Most of us think of corn as a sweet food that we enjoy in various forms. This is the barbecue season and corn on the cob is a natural companion food to the hot dogs, burgers and steaks that are the norm on the grill. But corn is such a versatile product with multiple uses. One good example is its use as a feed for animals. This is because corn is a rich source of carbohydrates, and in combination with protein from soybeans, it is an effective diet for livestock. It is also extremely relevant to our fuel supply. In the United States, federal mandates require vehicles to use a blend of gasoline and biofuels like ethanol—94% of which is produced from the starch in corn grain.
Remarkably it does not end there. Corn is used to make Dextrose, a sweetener, dextrins for industrial uses, cornstarch, corn oil, and corn syrup to name but a few. Corn is also used to make toothpaste, dish detergent, paper, clothing dyes, explosives and soaps, all part of a vast list of products that contain corn products. In fact, it is estimated that one quarter of items found in a grocery store contain corn in some form.
In addition, corn is used as animal feed and even as a source of energy. When the price of corn as a commodity hit a historic high of $8 a bushel, it naturally had repercussions on a long list of products. Why did corn suddenly spike? A drought in some of the corn growing regions as well as a shrinkage of sources such as corn that was affected by the Ukraine war.
Because of its diverse usage and extreme value, corn is a commodity that is traded and most importantly determines the price of a long list of products. It is not only corn but a host of agriculture products such as soybean that make up the commodity market. So, if one wants to understand why so many prices are going up and why inflation is haunting us, simply check out the commodity market.
What is a commodity? The dictionary defines commodity as an economic good such as a product of agriculture or mining agricultural commodities like grain and corn. Some simply define it as raw materials. Commodities are traded and can be quite a lucrative investment when buying low and selling high, as so many people have found out.
Commodity prices are believed to be a leading indicator of inflation through two basic channels. Leading indicators often exhibit measurable economic changes before the economy as a whole does. One theory suggests commodity prices respond quickly to general economic shocks such as increases in demand. Rising commodity prices increase the cost of the goods made by producers who will, in turn, pass on those costs to consumers. We tend to notice price increases most for products that we purchase frequently, such as grocery items and fuel for our vehicles but the repercussions of commodity price increases go far beyond the products we use every day.
One economic expert summed up the current state of commodities as follows: “The recovery of the global economy following the shock of the pandemic, in a context of abundant financial liquidity and a highly expansionary fiscal policy in the major developed countries, has favored rising commodity prices.” In the first two quarters of the year, Bloomberg’s general commodity price index rallied more than 20%, largely driven by the rise in energy prices (44.5%), followed by the less pronounced but nevertheless important increase in agricultural goods (20.5%) and industrial metals (17.6%).
It is these whopping commodity prices that are whipping up the winds of inflation. For the purpose of understanding the impact of the commodities on inflation, consider commodities as the ingredients for the products you buy. For example, corn syrup is often used as a sweetener in beverages, candies, and other sweets. Also, candies that are formed in molds often contain cornstarch in order to maintain consistency. So, the grocery consumer is not just paying more for corn itself whether in a can or on the cob, but every single product that uses corn as an ingredient is affected.
When corn is used as animal feed, any appreciable increase in the cost of the corn will subsequently drive up the price for beef and poultry as we have seen in recent months. The farmers simply pass along any increase in price for the feed to the producers and distributors and the customer bears the brunt.
Thus, the price of corn has had a significant impact on food pricing. As prices soared to an almost decade-old high, it in turn caused higher prices for any food products that included corn as an ingredient. With prices as high as $8 a bushel, it almost immediately had an enormous impact on a broad range of other food products. While being one of the most important ingredients, corn was just one of several agricultural commodities that has seen surging prices in recent weeks, in part due to the war in Ukraine ( a huge supplier of wheat), again prompting increased prices in a broad range of products. Chicago soybeans futures traded around $17 per bushel in the past year, trailing only lower palm oil prices as Indonesia, for example, is allowing more exports after a cap earlier in the year, hopefully easing supply issues. Still, prices of soybeans grains remain not far from a record-high of $18 hit in 2012. Add that to concerns that hot weather in the US could damage yields, alongside high demand from top importers and tight supplies from major producers, and it adds up to more price increases.
Drought in the western U.S. and elsewhere in the world has also driven prices higher. This comes on top of global supply concerns which are hitting agricultural commodities broadly. Since it is such an important category, corn is often the headline of rising commodity prices. But in truth, it is just one of several agricultural commodities that has seen surging prices in recent weeks, in part due to the war in Ukraine. Even prior to the war, agricultural commodities were seeing some upward pressure supply chain disruptions and high transportation costs that are contributing to inflation throughout the economy.
The discussion on inflation these days usually includes supply chain issues, labor shortages, transportation costs, and even weather. But to really understand the driving force in inflation, it is important to understand commodities and currently they are headed in only one direction: up!