U.S. Drought 2012: Farm and Food Impacts

Food Prices and Consumers

The ongoing drought has destroyed or damaged portions of the major field crops in the Midwest, particularly field corn and soybeans. This has led to increases in the farm prices of corn, soybeans, and other field crops and, in turn, led to price increases for other inputs in the food supply such as animal feed. Most of the impacts on retail food prices are expected to occur in 2013, but meats and animal-based products such as dairy and eggs may be starting to show increases in the final quarter of 2012.

• We will likely see the earliest impacts for beef, pork, poultry and dairy (especially fluid milk). The full effects of the increase in corn prices for packaged and processed foods (cereal, corn flour, etc.) will likely take 10-12 months to move through to retail food prices.
• The drought has the potential to increase retail prices for beef, pork, poultry, and dairy products first and foremost - later this year and into 2013. Drought conditions led to herd culling in response to higher expected feed costs, and this liquidation led to temporarily reduced prices for beef and pork in the months of August and September. However, the October CPI report indicates that the impact of the liquidation has ended and prices for beef and pork are now expected to increase through 2013.
• Commodity prices are just one of many factors affecting retail food prices. Historically, if the farm price of corn increases 50 percent, then retail food prices as measured by the Bureau of Labor Statistics (BLS) in the Consumer Price Index (CPI) increase by 0.5 to 1 percent. Commodities make up less than 15 percent of the average value of retail food purchases, so even if all commodity prices doubled, retail food prices would increase by no more than 15 percent.
• Retail food price inflation has averaged 2.5-3 percent each year on average for the past 20 years, and 2012 is no different. Next year, we will likely see a slight increase above those historical averages when food price inflation is expected to be between 3 percent and 4 percent, with increases centralized in animal products--eggs, meat, and dairy. That forecast will be updated at the end of the month, but is currently below some of the recent inflation spikes in 2004, 2007, 2008 and 2011.