Due to imbalances in the grain markets, Food prices are about to have a MAJOR increase
See the chart below.
Something that should be of interest to our readers is the current developments in the grain markets.
As you know, during most of the commodity-wide rally that has taken place over the last few years, the grain sector has been a relative laggard when compared to the extent of gains we have witnessed in some of the other sectors. Several market analysts have commented on the fact that when grain prices were compared to the commodity sector as a whole, they were actually quite cheap in historical terms.
Today the USDA issued a report which sent shockwaves through the entirety of the grain complex but especially the corn market. The report on crop output and usage estimated that old crop corn ending supplies in August of this year will be roughly the equivalent of three weeks of corn usage. That is simply staggering! Corn immediately responded by opening at limit bid and as of the close today, there remains an estimated 90,000 or better bids to buy at the limit price. That suggests corn will open limit up this coming Tuesday barring any unforeseen developments over the weekend.
The reason I mention this to our readers is that the rally in the grain complex is the market attempting to adjust to the new source of additional demand for corn in ethanol production – something which is not a flash in the pan kind of demand that comes and goes but rather a wholesale change in the supply/demand structure of the corn market. There is a spillover effect that has caused both soybean and wheat prices to rally as well.
The implications for this are enormous on the food chain here in the US. Corn is the primary feed source for the broiler and the livestock sector. Along with feed wheat and soymeal, the increase in price has a significant effect on the profitability of chicken, hog and cattle producers. Simply put, those guys are in direct competition with ethanol plants for available corn. The rising cost of corn has taken a huge toll on their profit margins and threatens the livestock and broiler industries. The only way they are going to be able to maintain current levels of production is to receive higher prices for their finished product since the cost of the grains to feed them is at a new higher level which looks to be here for some time. That in turn is going to require the packers being able to get higher prices for meat and chicken at the wholesale level so that they can offer more money to the producers. Of course, it goes without saying that prices must rise at the retail level to keep grocer margins profitable as well. In other word, brace yourself for higher meat and chicken prices in the months ahead.
Additionally, cereal makers, bread makers and anyone else that uses grain to make a baked or finished product of some sort faces the same predicament. They are going to have to charge higher prices to compensate for the increase in their input costs.
All of this is going to feed through into the food sector and translate into higher prices at grocery stores and restaurants. Consumers are going to see higher food bills – Period! The pencil pushers at the Commerce Department can massage and manipulate the data used to concoct the worthless CPI and will attempt to hide it, but real world experience is going to impact directly on the pocketbooks and wallets of Americans visiting the grocery store.
While the recent setback in the energy sector has taken some of the burden off of consumers from the high gasoline and heating oil prices seen earlier this year, higher food costs are on their way. Once the temporary surplus in gasoline and distillate stocks gets worked off and energy prices resume their uptrend or we get another surge in prices due to some sort of “10 sigma event”, a double hit is going to be felt here at home.
Either way, it certainly has my attention.
Best wishes from your pal,
Dan
Click here to view today’s Corn chart from Trader Dan Norcini
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