The fall out continues from the U.S. Department of Agriculture’s shocking turnaround on the size of this year’s corn crop.
On Friday October 8 the USDA completely reversed its optimistic September 30 projection of corn production for the year and slashed its estimate of end of the year stocks. The agency lowered its projections for end of the year corn inventory to just 902 million bushels, a 19% drop from its September 30 estimate and a huge drop from the 2009-2010 end of the year inventory of 1.6708 billion bushels. (For more on the corn harvest and the USDA’s projections, see my post (https://jubakpicks.com/2010/10/12/whoops-usda-has-to-eat-its-optimistic-projections-from-september-30-on-corn-crop-and-sets-off-commodity-surge/ )
Not surprisingly corn prices are soaring. They rose another 8.5% on the Chicago Board of Trade on Monday, October 11.
But the effects of higher corn prices are still rippling out across the economy. Meat prices, for example, are up more than 15% this year to their highest level since the 1980s, but they’ve lagged the increase in corn prices. And they’re almost certain to head even higher.
That’s because going into the surge in corn prices, livestock farmers recorded some of the smallest herds in decades. The U.S. cattle herd in July, for example, was the smallest since 1973, and in September the number of breeding hogs was close to an all time low.
Higher corn prices traditionally discourage livestock farmers from expanding their herds since it would mean the certainty of paying higher prices for feed in the hope of recouping those costs on higher meat prices sometime in the future.
As a consequence, according to industry tracker CattleFax, U.S beef supplies will be the lowest since 1952 and pork supplies the smallest since 1976.
See why meat prices are almost certain to keep on climbing?
That’s not good news for consumers who are looking at soaring costs to put meat on the family dinner table.
It’s not good for the U.S. economy as a whole since it means that U.S. consumers will have less money to spend on other parts of their budget after paying their grocery bills. (Oddly enough, surging food prices won’t show up in the Fed’s preferred method for tracking consumer price inflation since the central bankers look at consumer prices excluding food and fuel.)
And it’s not good news for food and restaurants companies who are facing rising costs for raw materials.
But it is good news for farm incomes as higher prices for corn and other commodities push up revenues.
That’s good news for the stocks of Mosaic (MOS) and Agrium (AGU) in the fertilizer group, seed companies Monsanto (MON) and Syngenta (SYT), and farm equipment makers Deere (DE) and AGCO (AGCO).
How long could the trend toward higher meat prices last? It’s got a while to run. It can take as long as three years to breed a cow and then raise that calf to slaughter weight.
Full disclosure: I don’t own shares of any company mentioned in this post in my personal portfolio
The spike in commodity prices comes from a shift from a projection that showed plenty of grain n year end stocks to one that showed a really frightening low level of reserves. And if ou remember 2008 when that happens nations freak out and horde and that makes prices really pop.
We try to eat local meat and produce–just like to know where my food is coming from and I enjoy getting to know some of the people who grow it at the weekend farmers’ markets. But haven’t quite figured ouit what to do about winter in New York. We don’t grow a lot of stuff here in February.
The burger or bacon you put on your plate is likely at its most expensive since the 1980s, and it’s only going to get pricier.
Uk Debt
TLA and orline,
Do you people realize why corn and other grains are goingup? Its because the US and the world are not producing enough food for the world. With Picken’s plan it calls for no GMO’s, if we don’t use them, then we would produce LESS food. Also his argument of corn leads to obesity, maybe soceity can get off their butts and excercise adn quit eating fast food or fattening food. Did the gun kill the person or the person using the gun kill them, get real. Also I would hope you both eat grass fed cattle or you have no gripe. Personally I like my steak to be with taste.
That picture is complete nonsense. About 5% of the US lifestock grazes on grass. The rest— you guessed it — corn. Food Inc is a worthwhile watch for everyone.
Agree with TLA — the farm lobby and subsidies to the farmers to grow the wrong foods…it’s absolutely ludicrous.
Jim, in the future, i’d be nice to have some sort of analysis on where you think you went wrong with missing or being late to some of the trends. I am well aware that this is very inexact science where it’s impossible to predict trends with any sort of certainty or time them.
Why do we still need to subsidize the farm industry? So I can pay more for food for my family and fuel in my ethanol (gas) tank. No thanks to that scenario. Food for food and CNG for fuel. A switch to a Picken’s Plan option will save us money on food, lower the trade deficit, lower needed military expenses, employee more US citizens and give us cheaper fuel. Can I get a little support in Washington?
Just bought DE – after lot of misgivings of maybe buying at the top. However, invested in 1 by 2 put spread at the same time.
I think AGU has left the station. Maybe get some MOO instead.
I did not fallow this one well. Can someone explain what caused this corn price hike? USDA underestimated the production, so the price went to the roof. Is it?
Just wait till the USDA report in December, things will change
This is a case where the trend seems clear, but the relevant stocks (MOS, AGU, etc) have already lifted off the launchpad … 🙁