Corn prices — which have already surged about 50 percent in the past two months — could go significantly higher if current trends hold up, and the effects might be felt throughout the economy.
Price momentum indicates corn could rise at least 21 percent over the next six months, putting $9.50 a bushel or even higher into play, according to a model used by the American Restaurant Association.
"It's not infallible but it suggests that there's definitely upside risk here in this market," said David Maloni, president and founder of the ARA Group. "It's alarming, that's why we look at it. We would not be surprised to some type of blow-off occur in corn and soybeans in the coming weeks."
Corn prices hit their lowest point in nearly two years in mid-June but have spiked violently as drought conditionshave worsened across the country.
With little relief in sight, there's growing belief from agriculture experts that the price trajectory for grains is decidedly higher.
"It just depends on how bad these crops are, and I'm not sure anybody knows how bad they are," Maloni said. "We're rationing corn and soybean demand. The question is how much demand do we have to ration? We don't know and probably won't know for sure until later this fall."
More troubling for corn's future is that the danger of a price increase isn't just indicated by technicals: there also are fundamental reasons. They include growing demand not just in the U.S. but also abroad in emerging markets, as well as the onerous ethanol mandates from the U.S. government.
"From a supply situation, yes, there is the possibility for a run at $9 or above," said Darin Newsom, senior analyst at DTN in Omaha, Neb. "It's there because what we could be facing is one of the tightest supply situations the market has ever seen, given the ongoing drought and given the type of yields that are starting to come in in front of Friday's USDA reports."
"Just about everybody connected to the corn industry is going to feel some kind of pain before this is all said and done."
If the production numbers come in as light as expected, the news could be just the thing the corn market needs to take yet another leg up.
With corn used to manufacture numerous food products as well as produce enthanol and feed livestock, a sharp move would have wide reverberations.
"This is not going to end well for anybody," Newsom said. "Just about everybody connected to the corn industry is going to feel some kind of pain before this is all said and done."
The only bright side both he and Maloni see is that demand likely will capsize if the surge is that high.
"If production gets as bad as what is expected, then demand is going to be cut further," Newsom said. "What's going to happen then is prices will post a quick peak and then collapse."
However, other forces could come into play to put a floor under food prices. The Federal Reserve's monetary policy is not dollar-friendly, so if the U.S. currency starts falling that could push commodity prices higher.
Food prices rose 0.2 percent in June, before the real spike in corn prices took hold. Maloni said a 3 percent to 5 percent increase in food is possible from the expected corn increase.
Richard Hastings, macro strategist at Global Hunter Securities in Newport Beach, Calif., looks at the spread between the Fed funds rate — near zero percent — and the consumer price indexand sees potential trouble.
"The market may not understand the pervasiveness of inflation because of the grain problem. I don't think the market's pricing that in," Hastings said. "Now that we have geopolitical, supply and refinery things pushing up gas prices to some interesting level, then you come in with the grain problem. You're looking at a pretty good push over the next four to five months against the CPI."
The ARA's Maloni said the restaurant industry also will feel an impact, though he said "it's not like a catastrophe."
He expects some government involvement, with efforts possible to reduce the ethanol mandate the most likely possibility.
"It's not a catastrophe for the restaurant industry," he said. "It certainly could be a catastrophe for those who are more needy in developing countries who are impacted more by a surge in grain prices, and of course the farmers who have suffered because of this."