Floods May Further Bloat Food Costs

Heavy flooding in the Midwest has sent corn prices soaring to record highs -- that much is clear. But what the effects will be in grocery stores and on dinner tables is far from obvious.

The torrential rains have left plantings down and projected U.S. production is set to fall 10% this growing season vs. last year, according to the most recent data published by the U.S. Department of Agriculture on June 10. As a result, prices for September-dated corn contracts have zoomed to $7.22 a bushel recently, up from around $6 at the end of June.

That may be as far as it goes.

Don Roose, president of West Des Moines, Iowa-based U.S. Commodities, says he doesn't see the price going a whole lot higher.

"I think something sub-$8 a bushel" will be the top, he says.

So, how does the price not continue its upward trajectory when U.S. consumption of the grain for ethanol has been expected to balloon?

Roose sees the high prices actually doing what they are supposed to do: restricting demand.

"That's the job of the market; to go high enough so that someone starts to slow down," he says.

Although he can't say for sure, Roose thinks it's probable that ethanol production won't grow as much as previously predicted, consumption of the grain by domestic livestock such as cattle and chickens will be more subdued and exports probably won't be as aggressive as they have been in prior years.

On top of that, the projected shortfall is likely to be somewhat offset by higher harvests abroad such as in Russia and Europe, explains Jerry Norton, grains economist at the U.S. Department of Agriculture in Washington, D.C.