The news media has been offering up a number of reports, facts and figures regarding increasing food costs. "Food inflation" has become a hot topic among the pundits.
We would like to present to you some of the real numbers behind the story. When you peel back the glossy media cover, there actually is some substance to this theme as arguably much of the geopolitical unrest we are seeing can be attributed to food inflation. Food inflation is here, and it is real; so traders should be prepared and position themselves to profit from it.
Corn prices have benefited from what is expected to be the tightest stocks-to-usage ratio in history this year (5%). Stocks-to-usage measures the amount of corn supply on hand at the end of the crop year (September 2010) vs. the expected demand for the coming year (see "Dibs on corn").
The U.S. ending stocks-to-usage ratio for 2010 is expected to be the lowest in history. The March 31 USDA quarterly grain stocks report suggested this number could drop even further.
This shocked corn traders and led to a limit up move and a two-day rally of 75¢. The report pegged U.S. stocks on hand at 6.523 billion bushels, about 165 billion bushels short of trade expectations. What it means, in short, is that despite higher prices, we are using more corn than most anyone had expected. When one considers that nearly 35% of last year’s U.S. corn crop went into ethanol production, there is that much less corn on the market to meet the world’s growing demand for feed grains. Feed grain demand has become especially acute in developing economies such as China, Brazil and India, where newly affluent middle classes are developing appetites for meat.