Food costs to soar as US drought bites

Corn, soya bean and wheat harvests all suffer as extreme weather decimates American crop

Agricultural commodities such as corn and soya beans have soared in value since the start of the year, outpacing mined raw materials, like oil and gold, and increasing food costs.

In the US, the worst drought in 50 years has destroyed almost one-sixth of the nation's corn crop. The price of corn has shot up 27.7 per cent since June, with the US Department of Agriculture (USDA) suggesting that extreme weather conditions are the primary cause.

Professor Whitacre, a professor of agricultural economics at Illinois State University, warns that consumers may see price rises in food products, as well as corn-based items such as cosmetics, as firms attempt to push the higher cost of materials on to customers.

The price of wheat-based products could also experience the hit on damaged corn crops, due to an increase in demand for the alternative grain. With things already looking bad, wet weather in Britain and its destructive impact on local crops is expected to push costs even further.

Corn is not the only crop to be hit by scorching weather across the Atlantic. The soya bean harvest in the US is expected to be the worst for five years, with the USDA adding that 47 per cent of the crop was in very poor or poor condition. Of all the soft commodities surveyed, the price for soya beans has climbed the most in the past six months – by nearly 38 per cent

Bill Tierney, the chief economist at AG Resource, says: "People are hoping that if we can last out until March 2013, when the soya bean crops in Brazil and Argentina are harvested, we will be fine. But this is not the case. In order for supply to last until then, we will have to see a 16 per cent decrease in soybean usage – this is double the highest level of decline experienced in the past. No matter how high prices go, it will not be enough to create the ration that we need."

Commenting on whether this surge in grain costs would affect prices offered to customers, Philippe Aeschlimann of Nestlé, said: "As far as raw material prices are concerned, we generally manage volatile input costs through adapted procurement strategies, cost savings, innovation and, as a last option, price increases.

"Each market takes individual pricing decisions based on its respective competitive situation, raw material purchasing and product mix."

Muktadir Ur Rahman, a commodities consultant at Capital Economics, is confident that the trend could soon reverse. He said: "In the current economic climate, there will be weaker investor demand for commodities generally. It has been empirically proven that soft commodity prices, such as that of corn and wheat, are heavily correlated with that of oil."

Following this logic, and with the price of oil down 4.8 per cent in the past six months, it can be predicted that downward pressure on inflation for these goods will be maintained.