While the hot, dry weather this past summer was great for backyard BBQs and parties, it was terrible for agricultural commodities. As the drought and hot weather presided across key growing regions in the United States and Canada's Midwest, a variety of crops, especially corn and wheat, saw lower plantings and output. That's causing havoc when it comes to prices for the two key commodities. Both corn and wheat prices surged over the last few months as the drought took place. Those rising prices have plenty of implications for both consumers and investors alike.
Four-Year Summer Highs
Coming off the worst and most extensive drought in 25 years, the agricultural sector is bracing for higher sustained prices. The lack of rain is expected to destroy and damage a portion of the field crop for both wheat and corn. These two crops are key pieces of the food value chain and more than 75% of U.S. processed foods contain corn in some form.
The key aspect of the recent drought was just how rapidly it increased in severity during the critical time for crop development. While there had been some rainfall and easing of drought conditions during early September, the key time period - June to August - really determines crop production and output. According to the USDA, as of mid-August 2012, roughly 60% of farms in the U.S. were experiencing drought and more than 28% were experiencing extreme or exceptional drought.
As such, corn and wheat stocks have begun to dwindle. On September 1, the USDA's survey of farmers and warehouses showed 988 million bushels of corn on hand. That's roughly 11% less than expected. That September 1 date is key, as it is the start of the corn marketing year. Wheat also showed fewer supplies with stocks of around 2.1 billion bushels. That was down roughly 7%.
Overall, falling supplies and poor weather have driven prices for both corn and wheat up to near four-year highs. A bushel of wheat is now sitting at nearly $9. At the same time, Corn can be had for $7.56 a bushel, though it spiked well above $8 a bushel during the thick of the summer. Both the Teucrium sponsored Corn ETF (ARCA:CORN) and Teucrium Wheat ETF (ARCA:WEAT) have risen accordingly.
The Key for Consumers and Investors
The drought and rising crop prices will eventually affect consumer's wallets. Raw ingredient costs will go up as well as other inputs in the food supply, such as animal feed. We will likely see the earliest impacts for beef, pork, poultry and dairy milk appearing on supermarket shelves throughout the fall. The full effects of the increase in corn prices for packaged and processed foods will likely take 10 to 12 months to move through to retail food prices, due to hedging programs at such food producers as Kellogg's (NYSE:K).
While consumers should be bracing for higher food prices after the worst U.S. drought in half a century trickles down the value chain, investors also might be in for a shock. Already, some firms are beginning to feel the pinch. Meat processor, Smithfield Foods (NYSE:SFD) said back in June that the cost of raising hogs jumped more than 17% over the past year due to higher corn prices. Overall, higher grain prices should effect the bottom lines of several food-related firms, such as Tyson (NYSE:TSN) and General Mills (NYSE:GIS), which do their best to deal with the increases and try to mitigate those costs to consumers.
The Bottom Line
As you can see, weather plays a big role in affecting commodity prices all the way down the food chain. For investors and consumers alike, one of the worst droughts in U.S. history is greatly pushing up corn and wheat, as the aftereffects take hold. As for whether we will see better harvests in the future, only time will tell. Until then, expect to pay more at the grocery store and perhaps see lower earnings from food producers.
At the time of writing, Aaron Levitt did not own any shares in any company mentioned in this article.