A Real Farm-to-Table Crisis

07/23/2012 9:18 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

Heat and drought have nearly decimated the corn and soybean crop, and consumers may have to deal with the effects of that in more places than the vegetable aisle, writes MoneyShow personal finance expert Terry Savage.

While politicians are still wrangling over the twin deficit dangers of tax and spending cuts, an even more dangerous financial crisis is about to hit the economy: the food prices crisis.

The searing temperatures and drought in the heartland of America have already devastated the corn crop—and without any relief in sight, the soybean crop will also be impacted.

Just take a drive in the country and you’ll see the corn plants, still tall in the fields. But the foliage is spiky and pointed skyward, in an effort to conserve water. And inside the green portions of the corn plant, the cobs are empty of kernels. The heat and drought made pollination impossible. The plants exist, but the cobs are stunted and empty.

Corn is now about $8 a bushel—twice what it was priced at just a month ago. Soybeans are at an all-time record price nearing $17 a bushel, up from $13 just two months ago. These two important crops have hit all-time highs.

According to official figures, 78% of the corn crop this year is now in a drought-impacted condition, and 77% of the soybean crop is similarly impacted. But for those of us who buy our food on store shelves, it’s difficult to make the connection between the worst drought in 50 years and the impact it will have on the family budget.

So Here's the Impact on You
Food prices overall rise about 1% for every 50% increase in corn prices, partly because corn is used in so many products. But most city dwellers don’t realize that a good portion of the corn and soybean crop are used to feed livestock. There the impact will be more dramatic—but not as immediate.

Ranchers will bring more of their hogs and cattle to market now, as they realize it will be expensive to feed them over the winter—if they can find enough hay after the drought. So the first impact is a glut on the market, driving prices down.

Then, with a few months lag, you’ll see prices of beef, pork, chicken, eggs, and dairy start to skyrocket—probably around Election Day.

Forget food prices for a minute. About 25% of the corn crop is used for ethanol—as a gasoline additive. So not only will food prices be impacted, but the price of a gallon of gasoline will start moving higher in the days ahead. Then we will see the true folly of subsidizing an industry that diverts food to fuel.

Since transportation is a key cost of many consumer goods, rising gasoline prices should push prices of many consumer goods higher. That’s exactly what the economy doesn’t need as it struggles to move ahead.

Higher food and transportation prices will be a drag on an already slowing economy—increasing the chances of recession as we approach the election. This drought adds the ingredient of stagflation—rising prices in a slowing economy.

Mother Nature and Politics
The politicians may be able to skirt the issues of taxes and spending and the debt ceiling until after the election. But there’s no way to postpone the impact of Mother Nature. Soon every voter will realize that a limited paycheck—if they have one—is going to have to stretch further to cover the basic necessities.

The last time this conjunction of economic slowdown and drought occurred was the “dustbowl” of the 1930s. A quick re-read of John Steinbeck’s classic The Grapes of Wrath reveals what happens when misguided government economic policies collide with the inexorable forces of nature.

We’ve come a long way in technology since the 1930s—but we still haven’t learned to control the weather. And it appears that government still hasn’t learned how to create policies that foster economic growth.

That wouldn’t combat dry farm fields, but a growing economy and more jobs would make the inevitable food price increases less painful. And that’s The Savage Truth.

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