All this recession needed was a Dust Bowl to make us feel like we're back in the 1930s.
It's looking like we are going to get one.
Last week I told you heat wave and drought covering the vast majority of this country would have a devastating impact on food prices.
Today the U.S. Department of Agriculture (USDA) validated my position.
According to the USDA:
- Corn is the most widely produced feed grain in the United States.
- Around 80 million acres of land are planted to corn with the majority of the crop grown in the Heartland region.
- Most of the crop is used as the main energy ingredient in livestock feed.
- Corn is also processed into a multitude of food and industrial products including starch, sweeteners, corn oil, beverage and industrial alcohol, and fuel ethanol.
- The United States is a major player in the world corn trade market, with approximately 20% of the corn crop exported to other countries.
In 2008 and 2011, the high price of corn and other food products caused riots in Asia and the Middle East...
Food scarcity was the spark that ignited the Arab Spring when Mohamed Bouazizi set fire to himself after police confiscated the fruits and vegetables he was selling at a roadside stand.
Corn ETF is Flying
Blood on the Plow
The most recent corn report by the USDA cut its estimates for corn yields by 12% from its report last month. The estimates are down to 146 bushels an acre from 166 bushels an acre.
The USDA has said just 40% of the nation's corn crops are in good or excellent condition, down from about 69% last year.
In Iowa, the top U.S. corn producer, only 42% of corn crops are rated good to excellent — down from 62% a week earlier and 82% a year ago.
The USDA reported: "Persistent and extreme June dryness across the central and eastern corn belt and extreme late June and early July heat from the central Plains to the Ohio River Valley have substantially lowered yield prospects across most of the major growing regions."
Exports projections were slashed by 300 million bushels to 1.6 billion bushels.
This is the third year in a row that the U.S. has experienced declining yields.
Wheat, soybeans, and ethanol production were also cut.
Corn prices jumped 41% in June and early July; wheat (WEAT) by 33%; soybeans (SOYB) by 26%.
A smaller harvest will cause higher prices into next year.
Most of the current demand growth is coming from China, India, and other developing markets.
Companies that have corn on the cost side of the balance sheet will see falling margins. These include livestock producers and food and beverage companies among others.
The biofuel sector will be especially hard hit. Costs from corn are rising as competing fuels such as oil and gasoline are falling.
Pacific Ethanol's (PEIX) stock price has dropped from $1.00 a share in May to $0.33 a share today. Tyson Foods (TSN) fell $2.50 to $17 over the same time period.
Companies that make money from seeds and fertilizer have popped — companies like Monsanto (MON), Potash Corp. (POT), and Origin Agritech Limited (SEED).
Nitrogen Fertilizer moved more than phosphate specialists. These companies include Terra Nitrogen (TNH), CF Industries (CF), CVR Partners (UAN), and Rentek (RTK), whose stock prices are up 7% to 15% this year.
Jim Rogers' Agriculture ETF (MOO) has tacked on $5 to $49 and change over the past few months.
Return of the Commodity Supercycle
Before the global crash in 2008, there was much talk about a commodity supercycle, the main thrust of which was developing countries were growing more populous and rich.
They would need more material. They were also moving up the food chain from rice to beef. This would push a constant demand for agriculture.
Stocks like Potash Corp. (POT) climbed from $10 in 2006 to $75 just two years later.
Today the same Malthusian investment themes are repeating themselves...
Only this time, countries like India and Egypt will have to spend higher amounts of ever-shrinking savings not on new houses, but on nourishment.
My prediction: pain.
Since 1995, Christian DeHaemer has specialized in frontier market opportunities. He has traveled extensively and invested in places as varied as Cuba, Mongolia, and Kenya. Chris believes the best way to make money is to get there first with the most. Christian is the founder of Crisis & Opportunity and Managing Director of Wealth Daily. He is also a contributor for Energy & Capital. For more on Christian, see his editor's page.