The corn crisis: What a drop in a key crop’s production means for you

What’s up folks? Here’s the latest entry in our weekly post series, “The Pitch.” This post, written by SFB editor Ernie Smith and researched by Seth Millstein, analyzes the current crisis facing the corn industry, and its larger ripple effects. Find Ernie on Twitter over here, and Seth over here.

Think beyond the cob: We’ve come a long way from the pilgrims and the first Thanksgiving, folks. Corn is used in an embarrassing amount of products — from popcorn to soda to Hot Pockets to fuel — and a recent drought that’s covering as much as 60 percent of the country could mean higher prices for you at the grocery store. But how bad is it? SFB’s very own Ernie Smith analyzes. (Oh, with an assist on the research from Seth Millstein.) Read more after the jump.

(photo by jster91)

Preface: What it’s like on the farm

• What i’m hearing is that this is the worst, most SEVERE drought we’ve had since 1988. There’s not really much we can do except sell our animals, because we don’t have enough proper hay to feed them.
• Creston, Iowa resident Anna Welcher • Discussing the drought in Iowa, and how it’s affecting her family’s farm. Welcher says corn yields are down 30 percent and it’s having a ripple effect on the farm as a whole, as well as a number of nearby farmers. “It hurts everyone: The farmer, the pork and beef producers, and the consumer,” she continues. “Once the farmers start selling their cattle, we’re hoping the prices in the grocery store go down, but when there is no cattle left, we’ll all have to become vegetarians.” How did we get to this point? And what does this mean for you, consumer that lives nowhere near a family farm? Let’s analyze.

Breakdown: The current yield level, compared

• 172 the number of bushels per acre Iowa corn farmers produced last year, on average
• 117 the number of bushels per acre Iowa corn farmers are expected to produce this year
• 80 the number of bushels per acre produced in 1993, the last time the level was so low source

» And 1988 really was a bad year, too: During the 1988 drought, Iowa corn production hit a mere 84 bushels per acre, though the production level was much lower 24 years ago. The current situation is nonetheless fairly dire, according to Bill Nelson, a Senior Economist at Doane Advisory Services, who came up with the recent yield estimate. “You could see very few ears filled to the tip,” Nelson said. “And the kernel counts are way below average.” Iowa is the state that produces the most corn, with other Midwestern states directly behind.

Why this affects you, dear consumer

This may not be a surprise to you, but … Corn is a key ingredient of your grocery store experience — outside of the produce aisle, many processed products use corn or soy to improve the texture of (or sweeten) the foods you eat. So, even foods which seem miles away from what you consider to be “corn” rely on that little pop to create the overall effect. There was even a movie about this a few years ago called Food, Inc. To give you an idea, all five of the items below use corn ingredients in some way, shape or form:

• this
• this too
• and that
• yup, this
• finally

» So if there’s a corn shortage … That means prices across your local grocery store could go up as a result. (Soybeans, another key ingredient of processed foods, have also been affected by the drought.) But, due to corn’s low costs compared with other parts of production, processed foods are less likely to be affected by the drought. The real issue? Foods created indirectly by corn — such as livestock, milk or poultry, all three of which rely on corn for feed. So basically, this drought is hitting the grocery store in multiple ways. (photo by lyzadanger)

But how much will prices rise?

• 3%the minimum grocery price increase expected in 2013 source

• 45% the increase in the price of corn this summer, on average; the price is nearing last summer’s records
• 1% the amount a 50% increase in the price of corn would boost the average grocery bill source

• >4% the increase in the price of beef as a result of the shortage
• >3.5% the increase in the price of dairy products (milk, etc.) next year
• >3%the increase in the price of poultry and eggs; pork will also rise  source

» Food price inflation is common. But this? In an average year, food prices increase at a 2.8 percent clip. But with increases as high as 4 percent possible, it could prove to have a real effect on consumer decisions. “In 2013 as a result of this drought we are looking at above-normal food price inflation. … Consumers are certainly going to feel it,” says USDA economist Richard Volpe. But don’t expect the effects to show up right away — you’ll likely see the effects first with poultry, which takes a relatively short time to raise. Beef may not show a significant price increase for another year or two.

Finally: A world reliant on American corn

You know who uses American corn? Everyone. Roughly half of the world’s exported corn comes from the United States, exported to all parts of the world. Japan, Taiwan and Korea alone are responsible for roughly a quarter of the world’s corn imports, and corn is a key building block for the developing world. That makes rising corn prices an issue that touches multiple parts of the world. “So we have an issue here where we have been feeding the world, but we’re going to have to slowly but surely dampen down those exports,” notes commodities trader Scott Shellady. So, in other words, all that corn has a wide reach and major ripple effect, effects you probably don’t consider when you nosh down on Hot Pockets without thinking about what’s inside. (Image via USDA)

Ernie Smith the editor of ShortFormBlog and a social media journalist for TMG Custom Media. He likes “The Room.” Reach him at @ShortFormErnie.