The United States Department of Agriculture (USDA) dropped a bombshell in early 2007 that may have a profound impact for years to come on how we meet our need for cheap food and fuel.
In a report measuring the previous year’s corn crop, the USDA revealed that far less corn was available than many experts had estimated. We all know what happens when demand exceeds supply. The next day, January 12, 2007, the price of corn skyrocketed.
Why should you care?
Sorry to be the bearer of bad news, but the rising price of corn could mean your food, energy, and housing bills will go up, and fast.
You may wonder, how can a simple grain like corn wreak so much havoc on my economy?
The answer is simple. Corn is not just that yellow kernel that we chew on an ear of each summer. Corn is used as feed in the meat and poultry industries. So expect those protein sources to go up in price. Corn is also used as a sweetener. But the taste can be bitter as the price of cereals, breads and sweets skyrockets.
But most importantly, America’s cornfields have become a new battlefield. And the fighters are those who need cheap food to survive, and those who believe that corn is a panacea for high energy prices.
The increase in grain prices is the result of the growing interest in the development of alternative fuels. Ethanol, which is derived from corn, is one of the most popular contenders.
Last year, in an article for Fortune magazine, Lester Brown, president of the Earth Policy Institute, said that the demand for corn could have disastrous consequences. “The growing myth that corn is a panacea for our energy problems is leading us into a potentially dangerous global food scramble,” he wrote.
Brown believes that the competition for corn will mean that “cars, not people, will claim most of the increase in world grain consumption.”
Long before the USDA report was published, the price of corn had enjoyed a good run. After hitting near-record lows in the summer of 2006, a pattern that has occurred nearly every summer in the 21st century, corn began to move. By the end of November, grain had risen by more than $1, pushing the March 2007 futures price to around $3.90 a bushel.
Futures traders who saw an opportunity in last year’s low prices are certainly pleased. Every $1 of move-in price pays $5,000 per contract.
But Brown believes skyrocketing food prices will endanger the lives of the world’s poorest people.
Jason Kottle, who blogs at Kottle.org, worries that one of the nations hardest hit by rising corn prices could be the United States’ neighbor, Mexico. “Maize (corn) was probably first domesticated in Mexico and remains a cornerstone of Mexican cuisine.”
And Mexico imports a lot of corn from the United States because it’s cheaper than local corn, Kottle wrote in his November 7, 2006 blog.
Meanwhile, at Lovecraft Biofuels in Silver Lake, CA, Brian Friedman is converting the latest model Mercedes Benz diesel-powered cars to run on vegetable oil. And business is booming, according to the Los Angeles Times.
Friedman’s company is driven by the idea that people can be freed from the energy of the Middle East. But one day, not too far in the future, the owners of those cars may be in for a rude awakening.
Imagine those alternative fuel vehicle drivers strolling down the grocery store aisle looking for food to fuel their car. They get to the corn oil shelf and realize the price has doubled and now they’re paying more for fuel than their neighbors who drive those old-fashioned fuel-injected hot-rods.
There is a solution?
In my previous article Household Expense Coverage: Families can learn corporate finance secrets. I make it clear that individuals and families do not need to settle for higher prices.
In fact, families around the world cannot afford to tolerate inflated prices on food, shelter and clothing, let alone fuel.
For a free tutorial on trading grains, visit the Chicago Board of Trade website. Click on education>publications and then search An introduction to CBOT agricultural futures and options trading.
Copyright 2007
