Crop planting is seriously delayed this year. Who will that affect more, Chinese factory works or the average U.S. household? Merely asking the question illustrates the degree of integration of the world’s food markets.
This all seemed highly relevant Monday morning when snowflakes were landing on the newspapers on my front step. The U.S. Department of Agriculture Crop Progress reports that came out later the day confirmed just how delayed planting is, particularly for corn, spring wheat and sugar beets.
As of May 1, Illinois had 10 percent of corn planted versus a five-year average of 46 percent. Indiana was similar: 2 percent planted this year versus 31 on average. Iowa was at 8 percent versus 48 percent, Minnesota 1 percent versus 46 percent, South Dakota 2 percent versus 15 percent, Minnesota 1 percent versus 46 percent and Nebraska 15 percent versus 35 percent.
Spring wheat, balrey and sugar beet plantings similarly lag behind.
Not everything is delayed. Winter wheat generally is doing well. Idaho and Washington are much closer to normal. Rice and cotton are only a bit behind their usual schedules.
Nor are we yet in a range where yield declines are inevitable. For corn, that is another week off. Moreover, modern shorter-season corn varieties carry less of a yield penalty for late planting than they once did. And crop seasons can turn around dramatically, for good or ill, over a six-month growing season.
Then, too, there is the capital intensity of modern U.S. agriculture. Snow on my paper Monday morning was one thing, but driving across southern Minnesota the next day was another. Enormous tractors were out wherever land was dry, covering many acres in an hour. At midnight, halogen tractor lights could still be seen across the landscape. So much can change in a week or two.
The fact that corn prices dropped rather than rose in response to Monday’s planting report showed that markets had already incorporated delays into price expectations and that the news was not as bad as some had feared. But the fact that prices are at $7 per bushel six months after an enormous harvest shows the strength of global demand.
So how will this affect Chinese factory workers or U.S. families?
Spikes in wheat and rice prices feed through into consumer food prices very quickly, because those crops are eaten directly by humans. Most corn is fed to livestock, the products of which are then eaten by humans as eggs, chicken, pork or beef. This delays any price adjustment at the consumer level.
Farmers, even ones with very large operations, are the proverbial price takers. They cannot autonomously raise prices in response to an increase in input costs as can a machinery manufacturer. At first, livestock producers must absorb higher feed costs. Over time, some cut back production. This reduction in supply forces livestock product prices higher. That is when consumers feel it.
Does this happen faster in China, which is a net importer or corn and where most corn goes into poultry and pork production, or in the net-exporting United States, where a higher proportion is fed to beef?
Change in Asia’s livestock sector and in the levels of feedstuff imposts has been so rapid that there are no patterns to look at. But there is evidence to suggest that prices will rise more rapidly there than here.
Who will feel the greater pinch? While Chinese consumption of corn-fed livestock prices has risen sharply with Chinese incomes over the past two decade, per-capita consumption remains low compared with wealthier countries. But food, and the livestock-product component of food, makes up a higher proportion of total household expenditures in still-poor China and other developing Asian countries than in our country or in Europe. So the average Chinese factory worker in one of the coastal cities may be more aware of the pinch earlier than a U.S. suburbanite.
This may be of more political concern to the Chinese government than here. The lower a household’s income, the greater food prices loom as a concern. Food price increases in Egypt probably were a larger concern for a bigger portion of the population that a desire for modern democratic rule. And China is already feeling the pinch of inflation.
This occurs while China is letting its currency increase in value against the U.S. dollar. This makes Chinese manufactured exports more expensive, which, all else held constant, depresses urban industrial employment. But it makes imports, including food and feedstuffs, cheaper.
All indications are that this summer will be a wild ride in commodity markets. U.S. consumers may feel an accentuated pinch in food prices, but high global agricultural commodity won’t affect them as deeply as they will poorer people elsewhere.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.