Friday, July 20, 2012

A Year Getting Worse II

The US drought is starting to raise eyebrows in the business world. So we can expect our politicians to start noticing soon. That usually means that its going to cost the taxpayer for some ad hoc design program that's intended to be a temporary measure, but has a good chance of becoming a permanent feature distorting markets across the globe. The beginnings of this are in place as the US has declared 1,297 counties in 29 states “disaster areas.” The USDA has cut its corn production forecast by 1.8 billion bushels and lowered yield expectations to 146 b/a from 166 b/a back in June of this year. Corn futures have hit an all time high of $8US a bushel, and as the primary crop in the US is industrial corn, that makes a heck of a difference (all figures current to 19 July/12). So what does this mean for you and I, sitting here in Canada, wondering what to do next? Well, it means some of our industrial farmers will be doing better this year. But with Canada's integration with global markets, it does not mean that Canadians will see any benefit. We will not be seeing any drop or even stability in the prices we pay in the supermarket. About 40% of North American corn production is used for animal feed (regardless of whether or not its good for the animals involved) so we can expect to see a hike in meat prices come through the industrial food system. When? That's a trickier story. If markets are efficient and honest, meat prices should begin to rise over the next six to twelve months. This would mean producers looking at older, cheaper supplies they have in stock and calculating when they will run out and newer, more pricey supplies begin to be used. What is far more likely—as the oil industry has shown us time and time again—is that the old stock will become re-valued at the new international price, and prices will rise immediately, in order to maximize profits. There is actually wiggle room available: about 40% of corn grown in NA is designated for biofuel production. With dramatically increased feed-stock prices, corn-derived fuel will quickly become uneconomic to produce and sell (unless, of course, oil heads well north of $120/bbl in the very near future). Reduced demand from biofuel manufacturers would free up stocks to go for animal feed, and help keep a check on the price rise. The problem, of course, is the ubiquity of corn in the food system. If you're shopping the produce aisles, you might be in reasonable shape. But if you shop the inner aisles you'll find corn or corn-derived products in pretty much everything. For example, the citric acid used as a preservative in tomato sauce: corn-derived. HFCS (high-fructose corn syrup), of course. But also margarine, candies, ketchup (and catsup), peanut butter, and mayonnaise. (And a lot of non-food products like paint, printing inks, and photographic films). But this is going to be the new normal. If not drought, floods. If not floods, tornadoes. Or other extreme weather events. North Americans have had artificially low food prices for decades, and that period is about to come to a close as a result of global climate change. Recent projections have put temperature rise at 8-10 degrees over the rest of the century. This means that all of us are going to be to suffering for a short time, those of us under 40 are really going to notice the changes, and those under twenty might not make it.

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