.

Agriculture economists say farmers will simply need to adjust, whether that means looking for operational efficiencies, selling assets to raise cash or purchasing crop insurance to make sure they can repay loans.

There is a bright spot in all this for meat eaters, economists said. An anticipated decline in demand from overseas means there should be plenty of beef, at reasonable prices, for U.S. consumers.

Has the credit crunch affected your business? Do you think farmers will just have to adjust to the new corn economy after years of high profits, or will the market even itself out again? Comment below and let us know your feelings.

Further Reading:

The Cattle Network on how consumers are willing to spend more money for premium meats.
The Cattle Network on livestock highlights.
The AP on Ag futures for Monday.

The Financial Crisis and the Food Industry

Cartoon by Steve Kelly

The Consumer Price Index for September was released last week. It contained data that most consumers and retailers already knew: prices are up and sales are flat. Specifics for the food industry included a .5% drop at eating and drinking places and a .5% drop at food stores. Food prices, however, rose .2% from August.

The economic crisis, centered on credit issues, has affected at least one major food producer. The Pilgrim's Pride Corporation says that it is nearing having to declare bankruptcy due to the tightening of credit lines. The Wall Street Journal reports:

Amid a near-frozen credit market, Pilgrim's Pride now finds itself grasping for a lifeline. A troupe of bankers is trying to restructure the company and refinance its debt -- something that might have been more feasible during the era of easy credit just two years ago. But, like many other companies hoping to refinance, Pilgrim's Pride is discovering that banks have gotten a lot tougher about lending. Compounding its difficulties, some suppliers are demanding new payment terms, such as payment on delivery or even in advance.

Suppliers and consumers are struggling alike with the current economy, and both are forced to make changes to stay afloat. Many restaurant chains will have to resort to raising prices and cutting back or restructuring value menu items. MSNBC has the story:

The decision to raise prices or change menus could have some harsh repercussions, especially because more diners are already eating at home to avoid pricey restaurant food. With the stock market dropping and consumers questioning whether their retirement savings will be available when the time comes, paying more for a meal out may be even harder to stomach. But for restaurateurs, there may not be much of a choice.

"This is the most challenging environment for restaurant operators regarding food price inflation on the wholesale level for almost 30 years," said Hudson Riehle, senior vice president of research at the National Restaurant Association.

The New York Times has a great article about spending habits of consumers in time of economic hardships:

DURING a recession, laxatives go up, because people are under tremendous stress, and holding themselves back,” said Mr. Shapiro, now chief executive of SAGE, a Chicago-based consulting firm. “During a boom, deodorant sales go up, because people are out dancing around. When people have less money, they buy more of the things that have less water in them, things that are not so perishable. Instead of lettuce and steak and fruit, it’s rice and beans and grain and pasta. Except this time the price of pasta’s so high that it’s beans and rice.

Do you feel like we are already in a recession? What are your plans to stay afloat until the economy has stabilized? Comment below.

Further Reading:

Newsleader.com on Families Grappling with Higher Food Costs
The Wall Street Journal on the Consumer Price Index
Seeking Alpha on The Relationship Between Food and Energy Prices

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?