Food Price Outlook: Drought Impact Expected to be Realized in 2013

September 25, 2012 03:32 AM

The Economic Research Service (ERS) reports that retail food prices, on average have been flat so far in 2012. The food-at-home Consumer Price Index (CPI) was unchanged from January to August 2012, with deflationary pressure due to unusually low fruit and vegetable prices as well as decreased prices for fluid milk and pork. Alternatively, prices for beef and veal, poultry, and fats and oils have increased thus far in 2012.

ERS also says that the ongoing, severe drought in the Midwest is affecting prices for corn and soybeans as well as other field crops, which should, in turn, increase retail food prices. The effect of the drought on food prices will be estimated once it is known how severe the drought has been and how much of the corn crop has been destroyed. However, 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. Any effect on retail prices would likely begin to appear on supermarket shelves in the Fall of 2012.

Based on these conditions, ERS's inflation forecast for both all food and food-at-home (grocery store) prices in 2012 remains unchanged at 2.5% to 3.5%. Looking ahead to 2013, inflation is expected to remain strong for most animal-based food products due to higher feed prices. Furthermore, inflation should be above the historical average for food categories such as cereals and bakery products as well as other foods. The full extent of the drought and its effects on commodity prices are as yet unknown.

The CPI for all food increased 0.2% from July to August, was unchanged from June to July, and is now 2% above the August 2011 level. The food-at-home CPI rose 0.2% in August and is up 1.5% from last August, while the food-away-from-home (restaurant) index increased 0.3% in August and is up 2.8% from last August. The all-items CPI was up 0.6% in August and is 1.7% above the August 2011 level. The year-over-year increase in the food-at-home CPI has fallen each month so far in 2012, indicating that food price inflation has slowed down since 2011 and that the impact of the drought has yet to materialize in retail food prices.

Following are some more details on the possible impacts of the drought:

  • Beef, pork, poultry, and dairy (fluid milk): The earliest increases in retail prices would appear within 2 months in 2012 and into 2013. In the short term, drought conditions may lead to herd culling in response to higher feed costs and short term increases in the meat supply, decreasing prices for some meat products. That trend would reverse in time after product supplies shrink.
  • Packaged and processed foods (cereal, corn flour, etc.): The full effect of the increase in corn prices for packaged and processed foods will likely take 10 to 12 months to move through to retail food prices.
  • Retail prices: Historically, if the farm price of corn increases 50 percent, then retail food prices (measured by the Consumer Price Index, CPI) will increase by 0.5 to 1 percent. More generally, as an overall commodity price index increases, about 14 to 15 percent of that increase is passed on to retail prices for products that use that commodity as an ingredient. For most foods, it is too soon for higher commodity prices to affect retail prices. Food-at-home prices have not increased from January to August, reflecting a decline in overall inflation since last year. However, egg prices have risen markedly since July, and beef prices have fallen moderately. Both of these movements are in line with expectations.


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