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A process operator shows a handful of corn at the GreenField Ethanol plant in Chatham, Ontario April 10, 2008. (MARK BLINCH/Reuters/Mark Blinch/REUTERS)
A process operator shows a handful of corn at the GreenField Ethanol plant in Chatham, Ontario April 10, 2008. (MARK BLINCH/Reuters/Mark Blinch/REUTERS)

Surging corn set to fuel widespread price hikes Add to ...

Looking for a good indicator for where food prices are headed? Watch corn.

Corn's impact on the food industry is unlike that of any other agricultural commodity. At its most basic level, corn is a food staple for billions of people around the world and a key ingredient in dozens of products like breakfast cereals, baked goods, breads, tortillas, chips, soft drinks and even bourbon. But its reach goes much further.

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Corn drives fertilizer prices because corn plants suck up soil nutrients more than almost any other crop. It also plays a critical role in the price of meat because corn is included in most types of feed for cattle, hogs and chickens.

"It's practically in everything we eat," said Douglas Yungblut, a farm consultant based in Waterdown, Ont. "It does drive a lot of the other commodities, other grains tend to follow it as well."

How big is corn? In 2009, the value of the crop in the United States, the world's largest producer, reached $49-billion (U.S.). That was $5-billion more than every agricultural product produced in Canada that year, including wheat, canola, soybeans, livestock, vegetables and even Christmas trees.

So with corn prices hitting near-record levels, it has become the commodity to watch. The price has already doubled in the last six months and it topped $7 a bushel on the Chicago Board of Trade last week. Since the exchange regulates how high prices can go during each trading session, analysts say corn is on track to break its all-time high of $7.65 a bushel some time this week. And few observers doubt it will stop there.

"Demand rationing has not even entered the picture with corn prices trading over $7 a bushel," said John Person, who runs Nationalfutures.com, a commodity investing firm in Glenview, Ill. "It is a strong possibility that we will continue to hear and read about continued record food prices until 2011 harvest time." Mr. Person added that corn could jump close to $10 a bushel if there are any weather problems this year.

The rising price of corn is already finding its way into a multitude of products. Prices for chicken, pork and beef are expected to jump by as much as 4.5 per cent this year. Several companies including McDonald's Corp., Coca-Cola Co., Kraft Foods Inc. and Sara Lee Corp. have said price increases for many of their products are on the way. "Commodity costs represent a major headwind for us in 2011," PepsiCo Inc. chief executive officer Indra Noovi told analysts last week during a conference call. "Our commodity cost inflation is expected to be in the range of $1.4-billion to $1.6-billion."

One reason corn prices will stay high is the constantly shrinking supply of the foodstuff. Last week the U.S. Department of Agriculture (USDA) reported that corn supplies are at their tightest level in 15 years. The agency also upped its estimate for how much corn will be used to make ethanol by 8 per cent, putting the figure at a record 4.95 billion bushels. That is nearly 40 per cent of the entire U.S. corn crop.

The USDA report has intensified the debate over U.S. government-sponsored ethanol programs designed to bring the amount of ethanol in gasoline blends up to 15 per cent over the next decade (Canada also has some government-sponsored ethanol programs but they are not as aggressive). Some of the chief critics have been cattle ranchers, pig farmers and meat processors, who have been reeling from rising prices for feed.

"The fact that more U.S. corn is being exported in the form of ethanol at a time when corn supplies are already low is simply indefensible," said a statement from meat giant Tyson Foods Inc. "We've got to get our energy and agriculture policies in sync."

Ethanol isn't the only factor driving corn prices. There have also been poor harvests in Europe and South America. And China has become a major corn buyer, importing more last year than it had in 15 years.

Whatever is pushing the price of corn, the impact will be felt at kitchen tables around the world. Corn "is used in so many applications, from an energy additive like ethanol, to sugar substitute, to animal feed, the impact is substantial," said Mr. Person of Nationalfutures.com.

Added Al Mussell, a senior research associate at the George Morris Centre think tank in Guelph, Ont.: "To say this stuff is ubiquitous in food products would be putting it mildly."

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