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Published: Tuesday, 7/24/2012

Drought to boost food costs

Futures prices for soybeans, corn surge to record highs

REUTERS
Laurie Russell selects a half dozen ears of corn at the Prairie View Farms sweet corn stand on Sagamore Parkway in West Lafayette, Ind. Corn and soybean prices on the futures market have surged to record highs amid the worst drought in half a century, with new crop contracts for corn rising 50 percent since early June and soybeans increasing about 35 percent. Laurie Russell selects a half dozen ears of corn at the Prairie View Farms sweet corn stand on Sagamore Parkway in West Lafayette, Ind. Corn and soybean prices on the futures market have surged to record highs amid the worst drought in half a century, with new crop contracts for corn rising 50 percent since early June and soybeans increasing about 35 percent.
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WASHINGTON -- Americans face higher food prices at the supermarket because of a drought this summer, but the increase will not have a lasting impact on inflation or the Federal Reserve's thinking on monetary policy.

Corn and soybean prices on the futures market have surged to record highs amid the worst drought in half a century, with new crop contracts for corn rising 50 percent since early June and soybeans increasing about 35 percent.

"It's kind of like a transitory oil price spike. We get good rains next year and it's gone, it isn't something that the Fed will fight as inflationary," said Diane Swonk, chief economist at Mesirow Financial in Chicago.

"Even though it is inflationary, it would not change monetary policy."

When oil prices spiked early this year, the U.S. central bank viewed the impact on inflation as temporary. Inflation pressures have generally been benign against the backdrop of sluggish domestic and global demand.

The inflation outlook will be one of the key factors that will determine whether the Fed will ease monetary policy further this year to aid the flagging economic recovery.

The Consumer Price Index increased 1.7 percent in June from a year ago, matching May's gain and below the Fed's 2 percent target.

Food prices -- which account for about 14.2 percent of the CPI -- increased 2.7 percent on a year-ago basis, pushed by rises in the cost of fruit and vegetables and meat products.

New-crop soybean and corn contracts for delivery in November and December respectively hit all-time highs last week. Economists said it will take at least six months for the impact to carry through to the supermarket.

"The effects become lagged because food processors have already locked in their commitments with the old crop. They will not be felt so much in 2012 as in the first half of 2013," said Howard Simons, an analyst at Bianco Research in Chicago.



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