The record-setting drought gripping the Midwest is a major reason why consumers may pay 3 percent to 4 percent more for groceries next year above this year’s level, USDA said this week in its initial forecast for 2013.
Beef prices may rise as much as 5 percent in response to tight supplies of corn used to feed cattle. The price of corn, the country’s biggest crop, has surged more than 50 percent since June 15. Food prices will rise 2.5 percent to 3.5 percent this year, USDA said, leaving its 2012 estimate unchanged. Poultry, milk, eggs, and pork are also expected to rise more quickly than historical averages with poultry and egg prices projected to rise 3 percent to 4 percent.
“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,” said Richard Volpe, USDA’s food economist. “In 2013, as a result of this drought we are looking at above-normal food price inflation. … Consumers are certainly going to feel it,” Volpe said. Normal grocery price inflation is about 2.8 percent a year, according to Volpe, so even a 3-percent increase is slightly higher than usual.
The new forecasts are the agency’s first food price projections to factor in the drought, though experts have been warning for a few weeks that prices will rise. As fields dry out and crops wither across much of the country’s midsection, prices for corn, soybeans, and other commodities have soared in anticipation of tight supplies. Corn and soybean futures both reached record highs this week on the Chicago Board of Trade.
Processed foods are not affected as much because feed costs do not account for as much of their price tag. Fruits and vegetables are not expected to be any more costly because they are irrigated even in normal weather. USDA is projecting an overall 2 percent to 3 percent increase for all fruits and vegetables next year, the same as it expects this year.
USDA economists were aware of the drought a month ago when they did their last projections but did not know how bad it would get, Volpe said. “This drought was a surprise for everybody,” he said. USDA has declared natural disasters in almost 1,300 counties in 29 states, The drought may lead to the smallest corn harvest since 2006, Doan Advisory Services Company said July 23. The drought now covers around 60 percent of the continental United States, the largest area since the epic droughts of the 1930s and 1950s.
The U.S. drought, the biggest corn exporter, may push up food prices worldwide as well, possily discouraging central banks from easing monetary policy, Merrill Lynch Health Management said Wednesday in a report.
