Higher Corn Prices May Carry Widespread Implications

By CnAgri2012-07-20 20:07:34 Print

Corn prices have soared since late May as drought conditions in the U.S. Midwest fuelled 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 would 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 US$3.75/bu 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.

The farm sector has had strong financial performance over the past several years, which will help it to withstand the drought.