The Motley Fool Previous Page

The Coming Corn Crisis

Andrew Marder
September 7, 2012

The spread of communication channels makes it easy for things to get out of hand. The benefit is that it also makes it easy for important things to be heard. Right now, the 2012 grain harvest is teetering in the middle of those extremes, and the world is watching to see what happens next. The UN is cautioning against using the term "crisis," while major exporters are assuring the rest of the world that if a crisis does hit, they won't do anything to make it worse. Regardless of the outcome, the situation has already had massive implications for investors and consumers, and there's still a whole harvest season on the line.

The landscape
According to the UN's Food and Agriculture Organization, the cost of food has risen to near record levels, with the forecast for grain looking especially grim. The shortfall has been driven by bad weather in a number of the world's biggest growing regions, including the worst drought the U.S. has seen in decades. That's leading some countries to start talking about export bans, which could mean bad news for an already troubled global economy.

One of the biggest long-term concerns for consumers is government sponsored demand for ethanol, and in the U.S., anywhere from 16% to 40% of all corn grown goes to create ethanol. That's due, in part, to government mandates which set out renewable energy standards for producers, and which give consistent demand to corn farmers. Both presidential candidates have expressed support for ethanol production, so the demand is unlikely to change for some time.

That will be good news for corn producers, and the companies that support them. ConAgra (NYSE: CAG  ) and Monsanto (NYSE: MON  ) both stand to benefit from regulations, both as sellers of corn seed, and potentially as refiners of ethanol. But now there is pressure from within the government to make a change. Corn prices have risen, along with other grains, and that has hurt both consumers and producers. As corn prices continue to rise, meat farmers are killing off animals at a record pace, in order to cut down on their feed costs.

Robbing Peter to pay Paul
President Obama vowed $170 million to buy meat from ailing farmers, which will support meat prices but could do so at the expense of corn. That's because keeping the government set demand for ethanol means keeping demand for corn high. That pushes up corn prices, making meat more expensive to raise. The government could have eased the demand for corn by enacting a waiver for the ethanol mandate, as many governors have requested.

But the situation might actually have a release valve already built in. Like seemingly every piece of