Breakout

Fighting the Food Crisis: Pray For Rain, Plant More Crops

Breakout

If the current rise in agricultural commodity prices were a Hollywood movie, "Drought" would clearly be the star of the film. After all, it has been 50 years since parts of the Midwest and great plains have seen so little rain. But according to John Taylor, an executive in the national Farm & Ranch division of U.S. Trust, for all its headline grabbing ability and huge price spikes in the so-called "row crops", the drought has simply amplified an existing issue.

"We are in a tough place right now for food," Taylor says about fears of an impending spike in prices. "But it's not just because of the drought."

As he explains in the attached video, an expected 15-30% hit on the corn harvest has been magnified. The 30, 40, and 50% price increase we have respectively seen in corn, soybean and wheat futures "points out how close we are on the world situation with supply and demand."

When it comes to the supply of grains in an increasingly affluent and hungry world, Taylor says we are "pretty much in equilibrium with demand."

Despite those historic price hikes and widespread worries, spiraling food prices - like all forms of inflation - have yet to materialize to any great degree. In fact, Taylor points out that the crop-to-shop ratio is not a 1-to-1 correlation.

"Corn going up 30% won't necessitate your food costs going up 30%," he says, adding that the USDA typically looks at about a 15-18% throughput of cost increases at the consumer level.

The Federal Reserve Bank of Kansas City recently offered a similar warning, even pointing out that meat prices may actually decline in the short-term as farmers bring herds to market sooner than usual to lessen the impact of high feed costs. But the message is clear, rising grain prices have rippling effects felt in a wide variety of items, including dairy, meat and even farm equipment, seeds and fertilizer.

Even ethanol's role in corn prices has been the focus of recent debate, as lawmakers and other parties outside the Corn Belt States are asking the government to suspend the mandate which requires the corn-based additive to be mixed into gasoline.

In the meantime, this son of the Texas cotton country has no doubt about the long-term trend for global agriculture and consumption, fueled by steadily rising demand from emerging markets, and says meeting that demand will be every bit as challenging as drought to price stability.

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