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 food and cheap fuel.
In a report measuring the previous year’s corn crop, the USDA revealed that there was far less corn 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 rising corn prices may mean your food, energy, and housing bills will go up, and fast.
You may be wondering, how can a simple grain like corn wreak so much havoc on my finances?
The answer is simple. Corn is not just that yellow grain that we chew on a cob every summer. Corn is used as food in the meat and poultry industries. So expect those protein sources to increase 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 more importantly, America’s cornfields have become a new battlefield. And the fighters are those who need cheap food to survive, and those who believe corn is a panacea for high energy prices.
The rise in grain prices is the result of 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 fight,” he wrote.
Brown believes that the competition for corn will mean that “cars, not people, will claim the lion’s share of the increase in global grain consumption.”
Long before the USDA report was released, 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 of the 21st century, corn began to move. By the end of November, the grain had risen more than $1, bringing the March 2007 futures price to around $3.90 per 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 that 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 may be America’s neighbor, Mexico. “Maize (maize) was probably first domesticated in Mexico and remains the 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 blog on November 7, 2006.
Meanwhile, at Lovecraft Biofuels in Silver Lake, CA, Brian Friedman is converting the latest diesel-powered Mercedes Benz 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 free 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 wandering 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 they’re now paying more for gas than their neighbors who drive those old-fashioned fuel-injected hot-rods.
There is a solution?
in my previous article Coverage of household expenses: families can learn secrets of corporate finance. I make it clear that individuals and families do not need to settle for higher prices.
Indeed, families around the world cannot afford to tolerate inflated prices on food, housing, and clothing, let alone fuel.
For a free grain trading tutorial, visit the Chicago Board of Trade website. Click on education>publications and then look for An introduction to trading CBOT agricultural futures and options.
Copyright 2007