Where corn prices go (and that's UP), meat prices will follow

10/14/2010 1:48 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

The fall out continues from the U.S. Department of Agriculture’s shocking turnaround on the size of this year’s corn crop.

On Friday October 8 the USDA completely reversed its optimistic September 30 projection of corn production for the year and slashed its estimate of end of the year stocks. The agency lowered its projections for end of the year corn inventory to just 902 million bushels, a 19% drop from its September 30 estimate and a huge drop from the 2009-2010 end of the year inventory of 1.6708 billion bushels. (For more on the corn harvest and the USDA’s projections, see my  post (http://jubakpicks.com/2010/10/12/whoops-usda-has-to-eat-its-optimistic-projections-from-september-30-on-corn-crop-and-sets-off-commodity-surge/ )

Not surprisingly corn prices are soaring. They rose another 8.5% on the Chicago Board of Trade on Monday, October 11.

But the effects of higher corn prices are still rippling out across the economy. Meat prices, for example, are up more than 15% this year to their highest level since the 1980s, but they’ve lagged the increase in corn prices. And they’re almost certain to head even higher.

That’s because going into the surge in corn prices, livestock farmers recorded some of the smallest herds in decades. The U.S. cattle herd in July, for example, was the smallest since 1973, and in September the number of breeding hogs was close to an all time low.

Higher corn prices traditionally discourage livestock farmers from expanding their herds since it would mean the certainty of paying higher prices for feed in the hope of recouping those costs on higher meat prices sometime in the future.

As a consequence, according to industry tracker CattleFax, U.S beef supplies will be the lowest since 1952 and pork supplies the smallest since 1976.

See why meat prices are almost certain to keep on climbing?

That’s not good news for consumers who are looking at soaring costs to put meat on the family dinner table.

It’s not good for the U.S. economy as a whole since it means that U.S. consumers will have less money to spend on other parts of their budget after paying their grocery bills. (Oddly enough, surging food prices won’t show up in the Fed’s preferred method for tracking consumer price inflation since the central bankers look at consumer prices excluding food and fuel.)

And it’s not good news for food and restaurants companies who are facing rising costs for raw materials.

But it is good news for farm incomes as higher prices for corn and other commodities push up revenues.

That’s good news for the stocks of Mosaic (MOS) and Agrium (AGU) in the fertilizer group, seed companies Monsanto (MON) and Syngenta (SYT), and farm equipment makers Deere (DE) and AGCO (AGCO).

How long could the trend toward higher meat prices last? It’s got a while to run. It can take as long as three years to breed a cow and then raise that calf to slaughter weight.

Full disclosure: I don't own shares of any company mentioned in this post in my personal portfolio
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