Consumers: Get ready. The effect of this year’s drought will show up on supermarket shelves as early as this fall.
In its first estimate of what will happen to 2013 food prices because of withered crops and grazing land, the U.S. Department of Agriculture forecast that prices will rise 3 percent to 4 percent next year.
Sign Up and Save
Get six months of free digital access to The Kansas City Star
And by the end of this year, food prices may rise a total of 2.5 percent to 3.5 percent, the government estimates.
The change is likely to be noticeable. So far this year, overall food prices have risen only 1 percent.
“Some farmers are starting to sell off their cattle rather than continuing to feed them. That could mean an abundance and lower prices for awhile, but then it will catch up down the line,” said Ruth Comer, spokeswoman for Hy-Vee, which has about a dozen Kansas City area grocery stores.
“Right now, with the weather we have been getting (and) the crop forecast, it looks like we will be looking at price increases this fall. Where it is going to hit and when it is going to hit we just don’t know yet.”
Beef prices are likely to show the highest inflation rate, rising 4 percent to 5 percent next year, according to the USDA report. That’s because corn, a primary cattle feed, has been hard hit by the drought. Smaller crops mean rising prices for feed.
This year’s corn harvest is expected to be the smallest since 2006. Already, corn prices have risen 50 percent this summer, up to $7.88 a bushel.
Any time corn gets more expensive that has a ripple effect throughout the food industry. Corn products are found in everything from baby food to beverages. When corn prices rise 50 percent, overall food costs jump 1 percent, the USDA calculates.
The items at the supermarket set to see the quickest price increases from the drought are expected to be eggs and poultry. That’s because birds are raised mostly on corn and, since they have shorter lifespans, thosedrought-affected products will hit groceries soon.
The USDA report said to expect 3 percent to 4 percent price increases for eggs this year, at least doubling previous projections. Dairy prices overall are forecast to rise 3.5 percent to 4.5 percent in 2012.
Still, “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,” said Richard Volpe, the USDA’s food economist.
The USDA has declared natural disasters in 29 states, many of them crop-growing and livestock-raising powerhouses such as Kansas and Missouri.
The government said 88 percent of the U.S. corn crop is drought-affected, as is 77 percent of the soybean crop. Soybeans, also used in animal feed, rose to $16.15 a bushel, more than a $3-a-bushel increase in two months.
Corn and soybean futures hit records this week, and wheat equaled its previous high in 2008.
Because the life cycle of livestock is longer than for chickens, it will take more months for meat prices to show the effects of higher costs for grain-fed animals.
Because of lost grassland and higher feed costs, herd reduction has the short-term effect of increasing meat supplies and thus temporarily holding cost increases at bay. Longer term though, smaller herds mean meat prices will rise. Analysts said the U.S. cattle herd was its smallest on July 1 than on any July 1 since 1973.
Some companies have said they’re able to moderate price increases. McDonald’s, the world’s largest restaurant chain, said earlier this week in a conference call with stock analysts that it had locked in some lower commodity and grain prices before the drought affected costs.
McDonald’s said it estimated its food cost increases at about 4 percent.
Larger restaurants and school districts tend to lock in prices with long-term wholesale contracts, so price increases won’t show up for several months, or even a year.
“We have warehouse and freezer space and vendor contracts for the coming year,” said Nancy Coughenour, food services manager for the Shawnee Mission School District. “The shorter term won’t be affecting us as much as a smaller restaurant or family watching their pennies.”
Kansas City-based Applebee’s has been closely monitoring the weather, it said in a statement, but said it expects “minimal disruption” to its operations.
Several months out, though, some food service providers are concerned.
Prices might drop for a little bit as producers pare their herds, but “in another five or six months they won’t have that cattle and chicken they normally have so we will see prices skyrocket,” said Kevin Lyman, president of The Kansas City Originals, a group of locally owned restaurants. “A lot of the big suppliers will be stocking up, but there is only so much room.”
Thus smaller restaurant operators are planning ahead.
“We are a small company, so our prices fluctuate quite a bit with our wholesalers,” said Jay Carpenter, a partner in The Big Biscuit Co., which has four area restaurants.
“To keep our prices competitive we always have to look out. So if that means moving to more pork items, we’ll move to more pork items. Or it could mean more fish items.”
When beef prices started increasing a year ago, for example, Big Biscuit introduced turkey and chicken items, Carpenter said.
Other food sellers say they’re not too worried.
Donna Pittman, owner operator of Curt’s Famous Meats, 10101 E. Truman Road, said she is not “significantly concerned” about price increases.
“I don’t think the increases will be that drastic for the consumer, and we try to keep our prices reasonable” by offering daily specials and discounts on quantity purchases, Pittman said.
Another reason why supermarket shoppers may not see an overall boost in their food tab this summer, said Bob Young, chief economist for the American Farm Bureau Federation, is that some cost increases in fruits and vegetables occurred earlier this year. Those already-absorbed price increases took place after crop-killing frosts.
Food costs in the United States account for about one-seventh of the consumer price index. So, while food inflation is noticed prominently by consumers — just like gasoline prices at the pump — food is not a major influence on the overall economy.
And, even with smaller crops or herds this year, overall food supplies aren’t expected to be a problem for U.S. consumers, given the ability to import food from other countries.
But, because the United States is the world’s largest food exporter, drought-related supply problems or price increases could have a greater effect in developing countries, according to research from the New England Complex Systems Institute.
The effect would most likely be in commodity speculation, which would push prices higher.