Drought Conditions Driving Corn and Soy to The Sky—Will Central Banks Make Things Worse?

FRITCHTON, IN - JULY 17: Corn plants dry in a drought-stricken farm field on July 17, 2012 near Fritchton, Indiana.

Photo by Scott Olson/Getty Images

As I mentioned yesterday, drought conditions across a large swathe of the United States are prompted hardship from farmers and bailouts from the federal government. They’re also driving financial market prices of key U.S. agricultural commodities through the roof. Here’s corn and soy, two of our main staples:

This is going to be excellent news for whichever soy and corn farmers’ crops haven’t been ravaged by drought, but the implications elsewhere are quite dire. Americans aren’t going to be starving in the streets due to higher food prices, but households will feel the pinch and the impact on household budgets won’t be helping the economy. High food prices are also quite bad for restaurants and allied businesses that use food as a production input. Last but by no means least while it should be obvious that high interest rates and sluggish job growth is not an appropriate remedy for a drought in North America, anything that pushes prices up will increase political pressure for tight money.

The Federal Reserve is, I think, smarter than that but the European Central Bank is not. In the past the ECB has tended to seize on any possible excuse for inappropriately tight money, and a failed corn crop is as good (or bad) a reason as any. And their monetary policy video game quite genuinely seems to be trying to teach kids that tight money is a smart response to bad weather.