Cheaper By The Bushel: What Corn Prices Tell Us About Inflation

Today the Labor Department reported that producer prices jumped 1.4% in May. This should not surprise anyone. It is patently obvious to all fully conscious American adults that the price of, well, everything is going nowhere but up. Why some people cannot grasp this fact is a subject for psychologists to debate amongst themselves.Agricultural markets are the latest inflation hotspot. For instance, rapidly increasing global demand along with bad weather in the Midwest is driving corn prices to record highs. Corn futures for December delivery closed at $7.76 a bushel, up more than 80% in the last year.

Let’s explore this a bit. Unless you have a particularly large family, you probably do not purchase corn by the bushel. How much is a bushel, anyway? For shelled corn, it is 56 pounds. Do a little math here and we find that wholesale corn prices are around 14 cents per pound. A year ago the price was about 8 cents a pound. So a pound of corn costs 7 cents more than it did last year. This doesn’t sound so bad.

At a local grocery store this very morning, I found that a 15 ¼ ounce can of whole kernel corn — slightly less than a pound – costs 79 cents. Even though I am a product of public schools, I am still aware that 79 cents is greater than 14 cents. It is 65 cents greater, in fact. At my store, at least, the actual cost of corn accounts for only about 18% of the retail price. In other words, corn at the grocery store is priced roughly 465% more than wholesale.

What does this tell us? Are we being ripped off? Probably not. The grocery business is intensely competitive and it is unlikely that one store could maintain significantly higher prices for long. The explanation is that the raw materials represent only a tiny part of the cost of most food products. Most of the price goes for distribution: transport, storage, packaging, etc. If all these other costs remained constant, the wholesale corn price could go up even more and most people would not notice. But in fact, distribution costs are going up. The trains that move bulk corn, the factories that put it into cans, the trucks that take those cans to local store, and the stocker who drives to work to put those cans on the shelf, all burn fuel. Lots of fuel. That’s why corn costs more. Ditto for just about everything else we eat.

So when central bankers and politicians warn that we must stop inflation before it begins “feeding through” the economy, you have my permission to laugh in their faces. Inflation has already taken hold of the economy. Nothing they can do will stop it now. The best thing they can do it get out of the way before they make it any worse.