Blame it on Ethanol

By Charles Delvalle

Did you know that ethanol production is on pace to use up 50% of our domestically grown corn? Predictions are that by 2012, ethanol will use ALL domestically grown corn.

That kind of use is enough to jack up the price of any commodity. Just imagine if 100% of the copper produced was single-handedly consumed by homebuilding. Other applications like wiring and cars would be in quite the predicament.

You can expect much of the same for corn. If 100% of the domestically grown corn is used for ethanol production, prices will skyrocket – and they already are.

According to the Wall Street Journal, the price of corn has gone up 61% from last year. And if a severe drought hits American corn fields, the price will rise even further.

Mix in the droughts that could occur in Central America due to the current El Niño, and you have a bullish scenario for corn prices, which will surely impact inflation.

Up to now, inflation hasn’t been too bad when it comes to food. But this will be the year food prices jump. In fact, it’s already happening. The latest Producer Price Index (PPI - which measures prices paid to producers) saw food prices rise 1.7%, the largest gain in more than three years.

And by the end of this year, corn will be twice as expensive. This price hike will reverberate all the way down the production chain. For example, Coca Cola prices could rise as corn syrup becomes more expensive… Corn flakes will rise in price… Beef, Pork and Poultry become more expensive as their feedstock (which uses corn) becomes more expensive.

Once all of this food becomes more expensive, restaurants and fast food joints will have to raise their prices just to keep profit margins looking good.

And that’s just corn. The truth is this will impact much more than corn related goods.

You see, if farmers see a better reward for growing corn this year, they’ll decide to grow more corn and less soybeans or wheat.

Since there will be a smaller crop of soybeans and wheat, prices go up. And with it, the prices of things like pasta, beer, alcohol, soymilk, soy, soybean oil and flour will rise. Again, this will put pressure on restaurants and grocery stores to raise their prices or risk shrinking margins.

And all of this would never have happened if the US had not decided to use corn to produce ethanol. But there’s no reason you have to sit there and just take the price hike.

You can make money from this food inflation by investing in an agriculture producer, corn seed provider, fertilizer provider or even a company that provides equipment to farmers.

Happy investing,

Charles