Higher corn prices may carry widespread implications

July 25, 2012
Institute of Food Technologists

Corn prices have soared since late May as drought conditions in the U.S. Midwest fueled expectations of lower yields and tighter supplies, according to a report issued by BMO Capital Markets.

“The production shortfall is making already-stretched supplies even tighter,” said Sam Miller, Managing Director and Group Head, Agriculture, BMO Harris Bank. “The states most heavily affected by the drought are Indiana, followed by Illinois, Missouri, and southern Wisconsin. If sustained, the surge in corn prices will raise production costs for many agricultural and food enterprises.”

While the latest jump in crop prices is unlikely to cause overall inflation to run rampant, it will impart some upward pressure. According to Kenrick Jordan, Senior Economist for BMO, “Corn prices had begun to rise sharply well before the latest drought and heat wave, climbing from $3.75/bushel in the summer of 2010 to an average of $7.15 during the middle two quarters of 2011.”

Unable to fully shift cost increases to consumers and given the widespread application of corn and corn-derived products in food processing, many food companies are likely to face downward pressure on their margins. If margin pressure persists, we could see some consolidation in livestock, other agri-food, and biofuel.

To assist farmers and livestock producers, U.S. Agriculture Secretary Tom Vilsack has announced new flexibility and assistance in the U.S. Dept. of Agriculture’s (USDA) major conservation programs. Vilsack also announced plans to encourage crop insurance companies to provide a short grace period for farmers on unpaid insurance premiums, as some farming families can be expected to struggle to make ends meet at the close of the crop year.

The assistance announced uses the Secretary of Agriculture’s existing authority to help create and encourage flexibility within four USDA programs: the Conservation Reserve Program (CRP), the Environmental Quality Incentives Program (EQIP), the Wetlands Reserve Program (WRP), and the Federal Crop Insurance Program.

To assist farmers and ranchers affected by drought, Vilsack is using his discretionary authority to allow additional acres under CRP to be used for haying or grazing under emergency conditions. The action will allow lands that are not yet classified as “under severe drought” but that are “abnormally dry” to be used for haying and grazing. This will increase available forage for livestock.

To help producers who may have cash flow problems due to natural disasters, the USDA will encourage crop insurance companies to voluntarily forego charging interest on unpaid crop insurance premiums for an extra 30 days, to November 1, for spring crops. Policy holders who are unable to pay their premiums in a timely manner accrue an interest penalty of 1.25% per month until payment is made. In an attempt to help producers through this difficult time, Vilsack sent a letter to crop insurance companies asking them to voluntarily defer the accrual of any interest on unpaid spring crop premiums by producers until November. In turn, to assist the crop insurance companies, the USDA will not require crop insurance companies to pay uncollected producer premiums until one month later.

Thus far in 2012, the USDA has designated 1,297 counties across 29 states as disaster areas, making all qualified farm operators in the areas eligible for low-interest emergency loans. Increasingly hot and dry conditions from California to Delaware have damaged or slowed the maturation of crops such as corn and soybeans, as well as pasture- and range-land. To deliver assistance to those who need it most, Vilsack recently reduced the interest rate for emergency loans from 3.75% to 2.25%, while lowering the reduction in the annual rental payment to producers on CRP acres used for emergency haying or grazing from 25% to 10%. Vilsack has also simplified the Secretarial disaster designation process and reduced the time it takes to designate counties affected by disasters by 40%.

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