The drought hitting America has devastated corn crops. The US government has reduced estimates for corn production for the second month in a row. This is a direct effect of the record-setting heat wave that has blasted the corn-producing states this summer. Overall yield will be 13% below last year contributing to a price rise in corn and related products.
As the USA is the world’s largest exporter of corn, food prices worldwide should feel the impact. Corn has become a key ingredient in foodstuff as diverse as pizza to chewing gum. If you wanted to live a corn-free life you would need to avoid a long list of products and ingredients.
Corn is also key in the production of beef, pork and chicken. Those key sources of protein are also expected to increase in price due to the shortage of corn feed. This will be particularly problematic for China, which sees historic rises in corn prices directly linked to price rises for meat.
Previously, Société Générale noted that meat prices inflation in China appears to be quite correlated with the changes in global corn price. The chart below shows a longer time series of year-on-year changes of corn price and meat price inflation, according to ALSO SPRACH ANALYST
In Asia, a decrease in rice production is contributing to a projected 10% increase in cost for this staple. While the USA is a rice exporter, the reasons for the shortage in Asia are different. A poor monsoon season in India caused production to fall. Thailand has provided subsidies to farmers, making its rice crop too expensive to export.
The increase in global food prices comes at a poor time for most Asian nations. Across the region economies are performing poorly. National budgets are under strain with reduced revenue. Individuals are less able to weather large price increases for basic foodstuffs.
“You’re going to see the ripple of this go out for quite a distance,” said Rick Whitacre, a professor of agricultural economics at Illinois State University.
And while Whitacre is predicting ripples across the cost of numerous foodstuffs, the ripples are likely to spread further. In 2007-2008 an increase in food prices led to food riots in over 25 countries. Protesters then gathered to express frustration at double-digit increases in the cost of rice and wheat, yet their aggravations spilled over to other areas of discontent. This led to the collapse of the government of Haiti.
We are still not through the summer, and the harvests of corn and rice may still surprise some. Yet we can expect a year of increased food prices and public discontent. How and where this plays out is anyone’s guess. But it has leaders of Asian nations on alert as they seek to ensure the basics for their populations.