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Is The US Food Drought As Bad As It Appears?

Corn prices in the US have shot up around 20% in the last 2 months due to a drought in the US mid-west. The prices I am referring to are the corn futures prices, and these increases have likely not reached the final products in the grocery store as of yet. Should you be concerned? The last time corn prices went up this high was back in 2008, when oil prices were well over $100 per barrel, and food prices were much higher than in recent times. (1) (2) (4)

The typical ramifications are as follows: since corn is used in many packaged foods in the form of syrup or filler, the prices of many food items will also go up. Corn is also used to feed livestock, so meat prices will likely also rise. Lastly, corn is used in biofuel in the US, so fuel prices may also go up. What is interesting is that corn can be used for corn and fuel - but how the use will be allocated is anyone's guess. (3) Since every choice has consequences, if corn is used only for food, there will be one set of effects, and if corn is used more so for fuel, there will be a different set of reactions.

Since the cause of these corn shortages is drought, you would assume that other food crops are also experiencing shortages. While this makes sense when looking at the US, the food supply is global, and the price paid for crops largely depends on the timing of the crop harvests around the world. There may in fact be a short term spike in food prices, only to be followed by an equally dramatic fall in food prices, depending on what happens with crops in the rest of the world. (1)

If you look at how politicians are reacting, the situation does seem dire. (4)(5) If we do get a repeat of the 2008 situation, there may be a lot of short term fear and volatility in the market place for many goods. As it stands now, a lot of the concern being perpetuated is from the possibility of losses for wheat crops in Eastern Europe and crops in India. (5) Higher food prices will lead to less money available for people to spend on everything else. Food shortages also can lead to civil unrest, and ramifications resulting from that. However, the way the governments of the world handle the situation will determine the outcome more than the situation itself. (6)(7)(8)

Is the food situation as bad as it seems? Possibly, but it is still too early to tell. Whatever happens is in the hands of the collective, so choices should be considered wisely.

Sources:

1) http://www.bloomberg.com/news/2012-08-23/global-corn-output-forecast-lowered-to-838-million-tons-by-igc.html

2) http://www.theglobeandmail.com/globe-investor/markets/indexes/chart/?q=OILC-I

3) http://www.bloomberg.com/news/2012-08-23/ethanol-stays-in-gasoline-even-if-mandate-ends-energy-markets.html

4) http://www.chinapost.com.tw/business/americas/2012/08/15/350955/p2/World-powers.htm

5) http://www.telegraph.co.uk/finance/commodities/9471914/US-and-France-ready-to-act-over-rising-food-prices.html

6) http://en.wikipedia.org/wiki/2007%E2%80%932008_world_food_price_crisis

7) http://www.ibtimes.co.uk/articles/375434/20120820/uk-food-prices-commodities-un-hsbc-world.htm

8) http://www.aljazeera.com/indepth/features/2012/08/20128218556871733.html

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.