Consumers could face steeper grocery bills due to drought
NEW YORK (CNNMoney) — As the widespread drought continues to damage grain crops across the Midwest, consumers could soon be facing steeper bills at the grocery store.
“We haven’t seen any rain at all, and based on that, food inflation is definitely a real threat,” said Phil Flynn, senior energy analyst at the Price Futures Group in Chicago.
The dry, scorching heat has had the most severe impact on corn crops.
Nearly 40% of the corn planted across the nation is in poor or very poor condition, compared to just 11% at this time last year, according to to the U.S. Department of Agriculture.
The drought and the fear that conditions could worsen, further pressuring crop yields, has triggered a 50% spike in the prices of corn futures over the past month to $7.79 per bushel.
On average, food prices typically rise 1% overall for every 50% jump in corn prices, said Richard Volpe, an economist for the Economic Research Service of the U.S. Department of Agriculture, but particular categories of food are impacted more severely.
Analysts and economists predict that prices of beef, pork and poultry will jump the most, as corn is the main feedstock for chicken, cattle and pigs.
Prior to the drought, analysts had predicted a 4% to 6% rise in retail beef prices, said Michael Miller, senior vice president of global research for the National Cattlemen’s Beef Association.
But if the drought lingers and the high cost of corn continues to weigh on farmers, consumers could face an increase as high as 10% for fresh protein at the grocery store, said Miller. That means beef prices could jump from an average of $4.35 per pound in 2011 to an average of nearly $4.80 per pound this year.
The true extent of the increases won’t be known until the crops are harvested later this year, and prices won’t jump overnight of course. In fact, consumers will likely face the trickle down effect toward the end of this year, and into the start of 2012, Miller added.
“We’re in one of those situations where everyone is watching the weather and corn prices from the edge of their seats,” said Miller. “This is the first time in a long time that we’ve had a drought this significant in the Corn Belt, and that’s why the market is so nervous.”
Weather experts aren’t at all optimistic in their forecasts. According to AccuWeather.com senior meteorologist Alex Sosonowski, “the combination of too much hit and too little rain moving forward into the middle of August will prove to be too much for corn to take.”
While the price of meat and milk products will likely rise as a result of higher corn prices, other products, like a box of corn flakes, will remain relatively steady, according to the USDA’s Economic Research Service, as prices for those types of foods are more heavily impacted by packaging, processing, advertising, and transportation. In fact, a 49% increase in corn prices only raises the price of a box of corn flakes by about 0.5%.
In a recent interview with CNN, General Mills CEO Ken Powell said that grains like corn represent less than 10% of the company’s total inputs, so although grains will be higher, modest inflation in other areas will mean that prices for consumers will remain stable.