How corn affects food prices

July 9, 2014 | by John Krebs

As corn goes, so goes the prices of transportation, animal feed and eventually everything from burgers to corn flakes.

Foodservice purchasers who are not aware of corn and other commodity price changes run the risk of not being able to properly plan their purchasing and cost analysis for the coming year. Corn prices are caught up in a maze of factors that range from weather to how large users leverage their purchases.

Most corn grown in the U.S. is used for biofuels – about 40 percent. The second greatest use is for “feed corn” – about 36 percent is for animal feed, plus the distiller leftovers from the ethanol production. The majority of the remaining corn is exported, as only a small percentage is directed to consumer use – and most of that is for high-fructose corn syrup.

Individual farmers decide at the beginning of each crop year how much of their acreage they will plant in each type of corn. They follow the commodities trading reports very closely to help them to figure out which types of crops will be the most profitable to plant each year.

Of course, in times of drought, the price of corn can skyrocket. Corn prices were up 13 percent in the first six weeks of 2014 which will undoubtedly adversely affect the price of many of the foods you stock in your restaurant. (See the Axis inflation report)

Corn for consumer use

Not surprisingly, the corn destined for human consumption will have the longest-range effect on consumers’ wallets. The corn has to be dried and then ground into flour or meal or pressed into syrup before being processed into whatever form is necessary for use by General Mills or Coca-Cola. 

One major factor that complicates the equation is the amount that supermarkets decide to mark up the foods they sell to shoppers. Since supermarkets are facing stiffer competition from big-box retailers and drug stores, they're being much more judicious about how much of their rising costs they pass on to customers.

Packaged foods that contain corn or corn ingredients are also affected by its price. High-fructose corn syrup, for example, is used in a wide variety of foods such as cookies, yogurt, cereals and spaghetti sauces. A can of regular soda contains 40 grams of the sweetener.

The corn ingredients that are used in packaged foods mostly aren't irrigated either, meaning they're also vulnerable to the vagaries of weather and the price fluctuations.

Corn for animal feed

But corn also indirectly impacts consumer budgets: We are seeing higher prices for meat because most corn is fed to cattle and hogs.

The recent drought caused higher prices for meat than for corn on the cob. That's because the sweet corn that shoppers buy at a grocery store is grown differently and not as vulnerable to drought conditions. As for the corn that's used as grain feed for cows, however, farmers paid more as the drought persisted.

Additionally, because farmers have been dealing with dried-out grazing pastures, they began selling off the animals they couldn’t afford to feed which adversely affected beef prices.

Prices spiked as a result of the smaller livestock herds and dwindling meat supplies. Already, the number of cattle in the U.S. has been dropping for years and the USDA said this month that the nation's cattle inventory was the smallest since the agency began an annual count in 1973.

Corn for ethanol

Corn also impacts what consumers pay at the pump; because some gas is blended with ethanol, the recent price increases negatively affect the price of gasoline.

When the U.S. mandated that gasoline contain 10 percent biofuel, it bumped up the need for ethanol which is made with corn. That, plus a tax credit, led to the establishment of hundreds of ethanol plants throughout the Corn Belt, and communities which in turn heavily rely on those plants for their livelihoods.

But, when the drought hit and corn prices rose, ethanol plants closed because prices were so high that ethanol has become too expensive to produce.

Then there is futures pricing.  Commodities such as corn and wheat are traded on the global market in such a way that the delivery price of corn in the drought-ridden crop of 2012 was set two years prior – before the seed for the crop was even purchased by farmers.

There is some good news though: Corn prices are actually falling.  According to a report by the Associated Press, corn dropped 7 cents, nearly 2 percent, to settle at $4.58 a bushel, its lowest settlement price since Feb. 27, according to FactSet.

"Corn is getting creamed," said Sterling Smith, a commodities strategist at Citigroup. "Planting is just about finished and it looks like we're getting a very solid-looking crop."

Whatever the current climate for corn, both literally and figuratively, it is essential that food buyers keep a close watch on the price of corn so they can be ahead of the game when planning their purchases.

Topics: Equipment & Supplies, Food Cost Management

John Krebs
John Krebs is a dynamic, seasoned executive with experience in building and growing multi-million-dollar organizations through strategic visioning, expert leadership, and strong operational expertise. Krebs has helped hundreds of foodservice organizations achieve a focus on exceptional results by using his operational and supply expertise in distribution, purchasing and operational management. wwwView John Krebs's profile on LinkedIn

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