Corn Inflation and the Specter of Unintended Consequences

This morning the U.S. Department of Agriculture issues its spring-plantings report. This will provide a window into the planting plans of the nation’s farmers. The major choices here, given the concurrent growing seasons, are corn and soybeans. The major factor, this year at least, is cost.

Producing high bushel per acre numbers when growing corn requires more fertilizer, also known as Anhydrous, than growing soybeans. For the City Mouses among us that might not mean much but the Country Mice know that NH-3 is one of the key factors in the cost per acre of things grown (you still have to run the tractor and harvester over the same ground regardless of what you plant) and hence is a major contributor/detractor of profit margins.

With things as tight as they are all over these days the farmers are going to be keeping a watchful eye on costs. The other side of coin, however, is what they can get for what they’ve grown once they’ve grown it. Soybeans traded as high as $9.1475 a bushel (basis December) last week up 10.5% recently but have been trounced by Corn’s 14% gain moving from $3.0825 on March 2nd to $4.3475 last week.

The early estimates for today’s report are showing that farmers will probably increase the acreage devoted to soybeans by about 3.5MM and reduce corn’s acreage by about 1.5MM.

This might be seen by some as the simple forces of supply and demand at work but even with the demand for gasoline down the federally mandated amount of ethanol that needs to be produced is higher for 2009 than it was in 2008 therefore taking more of what ever corn is produced off the market. (We will leave alone for the moment the disaster that the whole ethanol initiative has been in the United States.)

The point in bringing this up this morning is inflation. “Beans”, as they are affectionately called by those who grow them, might be cheaper to put in the ground but corn is what is used by the food industry. Lower acreage numbers and a higher ethanol requirement will push prices for the corn that remains up which will force the Kelloggs (K) and General Mills (GIS) of the world to pass through the cost increases or suffer lower margins.

The rumbling surrounding inflation due to the amount of money the Fed is pumping into the system is already growing. The counter to this, some say, is that the length and depth of the recession is more likely to cause deflation. That debate will only be decided in hindsight.

It does seem logical that lower supply equal to higher demand could put some upward pressure on corn prices. How that ripples through the economy raises, once again, the specter of “unintended consequences”.

Comments

[Moon Kil Woong:]

Nothing pisses off a population more than rising food prices in a down economy. I guess being able to eat is a sticking point for those not making millions running banks into the ground.

Fortunately, alternative energy sources based on algae, sugar, etc. are being developed. Corn based ethanol is a scare resource and not very economically efficient. I believe it is possible to have a viable economically efficient alternative to gas in a few years without needing government subsidies, etc.

The less we rely on the mideast the better off we are. Then I suppose they will regret not selling as much as they could when the world actually wanted it so badly. Cartels have a way of naturally obsolescing themselves due to substitution.

Apr 01 02:49 AM

[thannagan:]

If bean ac are up 3.5M and corn ac down 1.5M, where are the net 2M more acres coming from?

Apr 01 11:22 AM

[bones33:]

The price of NH3 is plunging due to the russians dropping prices by 30 percent.So this might affect your thesis a little.

Apr 01 11:13 PM