Corn and the Economy

The markets continue to be erratic this week responding to the rising price of corn, the slow U.S. economic recovery and the downslide in Europe.

Corn

It appears the economy isn’t the only climate struggling this year. With severe droughts and scorching heat tearing across large portions of the west, corn is quickly becoming a luxury good.

“I’ll use the word catastrophe – that’s my definition,” said Larry Pope, chief executive of Smithfield Foods in a recent CNBC article.* “Beef is simply going to be too expensive to eat. Pork is not going to be too far behind. Chicken is catching up fast,” he added.

Corn shortages have farmers and cattle ranchers trimming back their herds in an effort to minimize the skyrocketing costs associated with feeding their animals. Also contributing to the shortage is an Environmental Protection Agency mandate requiring more than 13 billion gallons of corn ethanol to be used in transportation this year. So until we see temperatures return to a normal level with an acceptable amount of rain, I think corn will continue to be in high demand.

The State of the Economy

As we turn our attention to the markets we see sluggish progress in the U.S. and slowing growth around the world. The recovery from the “Great Recession” of 2008 – 2009 is advancing, but at a slower pace than desired. Unemployment is stuck around 8% as companies resist hiring new employees. And despite some of the lowest interest rates in history economic growth continues to be below expectations. A bright spot is the housing market, which seems to be improving after a multi-year slide.

Many U.S. companies continue to do well, especially those that benefit from sales to emerging markets. The key driver continues to be the growing middle class consumer found in countries like Brazil, Russia, India, China, Mexico, South Korea and Taiwan. The economic activity in these areas averages two or three times our domestic growth.

Europe

Europe’s debt crisis and subsequent recession is affecting companies all over the world.  As European headlines unfold markets react suddenly and the volatility continues. Normally the stock market is forward looking – 6 months out or so. Today markets are instantly reactive and many investors have lost their long-term focus.

The resulting volatility can wear people down. However there are sparks of slow growth to be found.  The U.S. consumer is still very active, along with the growing middle class consumer in the emerging markets. Opportunity can be the flip side of volatility if we combine it with patience and perspective.

A great example is the stock market of the late 70’s and early 80’s – another time of frustration for investors. During that period economic growth was way down, unemployment was high, policy was uncertain and auto sales were off. I recall Business Week published an article saying stocks would not be going up for a decade. But August 1982 marked the beginning of one of the best bull markets in history!**

Today’s market might feel similar to watching corn grow for some investors. But we all know that with time and patience (and rain), growth occurs – the crop comes in and soon we are able to enjoy some fresh corn-on-the-cob for our summer BBQ. Patience and perspective changes everything.