While the latest jump in crop prices is unlikely to cause overall inflation to run rampant, it will impart some upward pressure.
The drought and heat wave will restrain GDP growth due to the drop in farm production and impact on the output of related suppliers. Illinois, Kansas, Indiana, and Wisconsin - among the top ten U.S. farming states as measured by value of production - would be particularly affected.
- USDA slashed its forecasts of corn production and yields by a record 12%
- Indiana, Illinois, Missouri, and southern Wisconsin are most affected by drought
- Food producers may have to absorb some of the higher costs
Corn prices have soared since late May as drought conditions in the U.S. Midwest fuelled expectations of lower yields and tighter supplies according to a report issued by BMO Capital Markets.
The production shortfall is making already-stretched supplies even tighter, said Sam Miller, Managing Director and Group Head, Agriculture, BMO Harris Bank. The states most heavily affected by the drought are Indiana, followed by Illinois, Missouri, and southern Wisconsin. If sustained, the surge in corn prices would raise production costs for many agricultural and food enterprises.
According to Kenrick Jordan, Senior Economist for BMO, Corn prices had begun to rise sharply well before the latest drought and heat wave, climbing from US$3.75/bu in the summer of 2010 to an average of $7.15 during the middle two quarters of 2011.
Unable to fully shift cost increases to consumers and given the widespread application of corn and corn-derived products in food processing, many food companies are likely to face downward pressure on their margins. If margin pressure persists, we could see some consolidation in livestock, other agri-food, and biofuel.
The farm sector has had strong financial performance over the past several years, which will help it to withstand the drought.
Economist Shayne Heffernan takes a look at Corn use today
The most historically American crop is also the most versatile. Corn (Zea mays) is essentially grass that has been cultivated and bred to the size it is today. Originally cultivated in Mexico 7,000 years ago, corn is now America's biggest crop and a staple of the global food supply. Corn is used in many ways other than feasting on at the dinner table or popping for movie snacks, some you might not even realize.
Cornmeal is made by grinding whole corn. The coarsest meal is called grits, which is used to make corn flakes. A somewhat finer grade is sold in stores to make cornbread, deep-fry batter, and hushpuppies. Even more finely ground meal is called corn cones, and is used for baking and for dusting pizza dough. The finest grade of ground corn is corn flour, used for pancakes, donuts, breading, and baby food. Another type of cornmeal is called masa flour, which is made by treating corn with lime (alkalai). This releases the corn's niacin into a form the body can use. The resulting whole corn is called hominy, and ground treated corn is dried and powdered to make masa flour, which is then used to make tortillas and tamales.
When you get past corn as a whole food in itself, you get into the wet-mill process, which breaks down corn into its components, and here is where you get so many other corn products.
Corn steep liquor is a byproduct of the process of separating the various parts of corn (see the byproduct in this flowchart). It is the water used to soak the various components, and it is reused in several steps. Corn steep liquor contains acids, yeast, gluten, and plenty of nitrogen, and is partially fermented by the time it leaves the mill. It was discarded as waste until the 1940s, when scientists determined that corn steep liquor is the perfect medium in which to grow large quantities of penicillin.
Corn Starch is made from the endosperm of the corn, the part of the seed that exists to nourish the potential new plant. After the hull and germ are removed, the endosperm is ground up and the gluten is separated from the starch, leaving nothing but carbohydrate. Corn starch is used as a thickening agent for liquid food and an alternative to talc in body powder. It is mixed with sugar to make confectioners sugar and was once used to make clothing keep a nicely-pressed look. Corn starch is also the main ingredient in biodegradable plastic.
Corn syrup is made from corn starch. Starch is a carbohydrate, a molecular chain of sugars. Enzymes are added to the starch to break the chains into sugars, mainly glucose. Further processing can change the sugars into high-fructose corn syrup. HFCS is used to sweeten a variety of products, most notably soft drinks. Corn syrup is much cheaper and sweeter than cane sugar. A number of studies have linked the use of HFCS to the rise in obesity. Whether this correlation (which does not prove causation) is due to any organic differences between HFCS and cane sugar or to the quantity consumed is still under debate. The Corn Refiner's Association has asked the FDA for permission to change the term used for high-fructose corn syrup to corn sugar.
People have made liquor from their crops for thousands of years, and in the western hemisphere that meant whiskey distilled from corn. During the settlement of the Appalachian Mountains by European immigrants, farmers found it much easier to transport their corn crop to distant markets when they distilled it first (and just as profitable, if not more so). Taxes imposed during the Civil War and later liquor prohibition laws split the corn whiskey industry into the legal distilling of Bourbon and the illegal distilling of moonshine, so called because it was produced at night to evade notice.
Distilled alcohol from grain is called ethanol. The word in modern usage usually refers to ethanol fuel or biofuel made by distilling corn. Regular gasoline-powered cars can run on gas blended with up to 10% ethanol. Corn is a renewable resource, so biofuels are seen as a replacement for fossil fuels. However, the growing use of corn for biofuel raises concerns about the diminishing availability of corn for food. Also, the production of biofuels uses as much -or more- energy than it produces.
Tea brewed from cornsilk is used as a remedy for urinary tract infections, as it has diuretic properties. The tea has been marketed to help everything from bedwetting to diabetes to cancer, but the medical community says there is insufficient evidence for such claims. Cornsilk is not harmful to most people, but there are some warnings for those with some health conditions or who are taking certain medications.
8. Corn Cobs
Corn cobs might seem like the throwaway part of corn, but have their uses -and more uses are discovered or developed all the time. Ground cobs are used for livestock feed. Traditional farm uses include animal bedding, toilet paper substitute, landfill, fuel, and to make corn cob jelly. Modern industrial products made from corn cobs include absorbents for oil and hazardous waste, insecticides, fertilizer, and grit for tumbling and blasting. Cobs, as well as corn stalks, are starting to be used to produce ethanol. And you can still make a pipe out of a corn cob.
Oil is produced by squeezing the germ of the corn. It is used as a food ingredient and for frying food in (most appropriately for popping popcorn). Margarine is often made from corn oil, although other oils are used as well. Corn oil is also used in many cosmetics, soaps, medicines, and other products.
Corn germ is a waste product of the separation of corn components. It is what's left of the plant germ after the oil has been pressed out, and is used for livestock feed. However, components of corn germ can be used to make industrial glue stronger. This reduces the amount of resin required in the glue formula, which should make the adhesive less expensive to produce.
Economist Shayne Heffernan of www.livetradingnews.com Market Outlook.
Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.
Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.Read the Terms of Service