America's worst drought for half a century has sent the price of agricultural commodities soaring, driving fears of higher food price inflation. The country is one of the world's largest exporters of corn. Scorching weather in the midwest has damaged harvests, leading to a record rise in prices amid fears of shortages. Corn is trading at $8 a bushel, while Goldman Sachs forecasts it will hit $9 within three months. Meanwhile, benchmark soya bean prices reached a peak of more than $17.
To make matters worse, America isn't the only country in trouble. Concerns about dry crop conditions and reduced production are also mounting in other parts of the world. In Brazil and Argentina, water shortages have hit soya bean output. Heatwaves in southern Europe are damaging corn yields in a region that accounts for 16% of global exports. In India, a delayed monsoon season has affected the lentil, rice and oilseed harvest, and in Australia crops are enduring below-average rainfall.
Record high corn prices are of particular concern, says Garry White in The Daily Telegraph they could drive food prices higher. Corn is the main ingredient in animal feed for chickens, cows and pigs. "Feed costs account for about 40%-50% of total costs of production, and when a rancher or poultry producer or dairy producer is faced with higher feed costs it's less profitable to produce that animal," says Joseph Glauber from the US Department of Agriculture. So high corn prices tend to lead to higher meat prices.
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The prospect of higher food prices is unlikely to sway the Federal Reserve's thinking on monetary policy, despite the impact on consumer price inflation, reckons Diane Swonk of Mesirow Financial. Just as with oil price fluctuations, the Fed will consider the surge temporary.
Weak consumer demand at home and abroad will also make it hard for producers to pass on increased costs to customers. However, the threat of rising inflation squeezing both corporate and consumer spending is yet another headache that central banks and the global economy don't need right now.
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