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High Corn Prices Threaten Consumer Spending

August 9, 2012 By Young Research

Stockpiles of grains are dwindling across the globe as droughts take hold in the U.S., Europe and Asia. Bloomberg reports:

Combined inventories of corn, wheat, soybeans and rice will drop 1.8 percent to a four-year low before harvests in 2013, the U.S. Department of Agriculture estimates. Crops in the U.S., the biggest exporter, are in the worst condition since 1988, heat waves are battering European crops and India’s monsoon rainfall already is 20 percent below normal. The International Grains Council began July by forecasting record harvests. It ended with a prediction for a 2 percent drop in output.

Could continually high prices spark repeats of the “food riots” seen in 2008? You can see on the chart of corn prices below that they have surpassed the highs reached in 2008. But corn is used disproportionately as feed for livestock and for ethanol, meaning high prices will have a greater effect on wealthy consumers who ingest more protein.

The United States harvests about 40% of the world’s corn crop.  According to Bloomberg 40% of the U.S. corn crop was turned into ethanol in 2011. The government requires that 13.2 billion gallons of ethanol are produced in 2012.  Jim Abrams at AP writes “Livestock farmers and ranchers seeing their feed costs rise because of the worst drought in a quarter-century are demanding that the Environmental Protection Agency waive production requirements for corn-based ethanol.”

With competing markets vying for what little corn may be harvested in 2012, prices for products relying on the corn harvest, like meat and gasoline, will probably increase. The already stretched American consumer will face higher prices for protein and transportation, leaving fewer dollars for other consumption spending.

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