What's going on with Corn?

Americans are crazy about corn. Well, some are. Corn is used for the following:

-Sweetener (high fructose corn syrup)
-Adhesives
-Aspirin
-Beer
-Gum
-Frozen Food
-Automotive (Cylinder heads, spark plugs, tires)
-Fuel (!)
-Instant coffee
-Ketchup
-Livestock feed
-Mayo, Mustard, Peanut Butter
-Soaps, Coke, & Toothpaste

The one item on the list that is causing food prices in general to rise 10-15% is ethanol. Ethanol is derived from corn inefficiently and has had an impact on Americans' finances over the past 5 years. If we used sugar instead of corn to make ethanol, which is a source of fuel for internal combustion engines (ethanol was once used for heat and lamps) we'd be far better off. It has incredible history as it has been used for recreation by many civilizations dating back to the Chinese of 9,000 years ago.

Here is a fun fact: Brazil using only 1% of its arable land produced 6.5 billions of gallons of sugar ethanol, about half the oil production of Iraq. Ethanol accounts for about 50% of Brazil's automotive fuel. You hear people talk about energy independence or oil independence, Brazil only relies on 10% imported oil for its energy needs--due mainly to its ethanol industry.

Ethanol from sugar versus ethanol from corn:

-8 units of energy per unit invested for sugar
-1.5 units of energy per unit invested for corn
-60 cents per gallon of ethanol from sugar
-$1.74 per gallon of ethanol from corn

In 1973, the USDA under Nixon's watch did away with agricultural price supports that were originally introduced by the Roosevelt administration. The USDA chief encouraged farmers to grow "fencerow to fencerow" as the US government guaranteed the difference between production cost and market price (subsidies). After prices collapsed, 'wet milling' came into its own. The new process turned corn into a sugar alternative: high fructose corn syrup. As Reagan took office and ushered in sugar tariffs, prices naturally rose. This made corn syrup the cheaper alternative to large companies like Coca-Cola and Pepsi.

The sugar tariff is benefiting the corn farmers at the expense of foreigners producers. We're bankrupting African and South American Farmers while sending them food aid. World sugar prices stand at about 22 cents/lbs, while US prices stand at 44 cents/lbs. Should prices collapse, the US government guarantees 18 cents.

So why not sugar-based ethanol? Corn farmers' equipment during the corn syrup off-season also makes ethanol. US government provides a 45 cent/gallon subsidy, and a 54 cent/gallon tariff on sugar-based ethanol. Even Federal Reserve Chairman Ben Bernanke stated that allowing Brazilian ethanol would affect prices favorably to Americans. Political groups have prevented from free markets and prices to work efficiently.

Congressional Budget Office concludes prices are negatively impacting Americans due to tariffs and biofuel policy

Consumer Price Index-Why it matters

Today, the Bureau of Labor Statistics released the CPI data, the most widely used measure of inflation. The index rose 0.4% in November, preceded by October's rise of 0.3%. If we exclude the increase in Food and Energy, the most volatile components, the index was flat at 0%. CPI tracks the weighted average of prices of a basket of goods and services from month to month. CPI is used to adjust the cost-of-living for both government programs as well as private contracts. This measure includes sales taxes associated with purchases of 200 categories in the index, but excludes Social Security taxes, investing in Stocks, Bonds, or Life Insurance.

CPI is the most followed economic indicator and is considered to be a market mover. If a sustained rise in the CPI will cause the Federal Reserve, our central bank, to tighten monetary policy. In other words, interest rates will rise (cost of borrowing or re-financing will go up).

Source

Producer Price Index-Why it matters

PPI captures the price movements at the wholesale level before price changes retail costs.

Here is a historical look at the PPI. It has grown at a rate of 6.95% annually for the past 30 years.

The PPI is not as strong as the CPI (consumer price index) or PCE Deflator (Personal Consumption Expenditure) in detecting inflation, but it is valuable because it is the first available measure of inflation in the month. Today there was a seasonally-adjusted increase in the PPI of 1.8%. This could possibly be a blip as it is only the second consecutive increase; October showed an increase of 0.3% year-over-year.