Reviewing the Building Blocks of the Global Food Chain

Declining crop prices are helping to alleviate inflationary pressures, notes Pavel Molchanov, Managing Director, Energy Analyst, Equity Research.

To read the full article, see the Investment Strategy Quarterly publication linked below.

For a typical consumer, the two most hot-button topics are food and energy. Both play a significant role in household spending, and just as importantly, both are highly visible. Gasoline prices are noticed every time a driver fills up at the pump, and food prices are front and center during every visit to a grocery store. Bearing in mind that everyone needs to eat, whereas it is possible to avoid spending on fuel, food tends to outweigh energy in economic importance. In the U.S. Consumer Price Index, for example, food and energy are weighted at approximately 14% and 8%, respectively. While the media likes to write about fast food and cartons of eggs as indicators of food cost inflation, the building blocks of the global food chain are staple crops.

Corn prices: A double-edged sword

To the extent that Americans think about crops, they are most familiar with corn – for one thing, they put it in the gasoline tank. Practically all of the fuel-grade ethanol blended into U.S. gasoline is derived from corn. Corn is also the predominant U.S. source of animal feed. Only 1% of U.S. corn supply is sweet corn, which is what’s sold in the supermarket. The U.S. is the world’s largest corn producer, accounting for nearly one-third of global supply, or as much as second-ranked China and third-ranked Brazil combined. Corn prices fell this past February to their lowest levels since late 2020, around $4/bushel, down from a high of $8/ bushel in mid-2022. U.S. corn plantings in 2023 were up six million acres to a near record 95 million acres – this means more supply in 2024. The U.S. Department of Agriculture forecasts a decline to 91 million acres in 2024, which shows a response to the lower prices.

China is the world’s largest corn importer, followed by Japan – in both countries, corn is important for animal feed. China’s own corn production has plateaued, so all of its incremental demand needs to come from imports. Historically, China had imported almost entirely from the U.S., but that is changing. After the Chinese government approved purchases from Brazil in 2022, imports from the U.S. fell by roughly half.