Corn prices are up more than 50 percent since early June and this season’s yield will be the lowest in 17 years. More than 60 percent of the U.S. is experiencing drought conditions, which has devastated the nation’s crop. According to CLS Portfolio Manager Matt Santini, we expect to see widespread food price inflation as a result. This is because corn is the preferred feed for poultry and cattle.
Mr. Santini also points out that a long-term impact will be felt in the price of beef. Cattle farmers are less “liquid” than pork and poultry farmers because of the time it takes to breed and raise cattle versus chicken and pigs. Exogenous shocks ripple through beef and dairy farmers for much longer periods. They can’t readily pare back their inventory to adjust for feed prices.
Another issue at hand is the effect of the drought on ethanol production. A large portion of corn harvested in the U.S. goes to the production of ethanol for gasoline. More expensive corn means more expensive ethanol is being felt at the pump. Mr. Santini explains that the market has an amazing way of being efficient. At some point, opportunity cost takes over and the product is no longer desirable at such inflated prices.
More information about the drought and ethanol debate can be found here: http://www.nytimes.com/2012/08/17/business/energy-environment/ethanol-quota-debated-by-corn-farmers-and-meat-industry.html