Higher Commodity Prices Might Be Good for American Economy

Thursday, 19 Jul 2012 08:33 AM

By Jacob Wolinsky

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According to The Wall Street Journal, corn and soybean prices have hit record levels. For the year, corn is up 23 percent, and soybeans are up 40 percent.

The news seems pretty bad on the surface. This is the worst drought since 1956, affecting 55 percent of the country. Some food experts are calling the drought a "disaster" for farmers.

“The drought could get a lot worse before it gets better,” says Joe Glauber, chief economist at the Agriculture Department.

There is fear that prices could go even higher if the temperature does not drop anytime soon and rain does not fall. Food prices will likely soar, hitting middle-class families pretty hard.

Raw vegetables like corn will increase in price. However, prepared goods will also increase in price, since products like corn are used in many food items.

The food manufacturers are likely to pass on higher prices to consumers, especially since food is a necessity and not a luxury.

However, there is some silver lining in the news. Americans complain that China makes everything, which is largely true nowadays. Go to any clothing, furniture or electronic store and most goods will have a “Made in China” label on them. America is an innovator of technology, although China does steal some of the secrets from the United States.

However, America has one good that China does not have and cannot steal: food. America is one of the largest food exporters in the world.

China is key here for two reasons.

The first reason is that China depends on America for food. While food prices might rise for most Americans, at least some money will come back to America. As American companies raise prices, they will make more profits on exports, rewarding shareholders and the overall American economy.

The second reason that Americans should not worry about rising food prices is because China’s economy is not looking too good. China is known for its secrecy, so when Premier Wen Jiabao says the country is facing “huge downward pressure,” that is not a good sign, to say the least.

Without getting into the whole macro picture, this is a very good sign for food prices in the United States. With China’s growth slowing down, import demands for food will decrease. Food is a necessity, but with most Chinese living in rural areas on meager wages, even a small drop in consumption there could have a huge effect on food prices here.

The drought is not good, but investors and regular Americans should realize that there are at least two bright aspects to the current tragedy.

© 2014 Moneynews. All rights reserved.

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