Midwest drought likely to raise cost of groceries
Kevin G. Hall / McClatchy Newspapers (MCT)
Published Jul 11, 2012 at 05:00AM / Updated Nov 19, 2013 at 12:31AM
WASHINGTON — A punishing Midwest drought may lead to food inflation as the cost of corn soars and the price of a key feedstock for ranchers rises. Experts warn it could mean higher costs for everything from a hamburger to a gallon of milk in the months ahead.
“Farmers are going to have higher feed prices. We’re definitely going to see food inflation coming into the equation,” said Phil Flynn, a veteran commodities trader for the PFGBest brokerage in Chicago. “I think we’re at the point of bigger problems. This was one of the most critical weeks, and we didn’t get the rain that we needed.”
Big users of grains, namely ranchers who depend on corn as a feedstock for their animals, are taking the first hit.
“This is going to be a beef issue, as well as a pork and poultry issue. We’re all sitting here with short breath watching the soybean and corn crops develop this year,” said Michael Miller, the senior vice president of global research for the Denver-based National Cattlemen’s Beef Association.
Earlier this year, the U.S. Department of Agriculture reported that farmers had planted 96.4 million acres of corn — the greatest amount since 1937, as the nation was coming out of the Great Depression. This year’s huge corn planting anticipated growing demand in an improving U.S. economy and from big developing countries such as China.
That led cattlemen to expect corn prices in the range of $5 a bushel. Instead, corn is selling this week at around $7.50 a bushel.
“That’s a 50 percent increase, based on their expectations,” said Miller, noting that it adds about $75 to $80 per head of cattle in production costs, which in turn could lead to an increase of as much as 6 percent when reaching consumers. And that’s if the drought doesn’t get considerably worse.
The rising corn prices have caused a large drop in the share prices of major chicken producers, who are spread across the Southeast.
The USDA, which had projected a record harvest of 14.79 billion bushels, now warns that about 60 percent of the corn grown in the United States faces moderate to extreme drought conditions. The question on the minds of growers and their customers is how much damage the dry weather will inflict.
Bumper crop no more
“We started the year with an expectation of probably a record corn crop that was going to blow away the old record by a billion bushels. Now we’re looking at a corn crop that is clearly not going to be a record and is probably going to be smaller than what we’ve had in the last several years,” said Dave Miller, who farms corn and soybeans on 350 acres near Lucas, Iowa.
He’s also the director of research for the Iowa Farm Bureau Federation, in the nation’s top corn-producing state. His farm hasn’t seen more than an inch of rain in five weeks, and he’s concerned that users of corn are going through stocks quickly. It means that the hit to crop output will come out of future usage, not stored supplies.
“Somebody has got to quit using it. That’s when you get the real sharp market impact, when you really have to curtail usage,” he said.
A three-week spike
When supply is tight and demand is strong, prices rise. The price for future delivery of corn soared 29 percent in the three weeks that ended Monday, approaching the record prices set in June 2011 during flooding in the Midwest. Prices dipped a bit Tuesday ahead of today’s update on corn crops from the USDA.
Additionally, prices for ethanol, a biofuel made primarily from corn, are at seven-month highs and producers are curbing production amid rising prices and falling demand from consumers, as gasoline prices have plunged in recent months. Financial wires report that hedge funds and other speculators are flooding back into contracts for future delivery of corn, wheat, soybeans and similar products, anticipating volatile prices in the months ahead.
It all means that the prices of hamburgers, steak, chicken nuggets, eggs and even a loaf of bread are likely to go up. It may happen subtly, but it probably will happen, much as it did in recent years as spikes in fuel prices fed into the cost of food production.
The Midwest isn’t the only place where dry conditions are hurting growers. West of Lexington, Ky., Adrienne Lewis’ family-run Cleary Hill Farm struggles with the unusually dry summer.
“Vegetables are drying up, even though we irrigate pretty much nonstop,” she said. “Now it’s not a matter of trying to get plants to produce; it’s just hoping to keep them alive until we get some rain.”
In Missouri, many ranchers have found grass pastures so thinned by the drought that they’re feeding their cattle with hay, when they can find it. Others are rushing calves to the sale barn.
“There’s no pasture and almost no hay to be found, and what you can find you can’t afford,” said Mickey Walker, who raises cattle and works at the Ozarks Regional Stockyards in West Plains, Mo. “A lot of people are getting rid of their cattle.”
Some will be sent to feedlots earlier than they usually would or shipped to areas in the northern Midwest, where the drought has been less severe.
How much this all translates to rising food prices for consumers is hard to gauge. Farmers now use genetically modified seeds that improve the plants’ drought tolerance, and this summer is effectively a trial by fire for the technology. A well-timed rain and drought-tolerant plants could mean that things don’t end as badly as now is feared.
“While there is a lot of speculation and a lot of nervousness, the reality is we won’t really know until we start harvesting this fall,” said Nathan Fields, the director of biotechnology and economic analysis for the St. Louis-based National Corn Growers Association.
Predictions of falling yields proved off during last year’s flooding, Fields cautioned, and the same could happen with this year’s dry weather.