Drought Fall Out
Jul 26, 2012
Here we go again – a short grain crop which means higher prices for wheat, corn, soy beans and on down the line. The fall out will be felt far and wide. The pain will not be shared equally.
The drought is going to seriously hurt some farmers, even though their crop prices are high. They just won’t have much to sell. Livestock producers will be crying too. They thought $5 corn was too expensive. How about $8 corn? We can expect some culling of livestock herds in the short run increasing the supply of meat and thus pushing down the price. But that will be short-lived. Pork, beef, and especially dairy prices will go up.
Now the question is – what kind of shock will the consumer experience? Some numbers from USDA might shed some light on this question.
1. A 50% increase in the price of corn could increase your grocery bill by 1%. That’s all. Out of that grocery cart of food, only 15% of the money you spent goes to the farmer. The rest goes for labor, packaging, transportation, and advertising. All foods are different. Cereal – 7% of cost goes to the farmer; but milk, 46% and pork, 34%.
Right now, USDA projects food prices to rise this year by about 3% -- not much more than the average over the years. Now, the drought could push this up to 4% or more next year, depending on the extent of crop loss. Beyond a food price increase, there will be other fall-out.
2. The volume of our exports will suffer because the high prices will discourage demand. Markets do work.
3. There will be a new ground swell of voices asking the government to lift the renewable fuels standard. They will be shouting – "We shouldn’t be making corn into fuel."
4. I think a better idea would be to release some of our Conservation Reserve acres for crop production. We have more than 30 million acres in the Conservation Reserve, and I would estimate that half of those acres could be safely farmed. 15 million acres could produce a lot of grain.
5. On the positive side, the critics of modern agriculture and genetic engineering are going to lose their case; because we need all the advanced technology to produce enough food.
It’s too soon to say how all of this will shake out. So – stay tuned.
In closing, I would encourage you to access my website which archives my radio commentaries dating back 10 years and will go back 20 years when complete. Check on what I said back then. Go to www.johnblockreports.com.