Drought’s effect on prices likely small
U.S. must consider alternatives to corn for ethanol
Most analysts do not expect price increases at retail to exceed four per cent before April.
GUELPH, ONT. — While markets look at demand rationing in the U.S. for grains, prices for corn, soybeans and other commodities will probably remain high because of the unprecedented drought Americans are experiencing this summer.
But as farmers in that country deal with severe climatic conditions, nearperfect growing conditions in most of Canadian farmland and skyrocketing corn prices mean many farmers in this country are cashing in.
And as U.S. consumers brace for higher food prices in coming months, the effect of the U.S. drought in Canada will probably not be significant.
Corn prices have risen almost 60 per cent since June, and hit an all-time high in recent days. Other grains such as soybeans, wheat, rough rice are also trading much higher over the past few weeks.
But, despite this, the full effect of the commodity price hikes for packaged and processed foods will probably take six to nine months to move through to retail food prices. Nonetheless, distribution efficiencies prevent input costs to be symmetrically reflected on retail food prices.
In fact, increases of 50 per cent may trigger retail prices to increase only slightly. This summer, animal protein will probably be affected the most, but most experts do not expect price increases at retail to exceed four per cent before April. In fact, we are seeing prices for some meats drop as farmers sell their livestock fearing higher input costs.
Other food categories won’t be affected at all. The cost of fruits and vegetables, for example, should not change substantially largely because the geographic are as they are mainly grown in were not affected by the drought. The Canadian dol- lar also offers food imports continued buying power. In reality, food prices could go up by no more than 4.5 per cent in Canada next year, a modest increase when comparing food prices to the cost for lodging or energy.
Considering that 38 per cent of all groceries bought in Canada are wasted, consumers can save by adhering to more responsible buying patterns.
Indeed, therein lies the real problem in food consumption.
As for critics of the socalled “ethanol effect” for higher corn prices, these claims are often overstated. First, even if almost 45 per cent of the now-shrivelled corn crop were intended for ethanol, the estimated aggregate domestic demand for corn in the U.S. would be down by 1.4 million bushels. Ethanol production in the U.S. has slowed down, even before the beginning of the drought.
Secondly, farmers need incentives to produce, which is exactly what the ethanol mandate achieved. If corn prices were lower, corn production would be lower. It is as simple as that. Finally, not all is lost: About one-third of the corn that is processed to make ethanol is subsequently converted into a form of animal feed called dried distillers grain.
We ought to accept the fact climate change is hostile to modern farming practices. Opportunistic farmers are hardly to blame, but more actions to mitigate risks are required. Building better water irrigation systems and promoting the use of weather derivatives are promising solutions for farmers for the future. With the proper tools, farmers can better offset the bitter consequences of unforgiving weather patterns.
Conversely, it is high time for the U.S. to consider other, more efficient means to produce ethanol, one of those being sugarcane. Producing ethanol f rom sugarcane takes less land and uses less fossil fuel than corn grown in temperate climes. This is the preferred approach in Brazil, which makes the U.S. ethanol version grotesquely wasteful.
Last year’s elimination of import tariffs and tax credits in both the United States and Brazil on ethanol was a significant first step toward making ethanol a traded commodity.
The two countries, which produce more than 80 per cent of the world’s ethanol, can sell in each other’s backyard at market prices.
Of course, to heavily rely on food crops to produce fuel is not a long-lasting sustainable approach to global food security.
However, on a global scale, the story is very different. We should recognize that the rest of the developing world will be hit harder by this drought than Canada and the United States. While Canadian and U.S. consumers, despite a modest rise in cost, will still enjoy access to the most affordable food prices in the world (excluding Singapore).
Corn price rallies have brought along other commodities for the ride. For example, the price for rice, a fundamental food staple for more than 3 billion habitants on the planet, is posing a particular problem. Projections see rice prices climb as much as $30-$40 per tonne.
The fears of embargoes and governmental kneejerk reactions, like we have seen in the past, can make the situation worse and lead to new food riots.
Alarmists in our country should recognize how lucky we all are before complaining about so-called “rising” food prices.