Spiking U.S. Grain Prices Have Far-Reaching Implications for Investors

In the wake of one of the worst droughts in U.S. history, domestic crop prices are spiking and leading to record gains on the S&P GSCI Commodities Index.

Corn, soybeans and wheat all have climbed in price recently and could rise further. The result is that investors in agricultural commodities, stocks and funds have had a chance to profit handsomely and additional gains may well lie ahead.

Year-to-date, the per-bushel prices have jumped 19.14% to $7.97 for corn; 32.04% to just above $17 for soybeans; and 24.45% to $8.85 for wheat. Indeed, the commodities index jumped 6% in August.

This kind of food price inflation could have significant consequences for the U.S. markets. For one thing, corn is used in a number of unexpected products — such as wallpaper, toothpaste, and insecticides. Thus, price hikes in corn could have a ripple effect far away from the kitchen table.

This jump in commodities prices also could have political dimensions. As November’s election rolls around, inflated food prices could become a voting issue in Midwest swing states such as Michigan and Ohio, both suffering from the summer’s drought. Michigan, for instance, lost almost its entire tart cherry crop and sustained major damage to other orchard fruits such as sweet cherries, apples, pears and peaches.

A rare period of summer-like temperatures in March caused trees to blossom earlier than usual, only to be followed by crop-destroying frosts and freezes in April. In addition, blizzards, hail, tornadoes, flooding, excessive rain and lightning between Jan. 1 and May 11 contributed to the crop disaster in the state.

Michigan Gov. Rick Snyder requested disaster relief on May 25 from the U.S. Agriculture Department Secretary Tom Vilsack, naming 72 of Michigan’s 83 countries that were affected.

Voters in Michigan and other states hurt by the drought might vote with their pocketbooks and hold the president partially accountable for climbing grain prices, if needed help is not provided.

Doug Fabian, editor of ETF Trader, said that U.S. agricultural policy has a direct bearing on the success of the commodities sector:

“America is the top agriculture producer in the world; we have some of the best practices in farming that come from a partnership between U.S. farmers and U.S. farm businesses,” Fabian said.

This price rise for agricultural commodities has international dimensions, as well. The fact that prices are at or near all-time highs will raise costs for China, one of the world’s biggest buyers of food crops. It also could lead to higher food prices for international consumers, as well. The United Nations Food and Agriculture Organization’s food price index rose 6% in July, in direct correlation with spiking grain prices in the American Midwest. The August jump was the steepest increase in almost three years. The food price index rose x% in August to continue the upward climb.

However, price inflation is not necessarily an indicator of economic growth. Though food prices are rising, and signs indicate that they will continue to grow, higher food bills likely will drain the individual consumer’s purchasing power. Because wages are not increasing alongside food prices, the recent crop inflation may not necessarily be a sign of economic growth.

“Agriculture investments will be a great inflation hedge in the future as higher agriculture prices drive reinvestment in productivity of farming,” Fabian said.