Midwest floods feed grain price inflation

John W. Schoen Senior producer • Profile • E-mail

Beyond the short-term losses from physical damage and lost business, the worst flood to hit the U.S. breadbasket in 15 years has added momentum to the recent surge in food prices worldwide.

Farmers and local officials were still assessing the damage Tuesday, as millions of acres of farmland remain submerged and thousands of Iowa residents were unable to return home due to the flooding.

Iowa Gov. Chet Culver said the state’s losses totaled in the billions of dollars, with 83 of 99 counties declared disasters and seeking federal aid. In 1993, floodwaters in Iowa, Missouri and neighboring states piled up $21 billion in losses.

The biggest economic impact — from rising grain prices — is already being felt. Corn prices at the Chicago Board of Trade soared to an all-time high near $8 a bushel Monday as the relentless rains and overflowing rivers raised fears that Midwest farmers will lose production on as many as 5 million acres, or 6 percent of the crop.

Food prices typically spike after bad weather ruins crops, but the increases are usually short-lived. This time, however, the spike follows a global rise in food prices that seems likely to last, according to analysts.

On Tuesday, the government reported that wholesale prices jumped in May at the fastest pace in six months. The Producer Price Index rose 1.4 percent, largely because of higher food and energy costs . The gain followed a modest 0.2 percent rise in April and marked the biggest increase since November.

Before the recent floods in the Midwest, corn prices already had more than doubled over the past two years; they've jumped another 25 percent in just the past few weeks.

Worldwide, food prices have risen 83 percent in the past three years, according to the World Bank. Bad weather in major grain-producing regions is part of the reason.

But growing worldwide demand — at a time when production hasn’t kept up — is also forcing prices higher, according to Sudakshina Unnikrishnan, a commodities analyst at Barclays Capital.

“Agriculture productivity levels have been stagnating for many years,” she said. “Suddenly you’ve had a situation where demand from emerging markets has been growing strong and stronger. The supply response from higher prices has been pretty abysmal: We haven’t seen production rising in response to the strong demand."

Interactive map Rampaging rivers Rivers in many parts of the upper Midwest have overrun their banks in recent weeks. Click to see latest developments as well as current and historical flooding data.

Concerns about rising demand and stagnant production have lead some grain-producing countries to halt exports, which has further crimped supplies for countries dependent on imports and driven up prices.

High demand coupled with tight supplies means that a disaster like the Midwest flooding could have a rapid and lasting impact.

“The issue of food security is becoming a big deal for a lot of food-producing nations,” said Ewen Cameron Watt, a market strategist at BlackRock Merrill Lynch. “There’s a whole host of food-producing nations — Egypt, Vietnam, Cambodia come to mind — who have effectively stopped exporting their surplus product because they’re concerned about potential shortages domestically and their effects on the domestic inflation.”

Demand for corn and soybeans also has been fueled by aggressive development of alternative fuels made from grains like ethanol and biodiesel. Higher oil prices also have raised the cost of producing grains, as farmers now have to pay more for fertilizers and the diesel fuel need to run their combines.

Higher corn prices could, in turn, make ethanol less profitable — despite heavy U.S. subsidies. Some 2 billion to 5 billion gallons of ethanol "could go offline in the next few months due to high corn prices," according to a research note from Citi Investment Research. The United States  now produces about 8.8 billion gallons of ethanol a year.

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