Food prices expected to soar as U.S. corn crop withers under drought

July 12, 2012 – CLIMATE — What looks to be the worst U.S. drought in a quarter of a century has given rise to an old-fashioned commodity rally on world markets, with key grain prices hitting highs which caused food crises in vulnerable parts of the globe last time around. Seeking to protect their populations from hunger this time, many countries relying heavily on imports have held off for now, touting healthy stock levels and hoping other sources will come through and bring prices down. But their hopes may be dashed if they all return to market at once. With so much of the world putting faith in a record U.S. corn crop, it is little wonder that prices have surged around 40 percent in the past three weeks as relentless dry weather melted yield expectations for cereals. Soybeans are at record highs, while wheat is not far behind. “Production potential looked great and it kind of lulled these end-users into a false sense of security. At that point we were seriously looking at (corn) prices under $5 if weather conditions remained ideal, but now we’ve rallied sharply higher and never looked back,” Jefferies Bache analyst Shawn McCambridge said. Now, corn futures contracts backed by the 2012 harvest are above $7 a bushel and climbing fast. Traders said consumers in Europe, North Africa and the Middle East had pulled back on regular purchases, expecting prices to cool off. “This to me is a time bomb. I am routinely one of the more bearish people but it wouldn’t surprise me if corn traded at $10,” the trader added. There are several parallels between the current state of play and food crises of the past few years, including scorching weather, wilting crops and sky-rocketing prices. Just substitute 2012’s U.S. drought and corn for 2010’s Russian crop failure. Similarities can also be found on the macro front – 2008, when prices were last at these levels, saw a mushrooming financial crisis culminate in the failure of Lehman Brothers, and now Europe’s debt crisis has left the euro zone precariously balanced, with other regions also on edge. The uncertainty has led to swings in all the markets this time as then, but the simple common denominator of supply and demand has been the driving force of the latest grain price spike, with weather the only fundamental that matters. Such frenzied buying leads ultimately to additional food inflation and domestic price rises can be a tipping point in countries with already struggling populations. –MSNBC

contribution by Ronni