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The Future of Food Prices: Corn

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While people in rich countries will moan about higher prices, inhabitants of poorer countries might face shortages and riots.

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Want to know why corn prices are near an all-time high? Blame it on the weather. The meager 2010 US corn harvest came after heavy rains damaged crops in key Corn Belt states. Prices are now at more than $7 per bushel, double the price of last June.

Meanwhile, the overall supply of corn is the lowest since 1963. Crop acreage shrunk to under 750 million bushels this year, compared to 1 billion bushels in 2009.

The US is the world's biggest corn producer, so the most recent crop "provided a supply shock to the corn market," commodities analyst Shawn Hackett tells Minyanville. "The US and China won't have another crop until next fall. Only Argentina (the world's third-largest corn producer) can provide corn right now."

"The market has to take prices higher to find out how high we have to go to hurt demand, so that we can buy time and hopefully get to a better crop," Hackett says.

US corn exports also went up 7% last year, thanks to Russia and China. After massive droughts, Russia, the world's fourth-biggest wheat exporter, stop exporting wheat . This boosted global demand for feed corn. China, the world's second-biggest corn producer, gave up a longstanding policy of not importing corn last year, further denting the US supply. Government projections now say Chinese imports will go up nine-fold.

Then there's ethanol. American ethanol refineries' output went up 21% in 2010. With $6 billion in annual subsidies and 35 million acres of dedicated farmland-twice the corn we export for food. American fuel corn is booming.

Ethanol production "is not why the bull market took place," says Hackett, "but it is a reason we're having trouble with corn acreage right now. It's forced farmers to plant more and more acreage to cover the extra demand from ethanol. We are almost maxed out in the ground that we can plant." He adds: "Had we had a good crop last year, it would have been alright."

Speculators and hedge funds are betting on increased prices, but Hackett says that during the coming year, "prices depend on whether Mother Nature cooperates or not. If we have normal weather this summer in China and the United States, and we have good yields, the prices will go down. If we have bad weather like we had last year, prices will go a lot higher."

Corn is a key food source for cattle, pigs and chicken. When corn prices go up, meat and dairy prices rise. Soy and wheat prices increase, too, since farmers use them as animal feed when there isn't enough corn . Cereal prices will also go up if corn rises high enough.

Higher corn prices are good news for companies that supply to farmers. Fertilizer companies like CF Industries Holdings (CF), seed manufacturers Archer Daniels Midland (ADM), Syngenta (SYT) and Monsanto (MON), and farm equipment makers like Deere (DE) will win from the increased production that will come from higher prices.

Food makers will be hit harder. Hormel (HRL) and Corn Products International (CPO) are being strategic about where they can pass on price increases to consumers. McDonald's (MCD) and Kraft (KFT) have successfully raised prices; Yum Brands (YUM) is talking about doing the same. So far, price increases are mild enough that consumers are still buying their favorite brands. But if prices rise too much, shoppers might defect.

While people in rich countries will moan about higher prices, inhabitants of poorer countries might face shortages and riots. Thais, for example, spend 26% of their income on food; Tanzanians spend 71%. (Americans spend a paltry 7%.) If corn skyrockets, food insecurity in many parts of the world won't be far behind.
No positions in stocks mentioned.

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