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Drought to Boost Food Price Inflation


U.S. food prices will rise faster than prices for other goods during the second half of this year and next year, with the worst drought in more than a half a century expected to push up prices for meat, poultry and fruit, USDA said last week.

"The drought is really going to hit food prices next year," Richard Volpe, a USDA economist, told Reuters News Service, adding that the pressure on food prices would start to build later this year.

"It's already affecting corn and soybean prices, but then it has to work its way all the way through the system into feed prices and then animal prices, then wholesale prices and then finally, retail prices," Volpe said.

USDA forecast on July 25 that food prices would jump between 2.5% and 3.5% in 2012 and then rise 3-4% in 2013. Food inflation was 3.7% last year but only 0.8% in 2010.

If USDA is correct, food prices will rise more rapidly than the overall U.S. inflation rate, a turnabout from the usual pattern. The U.S. inflation rate is estimated at a modest 2% this year and 1.9% in 2013.

USDA’s food price inflation forecast for 2012 was unchanged from its previous forecast, even though retail food prices on average were flat for the first half of 2012.

The food-at-home Consumer Price Index (CPI) actually decreased 0.1% from January to June 2012, with deflationary pressure coming from unusually low fruit and vegetable prices as well as lower prices for fluid milk and pork. Alternatively, prices for beef and veal, poultry, and fats and oils have increased thus far in 2012.

USDA expects potential increases in retail prices to appear within two months and continue in 2013. In the short term, prices may fall for some meat products as drought conditions may lead to herd culling in response to higher feed costs and short-term increases in the meat supply, USDA said. That trend would in time reverse.

It will take some time for the impact of higher corn prices on packaged and processed foods to be felt.

"The full effect of the increase in corn prices for packaged and processed foods will likely take 10-12 months to move through to retail food prices," USDA said.

Historically, if the farm price of corn increases 50%, then retail food prices will increase by 0.5% to 1%, USDA said. In more general terms, as the price of a commodity index increases, about 14-15% of that increase is passed on to retail prices for any products using that commodity as an ingredient.


Editor’s note: Richard Brock, Corn & Soybean Digest's marketing editor, is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report.

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