Oil’s grabbing the headlines at the moment but food price inflation is sneaking up on us again for the second time this year.
The US will get a reminder of the strength of inflationary pressures tonight, our time, when the Consumer Price Index for May is released: it is expected to be around 0.6% for the month and around 4.5% for the year.
A large figure will trigger more concerns about inflation and interest rate rises (misguided fears on rates). But the surge in corn prices has the capacity to add to pressures in the next few months.
US corn prices are hitting new records, but oil’s surge (it rose again to finish over $US136 a barrel last night) has diverted attention from what’s happening in Chicago.
Wet weather and bad flooding in some Midwestern corn growing areas is driving the price higher, and estimates of this year’s crop lower, as the United States Department of Agriculture cuts its initial harvest estimate by 3.2%, just one month after issuing it. The USDA says US corn output will be 11.735 billion bushels this year, compared with the 12.125 billion bushels forecast last month and the 13.074 billion bushels harvested last year.
That means the food industry, exporters, growers and ethanol companies will be chasing less corn in the coming year than thought, which explains why the price has risen so quickly — around 27% in two weeks.
Corn rose to a record for a seventh day overnight as it closed at $US7.09 on the Chicago Board of Trade. Because corn is at the centre of the US grains complex in the huge Chicago markets, it tends to influence the prices of other grains and oilseeds. So wheat, soybeans and rice have also risen in the past week.
The United States Department of Agriculture said in its monthly World crop report for June that that American corn production will drop 10%, or 1.33 billion bushels, from last year and stocks may drop to a 13-year low before next year’s harvest.
Corn prices have risen as higher demand from China, the ethanol sector and the requirements for livestock feed in the US have collided. Prices have risen more than 80% over the past year. Wheat, rice and soybeans also reached records this year, causing riots, social unrest and getting international groups like the IMF and World Bank interested in the issue for the first time in years.
The surge in food costs has added to the price pressures coming from oil: together they have made a mockery of the way central banks exclude them from working out so-called ‘core’ inflation levels in an economy. Food and oil prices — rising and remaining at elevated levels — have rapidly become an ongoing cost problem.
After the big surge earlier in the year that was led firstly by wheat (because of drought in Australia for two years running and supply problems in a couple of other producers), then soybeans and corn, prices fell as confirmation of big changes to the US and global wheat and soybean crops. But those very high prices for wheat and soybeans saw some US farmers switch from corn to those two crops, meaning corn supplies would be lower.
Now they will be lower still, and even though stocks in the US are a touch higher, the fall in the harvest and growing demand threaten to push global stocks of the grain down to the level they were in 1995.
US traders say that even after the floods ease and ground dries out, corn yields will fall because plants in many growing areas will have missed the most vital part of the cycle after shooting.