Cause for Concern: Market Structure and Drought Creates Fear over Corn Prices
Cause for Concern: Market Structure and Drought Creates Fear over Corn Prices

One of the defining events of the summer of 2012 was the drought that laid scourge to the Midwest United States. Record breaking temperatures and yawning gaps in precipitation in recent years exacerbated damage to crop yields in the region (Cortes, 2012). Recent weather patterns seem to point to global warming as a link matching rising temperatures and climate shifts to the increase in carbon emissions globally. The origin of a profound ripple in the global economy can be traced to the Midwest as the epicenter of a looming international corn scarcity.

The United States accounts for as much as 60 per cent of total corn exports worldwide. The price of the commodity can largely be traced to seasonal weather in the United States’ “corn belt” (United States Department of Agriculture, 2012). In June 2012, over 170 U.S. temperatures were met or broken, including records in August and July, months that are, on average, hotter than June (Coulter, 2012). Crop yields are projected to be 17 per cent lower than expected, which will raise corn prices around three to four per cent (Cortes, 2012).

Corn as an input

Uses of corn range from livestock feed to ethanol production and can be found in a large supply of common items found in the average American supermarket (Philpott, 2010). Widespread use of the crop across the market shows its versatility as well as the sheer volume that is grown. Under normal weather conditions, the price of corn as a dietary staple and input in the production of other goods are low. With corn prices expected to rise due to the shortage, many other commodities will be affected, as corn is key to production. Already prices of related commodities, like meat, are going up as corn feed prices continue to rise (McFerron and Wilson, 2011).

Government action

Government at the local and national level has been working to alleviate some of the stressors on crops and farmers. At the national level, a series of aid programs were enacted to provide loans and aid to farmers struggling to supply their livestock with feed and water as well as rehabilitate crops that have been badly damaged by drought. The Army Corps of Engineers worked to prioritize water flows around the most affected areas (The White House, 2012). At the local level, states like Missouri started cost share programs to help subsidize the cost of providing water to “farmers and livestock producers” (The White House. 2-12).

Cross-market concern

Ethanol, a gasoline additive that reduces emissions, is commonly made using corn. In 2007, the Renewable Fuel Standard was passed with an ethanol mandate, stating that more than a third of U.S. corn production must be used to make ethanol. Recent strain on corn supply has made livestock farmers grow squeamish over the idea of skyrocketing feed costs. Lobbyists for the meat industry are trying to work with the Environmental Protection Agency (EPA) to either reduce or suspend the mandate in hopes that it will lower the cost of feed (WRAPUP 1-US drought spurs ethanol push-back; World Bank watchful, 2012). While the livestock industry has faced increased costs of production, American drivers have also felt the pain inflicted by the increasing prices of corn. Gasoline prices have been on the rise, in part because of increasing ethanol prices (Lefebvre).

In an already squeezed economy, consumers carry much of the burden of a recession economy. Firms have been slow to hire workers and overall confidence of firms and households has been slow to improve. With basic necessities, such as gasoline and food prices erratically rising, confidence is sure to be rattled. More of consumers’ budgets will be soaked up by the basic costs of living, leaving little for the consumers’ discretionary budget, further slowing down the viability of a stable recovery.

Works Cited

Cortes, C. (2012, August 12). US drought exposes water management problems. Aljazeera. Retrieved from http://www.aljazeera.com/indepth/features/2012/08/2012812143842961375.html

United States Department of Agriculture. (2012, August 14). Corn: Trade. Retrieved from http://www.ers.usda.gov/topics/crops/corn/trade.aspx

Coulter, D. (2012, August 2). The summer of 2012—Too hot to handle?. National Aeronautics and Space Administration. Retrieved from http://science.nasa.gov/science-news/science-at-nasa/2012/03aug_summer2012/

Philpott, T. (2010, March 26). Why are we propping up corn production, again?. Grist Magazine. Retrieved from http://grist.org/article/2010-03-25-corn-ethanol-meat-hfcs/

McFerron, W. & Wilson, J. (2011, January 12). U.S. commodities: Corn, soybeans, wheat rise on supply outlook. Bloomberg. Retrieved from http://www.bloomberg.com/news/2011-01-12/u-s-commodities-corn-soybeans-wheat-rise-on-supply-outlook.html

The White House. (2012). Fact sheet: President Obama leading administration-wide drought response [Press release]. Retrieved from http://www.whitehouse.gov/the-press-office/2012/08/07/fact-sheet-president-obama-leading-administration-wide-drought-response

(2012, July 30). WRAPUP 1-US drought spurs ethanol push-back; World Bank watchful. Reuters. Retrieved from http://www.reuters.com/article/2012/07/30/usa-drought-idUSL2E8IUBMG20120730

Lefebvre, B. (2012, August 100. Midwest drought hits gas pump. The Wall Street Journal. Retrieved from http://online.wsj.com/article/SB10000872396390443537404577581533016872946.html

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