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Economy
12:42 pm
Wed July 25, 2012

Pray For Rain: Food Prices Heading Higher

Originally published on Wed July 25, 2012 2:30 pm

A fierce drought has been scorching crops this summer, but it's still too soon to know exactly how much of a hole it will burn in your wallet.

The U.S. Department of Agriculture has just released its latest forecast for retail food prices. Although beef and poultry prices are expected to rise as much as 4.5 percent this year, the USDA left its earlier forecast for overall food inflation about where it was — at 2.5 percent to 3.5 percent for this year.

That could change if the drought continues, USDA economist Richard Volpe said Wednesday.

When it comes to rain, "it's a moving target; it's changing every day," he said. "Until we get that first heavy rain, we're not going to know for sure" just where prices will end up in 2012. But it's clear the general direction is up – especially for meat. And 2013 will see even more food price inflation as the drought impact works its way through the pricing pipeline, he said.

The USDA report concluded that "the severe drought in the Midwest is expected to affect prices for corn and soybeans as well as other field crops which should, in turn, impact retail food prices."

The Outlook For Next Year

But the lag between when a crop is in a field and when a food product gets to the store shelf is considerable. That long process likely will shift much of the drought-related price inflation into next year. "The transmission of commodity price changes into retail prices typically takes several months to occur, and most of the impact of the drought is expected to be realized in 2013," the USDA report said.

A good example of that lag can be found at your meat counter today. The high prices you see there reflect the impact of last summer's vicious drought in Texas. With the ground burnt dry last year, the cost of keeping cattle fed in Texas shot up. The conditions sent beef prices soaring, up 10.2 percent for 2011.

The impact is carrying over into 2012. The USDA says beef and veal prices will rise as much 4.5 percent this year and 5 percent next year. That's because last summer's conditions forced Texas ranchers to slaughter an unusually large number of livestock last fall. A "historically low inventory" of cattle and hogs is driving up meat prices, Volpe said.

That dynamic will continue into next year. "We expect a continued sell-off of cattle" because this year's drought is going to continue to push up feed prices. "To avoid those feed costs, any cattle considered 'market-ready' is going to be slaughtered," he said.

As corn and soybeans wither in the parched soil of the Midwestern Corn Belt, crop prices are rising in commodity markets. The price of a bushel of corn, for example, shot to a record of more than $8 a bushel recently, up more than 50 percent in about a month. Some experts say it could push to $9.

Each July, USDA economists look out across crop conditions to construct forecasts for food prices over the next 12 to 18 months. Last year, food prices rose for Americans by about 3.7 percent, a sharp increase from 2010 when prices rose less than 1 percent.

Heading into this year, most forecasters had been expecting the rate of food inflation to slow, rising only perhaps 2.5 percent for 2012. Volpe said that figure is still possible, but the more likely outcome now will be a somewhat higher figure — more like 3 percent or so.

Feeling The Pinch At The Register

Food experts say Americans, whose wages have been growing only slightly, will surely feel a hard pinch at the grocery cash register, but a much bigger problem looms overseas, where basic food prices could spike far higher.

That's the scenario that played out in 2008 when crop prices began rising sharply, along with more expensive oil. While Americans experienced unwelcome increases in retail prices, people in many poor countries got hit with huge spikes that led to riots that year.

In 2009 and 2010, the global recession cooled food and fuel price pressures, but then in 2011, inflation began rising sharply again, especially for rice, cereals, cooking oil and sugar. Those hikes triggered political unrest in Tunisia, Yemen, Egypt and other countries.

Higher global food prices generally reflect the law of supply and demand. Because of tough weather conditions in the United States and elsewhere, global grain stocks are very low this year.

The Global Impact

At the same time, demand for food keeps rising. As people get wealthier in fast-developing countries like China and India, they can afford to eat more and better foods. Other factors are at play. too, including food-trade policies and financial speculation in commodities markets.

A recent report by the Food and Agriculture Organization of the United Nations named another problem: "Higher oil prices are a fundamental factor behind the higher agricultural commodity price projections, affecting not only oil-related costs of production but also increasing the demand for biofuels and the agricultural feedstocks used in their production."

Economists hate to see any inflationary jolts coming at a time when the global economy is in a fragile condition. In the United States, for example, food price hikes would leave consumers with less to spend on clothes, cars or other goods.

Still, the drought's impact in this country has been relatively muted because the price Americans pay at the store is determined by many factors beyond the cost of raw foods. When a shopper picks up, say, a box of corn flakes, the corn itself accounts for just a few pennies of the sticker price. Most of the retail price reflects nonfood factors, such as the colorful packaging and marketing, as well as the store's air conditioning and decor.

It's different in less prosperous regions of the world. Many shoppers in poor countries pick up a simple sack of cereal at an open market. There's no elaborate packaging for the food or light fixtures for the store. The price paid by the customer tracks closely with the cost of the crops. So a spike in commodity prices can translate much more directly into a jump in the retail price.

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