Food-Price Surge Not Expected From Drought

Catherine Hollander

The United States is in the midst of its worst drought in half a century, with significant impacts on food production, but economists say that global consumers rather than U.S. shoppers are likely to shoulder the biggest burden of the resulting rise in commodity prices.

Even with the severe drought, the Agriculture Department projects that food-price inflation in the United States will be 3 percent this year, in line with the average annual increase that has occurred since 2004. Next year, it expects food prices to rise by 3.5 percent—still well below the 5.5 percent increase felt during the global food crisis of 2008, and even less than the 3.7 percent increase prices experienced last year.

Jason Henderson, who coauthored a recent analysis by the Federal Reserve in Kansas City projecting that the current drought could add 4 percent to retail food prices over the next 12 months, said he expected price increases in the U.S. to be first seen in cereals and bakery products.

(INTERACTIVE: Voices From the Drought)

Consumers may actually see meat prices fall for the next few months as farmers try to cull herds that have become increasingly expensive to feed due to rising corn and hay prices. Once this initial sell-off is complete, prices for meat are expected to rise, likely in early 2013, and remain elevated at least through the 2013 harvest a year from now.

“The impact of this drought is really going to be felt for a year to a year-and-a-half,” said Corinne Alexander, an agricultural economist at Purdue University. “You can’t have a short-term impact from a drought that’s this severe.”

The good news for consumers' wallets is that Americans on average spend less than 10 percent of their disposable income on food, according to the USDA, although the percentage is higher for lower-income families. In developing countries, that number is much higher, often closer to 40 percent, Alexander said. The greater the share of income spent on food, the larger the burden felt by rising prices.

American consumers also eat more processed and prepared foods than their global counterparts, which will help to lessen the financial impact of the drought that has affected nearly two-thirds of the continental United States this summer.

“The consumers that are going to have the biggest burden from higher food prices are actually going to be global consumers,” said Henderson, vice president and Omaha Branch executive with the Kansas City Fed.

The fact that the average U.S. consumer won’t be feeling much of a pinch in the next few months—and maybe even over the next year—could spare President Obama from a pre-election backlash over the rising cost of food. But that doesn't mean there won't be suffering: Farmers, certainly, but also low-income Americans and the many other countries that rely on U.S. exports are sure to feel the negative effects of the historic drought.

It has been more than 50 years since a drought has affected such a large area of the country, according to the National Climatic Data Center. Some of the hardest-hit areas had less than half their normal amount of rainfall last month, the Agriculture Department said. And the National Weather Service’s latest Seasonal Drought Outlook for the U.S. predicts that the drought will persist into the fall for much of the country. On Friday, the USDA slashed its forecasts for yields of corn and soybeans this year.

Commodity prices account for an average of 14 percent of U.S. food costs, USDA estimates. The other 86 percent includes costs for food processing, packaging, retail trade, energy, and transportation. A doubling in all commodity prices would cause retail food prices to rise by about 14 percent in the U.S., the government projects.