Friday, October 22, 2010
Corn prices: As high as an elephant's eye
On October 8th, the USDA reported that United States corn production will be down 4% in 2010. Prices immediately surged 6% and trading at the Chicago Board of Trade stopped. The decreased production is due to flooding and scorching heat/sunlight throughout the summer and fall. This news was unexpected and it strongly impacts the U.S. economy - the source of 60% of global corn exports. Corn production is so prevalent in the U.S. because of government subsidies for corn production. This is part of the reason why so many U.S. products contain high fructose corn syrup.
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3 comments:
Corn is the staple ingredient for many of our food and beverage products, not only those that contain corn syrup, but also such foods as cereals, tortillas, and chips. Corn is also often used to feed livestock. An increase in prices for corn could increase a lot of food prices, which is especially bad for people with low incomes, both domestic and abroad, for whom food is a major part of their spending.
I agree it is a very important ingredient for food and beverage companies. For example, Kraft has many subsidiaries that use corn. Thus, the increase in prices especially from flooding and the Russian fires earlier this year will greatly increase costs and decrease profits. Look for lower earnings that usual in this industry this year.
I find this article very interesting from a finance point of view. With high volatility among agriculture prices becoming the norm, corn producers are going to be more reliant on futures and options to hedge risk. Not only will farmers have to be educated in farming but now will have to become educated in financial instruments as well.
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