1 Great Reason to Freak Out About Skyrocketing Corn Prices (and 3 Reasons to Calm Down)

By Derek Thompson

Corn futures are setting daily records thanks to America's miserably hot weather. Time to panic?

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Reuters

Spectacularly hot weather across the Midwest has led to a historic drought, sending prices of crops like corn and soy up to all-time highs. This has inspired quite a lot of screaming across the business press, some for good reasons, some for bad.

Here's one good reason. Food prices were behind the protests that swept the Middle East in 2011, leading to a disruption in oil supply that contributed to the United States' near recession last summer. In 2011, when the FAO food price index broke its all-time high, protests swept the Middle East, where nourishment commands up to 40 percent of the typical family's budget. The Arab Spring was not, strictly speaking, a revolution about food. But the spiraling of food prices contribution to the dissatisfaction and sense of helplessness that inspired the revolutions. I'd hesitate to draw too clear a line of causation from corn price spikes->protests->oil price spikes->global economic disruption, but the overall message is clear: Instability breeds instability, and corn futures are about more than the price of your burger.

But there are three big pieces of good news -- at least for now. First, the United Nations agriculture agency has held off announcing a "food crisis" because it does not see "any production or supply problems with rice, [which] is very important for food security of millions of people around the world."

Second, the FAO food price index is still below its 2011 high. The cereals and dairy index are both far off their 2008 and 2011 peaks. Now this could change fast if corn prices continue to spiral. In fact, corn prices have a way of getting into lots of other food prices. Wheat and soy prices spike when corn prices rise, since their land is replaced by corn "High corn prices cause higher meat, dairy, wheat and soy prices for consumers," the New York Times has explained. Still, there a bit of room before we hit all-time crisis territory.

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Finally, American consumers should take heart in the fact that they won't see roller-coaster corn futures show up as dramatically in their grocery stores. There are two reasons for this. First, the weak position of the U.S. consumer has forced grocery stores to offer heavy discounts to keep shoppers flocking. Second, Americans eat more processed stuff -- like potato chips and hot dogs -- whose price is more determined more by marketing and processing than crude prices.

Here's a graph I posted last year from Prof. Mark Perry showing the last 10 years in food prices. The blue line reflects the wild prices the business press is writing about today and the red line reflects the considerably less wild price you pay at the store.


This article available online at:

http://www.theatlantic.com/business/archive/2012/07/1-great-reason-to-freak-out-about-skyrocketing-corn-prices-and-3-reasons-to-calm-down/260117/