Could Food Prices Move Higher On Smaller Corn Crop?

I grew up in a couple of small farming communities in Iowa and Minnesota. When I was very young my father farmed on rented land and when we moved to town he worked for the local fertilizer plant and eventually managed a fertilizer sales operation. My grandparents, many relatives and friends were/are lifetime farmers with the primary crop in the area being corn. My father, well into his 70’s, still helps out a local farmer by driving a tractor and chisel plow to till his fields. So to get some information on the current corn crop, I thought I would get close to the source: I sent my parents an email.

From my parents in Minnesota the report is the corn crop is mostly planted, but the fields are much too wet for optimum growing. In Iowa, 50% of the counties are reporting flood problems and an uncle near Iowa City reports many of the farms in his area are not planted. More rain is still expected. See today’s weather radar from Des Moines below. News reports show similar rain effects in Wisconsin, Illinois and Indiana.

The states listed above are the #1 (Iowa), #2 (Illinois), #4 (Minnesota), #5 (Indiana) and #9 (Wisconsin) producers of corn in the U.S. They are also the homes for the majority of ethanol production plants. Right now, this anecdotal evidence points towards a much lower corn yield for 2008 than current forecasts.

What does this mean to investors? I see serious consequences for suppliers, processors and users of corn. Ethanol companies are the first that come to mind, but I have postulated that ethanol prices will match changes in corn prices to allow some level of profitability. The very hot fertilizer stocks may be in for some nasty surprises if farmers decide not to plant washed out fields and take government crop insurance. Fertilizer prices have risen by multiples with the rise of grain prices. I hate to guess what would happen to fertilizer prices of a significant portion of farmers do not buy any this year. For the next few months, until a better estimate on the actual corn crop is available, I would avoid any stock in the ag sector. No matter how high the grain prices get, a shortage of product will hurt many of these companies.

Posted in Categories: Commodities, Contributor, External Research, Stocks, USA.

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