The Implications Of The Summer Drought Are Devastating

Friday, July 20, 2012
By Paul Martin

Marc Chandler
Jul. 20, 2012

The US main agriculture region is experiencing the worst drought in more than half a century. Corn and soybean prices are being driven through the 2007-2008 highs to new record levels. The latest US Department of Agriculture estimates that 31% of the corn crop is in good to excellent condition compared with 40% a week ago. The soybean crop is not faring much better with 34% of the crop considered good to excellent compared with 40% previously.

Many consumers and investors do not fully appreciate the extent to which the modern economy is based on corn. It is not simply used as a substitute for gasoline and animal feed, but reports indicate a full three quarters of the products in a supermarket use corn in some form.

The roughly 50% increase in corn prices translates to a 1% rise in shopping bills according to economists at the USDA. The effect on specific food prices vary. It takes, for example, about 2.6 pound of corn to produce a pound of beef. That means that the increase in corn prices may see a 4-5% increase in beef prices. The increase in the price of corn (chicken feed) will boost egg prices 1-2% and a 2-3% increase in dairy prices.

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