Food Prices to Rise on US Drought

The US Department of Agriculture (USDA) today published the first of its food prices report to include the effects of the current drought in much of the US Midwest. The report notes that the damage to the corn crop is not yet factored in:

The effect of the drought on food prices will be estimated once it is known how severe the drought has been and how much of the corn crop has been destroyed; any effect on retail prices would begin to appear on supermarket shelves in the Fall of 2012.

The USDA expects drought impacts to hit meat and dairy prices within 2 months, saying that herd culling to reduce feed costs is possible and could lead to a short-term drop in meat prices. Packaged and processed foods will take 10-12 months to affect retail food prices, and a lot depends on what happens to the corn crop. Here’s what the report had to say about retail prices:

Historically, if the farm price of corn increases 50 percent, then retail food prices (measured by the Consumer Price Index, CPI) will increase by 0.5 to 1 percent. More generally, as an overall commodity price index increases, about 14 to 15 percent of that increase is passed on to retail prices for products that use that commodity as an ingredient.

As a reminder, corn prices have risen from around $5.50/bushel in late May to about $7.96/bushel today. That’s a jump of about 45%.

The USDA outlook calls for an increase of 2.5% to 3.5% for food consumed at home in 2012, rising to an increase of 3%-4% in 2013. Beef and veal prices are expected to rise 4%-5% in 2013.

The USDA report is available here.

Paul Ausick