Via a special arrangement with Informa Economics, Inc.
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Initial assessment of drought impact signals price increases will come, but not until 2013.
USDA's forecast of US food prices calls for an increase 2.5 percent to 3.5 percent in 2012 - unchanged from their prior outlook - but in their first outlook for 2013, USDA economists now see a rise of 3.0 percent to 4.0 percent for food prices.
"The severe drought in the Midwest is expected to affect prices for corn and soybeans as well as other field crops which should, in turn, impact retail food prices," USDA's Economic Research Service (ERS) said. "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."
As for 2012, ERS noted, "Retail food prices, on average, were flat for the first half of 2012. The food-at-home Consumer Price Index (CPI) decreased 0.1 percent from January to June 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. 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 percent."
For 2013, ERS said, "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."
Via the monthly update on food prices, ERS said, "new information on the scope of the drought will be incorporated into the estimates as it becomes available."
ERS also noted the following relative to the drought and the 2012 situation:
The severe and ongoing drought of 2012 is expected to destroy or damage a portion of the corn crop in Iowa and other states. This has already resulted in an increase in the farm price of corn, which will, in turn, affect the price of other crops and possibly retail 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; any effect on retail prices would begin to appear on supermarket shelves in the Fall of 2012.
- Beef, pork, poultry, and dairy (fluid milk): Potential 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.
Here's a look at their current food price forecasts:
PERSPECTIVE: The ERS update backs up most expectations that the bulk of any rise in commodity prices won't come through to consumers until 2013. But their notation on 2012 could be a key one to keep an eye on the balance of the year unfolds.