Last updated: Wednesday, December 26, 2012
The most severe and extensive drought in at least 25 years is seriously affecting U.S. agriculture, with impacts on the crop and livestock sectors and with the potential to affect food prices at the retail level. Below is current information on potential impacts of the drought on key commodities and food prices.
Current USDA estimates of weather impacts on the farm sector are reflected in the December 11 World Agricultural Supply and Demand Estimates (WASDE) report and the December 11 Crop Production report. ERS’s November 27 farm income forecast reflects information in the November WASDE report and will be updated in February.
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.
•Sweet corn, eaten by humans, is distinct from field corn (used for feed) and is not being heavily affected by adverse weather at this point.
•The October CPI data from the Bureau of Labor Statistics (BLS) reflect the first discernible price impacts of the drought. For most foods it remains too soon for higher commodity prices to affect retail prices. However food-at-home prices increased by 0.4 percent from September to October, reflecting the largest month-to-month increase in 2012. We observed monthly price increases for poultry, dairy (notable fluid milk), eggs, beef, and pork, all of the categories expected to increase first due to the impact of the drought on feed prices.
•The December update to ERS’s food CPI forecast provides forecasts for 2012 and 2013 and incorporates information available on drought impacts at the time of writing. The next food price outlook will be released on January 25.
Listen to the USDA Radio interview with Richard Volpe, ERS Consumer Price Index analyst.
View the USDA TV report on forecast food price changes.
Farms
About 80 percent of agricultural land is experiencing drought, which makes the 2012 drought more extensive than any drought since the 1950s. USDA’s December 11 World Agricultural Supply and Demand Estimates (WASDE) report reflects current estimates of weather impacts. ERS’s November 27 farm income forecast reflects information in the November WASDE report and will be updated in February.
Highlights
•The drought rapidly increased in severity from June to July and persisted into August. As of September 12, over 2,000 U.S. counties had been designated as disaster areas by USDA in 2012, mainly due to drought.
•As of August 14, 60 percent of farms are located in areas experiencing drought.
•Based on the 2011 value of production, at least 70 percent of both crop production and livestock production is in areas that are experiencing at least moderate drought as of August 14.
•Severe or greater drought is impacting 67 percent of cattle production, and about 70-75 percent of corn and soybean production.
•More than 80 percent of the acres of major field crops planted in the United States are covered by Federal crop insurance, which can help to mitigate yield or revenue losses for covered farms.
For more information, http://www.ers.usda.gov/topics/in-the-news/us-drought-2012-farm-and-food-impacts.aspx
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