One early sign of the drought-damaged corn crop’s effects on the food industry was the recent reduction from a year earlier of $1 billion in sales forecast by Tyson Foods for the year ending Sept. 30. While Tyson said demand for protein recently has been soft, it also placed some of the blame for weaker results on the skyrocketing price of feed, much of which typically would be corn or its byproducts.
Market analysts agreed that reduced yields and damaged ears of corn in this year’s crop will translate into higher costs for food businesses, ethanol users and consumers, with effects not fully known until well into the next calendar year.
Around 40% of this year’s corn crop had been slated for use in the production of ethanol in 2012-13, but manufacture of the biofuel may be curtailed by high corn prices. A number of Midwest ethanol plants closed temporarily in July because making the product was unprofitable.
Corn, the most ubiquitous field crop in the United States, has a huge influence on the whole agricultural sector of the economy. Declining corn inventories place upward pressure on soybean and wheat prices, hurt exports and affect the price of ethanol futures.
“When corn sneezes, other crops catch a cold,” said Bill Lapp, president of Advanced Economic Systems of Omaha.
The marketplace was prepared for a bumper corn crop — given the most corn planted since 1937 — before the worst drought in decades dashed those hopes. The Aug. 10 Crop Production report from the USDA will help give a clearer picture of how much damage the corn crop has sustained thus far (click here for article).
Paul Meyers, vice-president of Commodity Analysis at Foresight Commodity Services, predicted the USDA may eventually work its average corn yield estimate down below 120 bushels an acre, similar to some other private forecasts. Meyers said such yields would represent a 29% decline in the size of the crop compared with early 2012 forecasts.
The USDA has provided considerable information about how the drought’s effects were likely to percolate through the economy. Because of a smaller-than-expected corn crop, the USDA said it can make the general prediction that “we will see impacts within two months for beef, pork, poultry and dairy (especially fluid milk). The full effects of the increase in corn prices for packaged and processed foods (cereal, corn flour, etc.) will likely take 10-12 months to move through to retail food prices.”
The USDA has a formula for predicting changes in the rate of inflation caused by gains in prices at the commodity level: if the farm price of corn rises 50%, retail food prices rise by 0.5% to 1% as measured by the Consumer Price Index (CPI). The price of September corn futures from mid-June until early August advanced 55%, meeting the USDA’s criterion for a measurable increase in the CPI
Lapp presented a more extreme scenario than the USDA He predicted that the damage to the 2012 corn crop will translate into a food inflation rate of 4% to 5% in 2013. In his view, the dollar cost of the drought already was $30 billion, which accrued rapidly over the summer.
“This is a cost that somebody has to bear,” Lapp said. “Some price hikes are fairly quick and others take a while.”
He said high feed costs will have to be absorbed by producers, who will likely liquidate part of their cattle and swine herds and poultry populations. At the retail level, the drought’s effects will translate into narrower margins — and expected higher prices — for processed food and soft drink manufacturers among others.
Lapp offered his opinion that legislation that has effectively required 40% of the corn crop be used in making biofuels has made everything worse.
“The situation has been aided and abetted in a negative way by the biofuels mandates,” he said. “Shame on us for having mandated so much to corn ethanol” without creating contingencies for a bad crop year.
Meyers noted that this year’s corn crop won’t be an outright catastrophe for farmers because 85% of them have crop insurance, which should provide them enough money to stay in business but not necessarily be profitable this year. Livestock producers, he noted, are not so lucky and will be hurt the worst.
Lapp pointed out that users of corn in any form have wide variability in the ease with which they can pass higher costs on to consumers. In the case of a frozen meal product including some corn-fed protein such as chicken, the manufacturer may not easily raise prices without losing long-term market share. In Lapp’s view, most food manufacturers facing this dilemma will likely sacrifice margins, and profits will be seriously squeezed, at least in the short term.
Meyers said the reality of $8-a-bushel corn, instead of the $email@example.com corn expected at this year’s planting time, has already considerably slowed export shipments. He said recent estimates of 2011-12 U.S. corn exports of about 1.6 billion bushels now seem to be about 50 million bushels too high, which also may hurt corn producers’ bottom line.
One of the major sectors that may be hurt by higher prices is the sweetener industry. High-fructose corn syrup (HFCS) is the third-largest use for domestic corn, behind animal feed and ethanol, and price advances at the commodity level would have ramifications for American consumers, as well as export markets for HFCS, especially Mexico. Most soft drink manufacturers lock in their sweetener costs with year-long contracts that insulate them from many of the market’s gyrations. Meyers noted, however, that in July, year over year, net corn costs were up 16% and, if the main ingredient is high-fructose corn syrup, retail costs for 2013 may be up 20% or more, he said.