Much has been made of food "inflation" and the underlying causes of higher food prices seen in the last six months. Some have even attempted to blame Fed policy or speculators for higher prices and turmoil in Egypt. So lets take a look at what is happening.
Feb. 9 (Bloomberg) -- U.S. stockpiles of corn before the next harvest will be 9.4 percent smaller than estimated last month, a bigger drop than expected, because of increased ethanol production, the government said.
The surplus on Aug. 31, the end of the marketing year, will be 675 million bushels, down from 745 million forecast in January and less than 1.708 billion on hand a year earlier, the U.S. Department of Agriculture said today in a report. Analysts surveyed by Bloomberg News expected 729 million bushels, on average. Corn prices have jumped 89 percent in the past year.
http://www.businessweek.com/...
Five billion bushels of corn were used to produce ethanol in 2010 as Iowa experienced massive flooding amid record demand. Corn is the preferred sweetener now in the USA even as sugar prices rise to record highs due to poor harvests in Brazil.
Sugar output in Brazil’s Center South, the world’s largest producing region, dropped 81 percent in the second half of December, industry association Unica said.
http://www.bloomberg.com/...
Fertilizer is petroleum based and the highest input cost for US crops. Any spike in crude oil prices would impact all prices across the food chain.
Feb. 9 (Bloomberg) -- A drought in China’s Shandong province may persist, threatening winter-wheat crops, said the Qilu Evening News, citing the weather service. Wheat in Chicago jumped to the highest level in 29 months.
About 30 million mu (4.9 million acres) of winter wheat in the eastern province have been affected and no significant rain is expected in the next week, the report said. Shandong is facing its worst such event in 200 years if the region doesn’t receive rain by the month-end, said the Xinhua News Agency.
China, the largest wheat producer, is contending with severe dryness in the North China Plain after "substantially" below-normal rain since October, said the United Nations’ Food and Agriculture Organization. Wheat traded in Chicago, a global benchmark, climbed to its highest level since August 2008 today on concern over supplies. Protests partly linked to food costs erupted in North Africa and the Middle East in the past month.
http://www.businessweek.com/...
Drought is persistent in China and Russia causing the latter to halt exports of wheat. Egypt is the world's largest importer of wheat and is feeling supply pressure as prices rise.
Russia stopped grain exports last summer after the worst drought to hit the country in over a century ravaged the country’s harvest and cut production by nearly 40%. The ban sent shockwaves through international markets and propelled wheat prices to highs not seen since the 2007-08 food crisis.
http://blogs.wsj.com/...
Drought has made the ground in Russia too hard to plant wheat as input costs rise and yields fall. Russia has the most arable land in the world yet will not resume wheat exports until 2012 at the earliest according to commodity experts in the country.
Syngenta, the world's largest crop protection company, is hitting record profits as sales rise in emerging markets. The company began operations barely 10 years ago.
"Sales of $11.6 billion in 2010 have almost doubled since Syngenta's creation ten years ago. Expansion has been particularly rapid in the emerging markets, which now account for almost 50 percent of our sales. Our leading position in these markets - the key driver for our industry in terms of population growth and dietary change - will be pivotal to our future success. Global growth in both Crop Protection and Seeds has been accompanied by a significant improvement in profitability, with an EBITDA margin of 21.5 percent compared with 17.8 percent in 2001.
http://finance.yahoo.com/...
Tight world supplies of sugar are contributing to the demand for corn in Wednesday’s USDA in two ways, by increasing exports of U.S. ethanol into markets usually served by Brazil, and by increasing the demand for high fructose corn syrup, analysts told Agriculture.com Wednesday.
"The export market needs ethanol because Brazil isn’t producing anything because sugar is too profitable," says Jerry Gidel, of North America Risk Management Services in Chicago.
http://www.agriculture.com/...
So cane sugar is priced high and causes corn prices to rise as demand for corn-based ethanol increases.
World population is headed to nine billion by 2050 from 7.5 billion today and climate change is just beginning - so this is just the start of this demand phenomena.
Its not speculation or the Fed - its a hungry world living on a smaller world.