Amid unusually widespread drought, warnings on food prices
The drought has already raised the price of corn following lowered USDA crop projections that some experts say are still optimistic. Look for meats to lead the way as food prices rise.
Farmers fromÂ Illinois toÂ Wyoming are watching crops and livestock wither as the most widespread drought since 1956 persistsÂ across more than half the US, and higher food prices wonâ€™t be far behind.
Already, the US Department of Agriculture has lowered its crop projections for corn by some 12 percent, and the price of corn has jumped 34 percent in the past months alone. As cornÂ â€“ one of the hardest hit crops â€“ is one of the main ingredients in everything from, well, corn flakes to cattle feed, experts say a rise inÂ food prices is inevitable.
â€śPrices are going to go up,â€ť says Justin Gardner, assistant professor of agribusiness at Middle Tennessee State University. â€śThe only question is when.â€ť
The first categories to be hit, he says, are meats, such as beef, poultry and swine. But â€śfiguring how quickly the pocketbook will get hit is a bit tricky,â€ť he notes, â€śyou have to figure how long it takes to move corn into cattle and into your grocery store.â€ť
Americans are probably already seeing the droughtâ€™s impact, and it will get worse before it gets better, says Jeff Born,Â a finance professor and director of the executive MBA program at Northeastern University in Boston.Â
HeÂ visitedÂ parts of the afflicted area a couple of weeks ago and says there has been no significant relief with rain. He points out thatÂ while corn is resilient, if the stalk dies the ears cannot get water no matter how much rain falls later.Â
Bottom line, he says via e-mail,Â is that â€śif you like bacon/pork you should buy it now, because by the fall you are going to be stunned at what it will cost.â€ť Â
USDA officials, however, are predicting a less dramatic impact on food prices. According to USDA estimates,Â only 14.6Â cents of every grocery dollar goes to farmersÂ or ranchers.Â Labor and processing make up a much larger part of the cost ofÂ food, points out Professor Gardner, adding that â€śthe impact of the drought wonâ€™t really change those costs.â€ť
The USDAÂ calculates that overall prices rise one percent for every 50 percent increase in the price of corn.Â On Sunday, Agriculture Secretary Tom Vilsack appeared on CNNâ€™s â€śState of the Unionâ€ť to say itâ€™s too soon to see the crop losses now being witnessedÂ across the nationâ€™s bread basket translate into sticker shock at the grocery store.
While commodity prices will likely increase, he said, â€śit will have a marginal impact on food prices.â€ťÂ He addedÂ that energy prices drive up food prices more significantly.
â€śThe prices and the impact of a drought probably will not likely be seen in the grocery aisles until later next year, 2013,â€ť he said.
"My sources in the Midwest tell me that the drought is actually worse than indicated in USDA's recent yield estimates,â€ť he says via e-mail.Â HeÂ says the USDA estimates of a 12 percent decline in corn yields were fromÂ â€śoverly optimistic initial yield estimates.â€ť He suggests that farmers will more than likely see close to another 10 percent decline in yield.
Even so, he adds, projected corn production in 2012 is still higher than the levels in 2010 or 2011.Â What will make the difference is global demand, which is higher. As far as the economics of livestock, he points outÂ that much of the adjustment to higher feed costs has already been made through reductions in animal numbers.
However, he adds,Â â€śitÂ will still be hard for those remaining in business this year.Â The issue will be how many will remain in business until grain prices decline.â€ť
How hardÂ your bottom line is hitÂ depends on where you are in the food chain, says Scott Rothbort,Â publisher of The LakeView Restaurant & Food Chain Report and president of Lakeview Asset Management in Milburn, N.J.
Large companies such as Kelloggâ€™s and General Mills hedge their lossesÂ in the marketplace, protecting themselves from small price gyrations of the marketplace for up to six months. Restaurants and other food vendors do the same, with longterm contracts thatÂ lock in price stability.
Even farmers haveÂ crop insurance to cover their losses, a federal program that by some estimates may top $30 billion in 2012. â€śBut prices for the average consumer at the grocery store will be more problematic,â€ť he says, adding, â€ścertainly fresh produce, meat, and baked goods will be impacted.â€ť
This drought isÂ unusual, he says, because normally they tend to be â€śpatchy,â€ť meaning that while one area of the country is experiencing drought, others areÂ compensating with other weather.
But what makes this drought â€śso impressive is that it is largely continuous.â€ť More than half the country isÂ engulfedÂ by this drought, he points out, adding, â€śthat makes it special,â€ť and the longer term impact less clear.Â