Why Your Grocery Bill Will Increase

Forbes: The Drought's Impact on Food Prices

The drought has led to the lowest projected corn yield in the U.S. in 17 years. With such a diminished supply, feed costs have rocketed. While farmers and feedlots are paying the price now, it won’t be all that long until consumers see the impact on their grocery bills. Some foods will experience spikes in prices as early as the fall, but others won’t be affected until 2013. And not everything on the supermarket shelves will be equally influenced by the sky-high grain prices either. Read on to see just how the drought has impacted different foods.

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Why Your Grocery... The drought has led to the lowest projected corn yield in the U.S. in 17 years. With such a diminished supply, feed costs have rocketed. While farmers and feedlots are paying the price now, it won’t be all that long until consumers see the impact on their grocery bills. Some foods will experience spikes in prices as early as the fall, but others won’t be affected until 2013. And not everything on the supermarket shelves will be equally influenced by the sky-high grain prices either. Read on to see just how the drought has impacted different foods.

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Dairy Dairy milk and dairy products like cheese will be the first “food” victims of the drought. We’re likely to see price hikes in this category as quickly as the fall, and by Christmas analysts predict that a gallon of milk could potentially increase 25 cents up from end-of-summer prices. Cows produce less milk when the temperature soars due to heat stress. On top of that, dairies are facing higher feed costs and the additional expenses of fan and sprinkler systems to keep the cows cool day and night. All in all, this was bad news for an industry that was already on the receiving end of very low milk prices. In July, prices were at their lowest for 18 months as the result of an excessive surplus built up over a mild winter and spring.

To solve for the bad situation, dairies have been sending cows to slaughter prematurely, rather than paying to keep them producing, says William Snell, of the Department of Agricultural Economics, University of Kentucky. In its September Livestock, Dairy and Poultry Outlook, the USDA notes an overall milk production reduction for 2012 based on a lower forecast for milk yield per cow. With tighter supplies on the way, prices will rise in the near term and will continue to increase into next year as dairies work to replace the liquidated livestock, adds Snell. According to the latest Consumer Price Index, in 2013 dairy products will jump a significant 3.5% to 4.5% up from 2013. (2.8% is the average and expected rate of food inflation.)

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Chicken Chicken will be the first meat to see an increase in price, but it won’t hit consumers until winter 2012 or early 2013. Demand for chicken typically picks up in the spring, and analysts say that that the increase will be most noticeable then for all parts of the bird. To understand the dynamics of the price increase, we need to look back, past even the start of the drought. Like the pork and beef industries, in the early spring of 2012, the chicken industry believed this summer would yield a bumper corn harvest, and so it upped production levels to utilize this large crop. “By the time June arrived, it was clear that rather than the record crop the USDA predicted, there was going to be a severe shortfall,” says William Roenigk, Senior vice President of the National Chicken Council. “But, by then it was too late to go to the futures market to lock in $5 corn. It was already at $8 a bushel, and now it’s nearly $9.” But it wasn’t just the lack of corn that posed a problem. Chicken producers are reliant on soybean meal for the protein element of feed and the drought has also damaged this year’s soybean crop.

With the ensuing high feed costs in mind, producers are having to readjust production in order to get demand and supply at a level where they are able to break even. In order to recoup increasing costs, the industry needs to quell supply and reduce output so as to drive up prices. “They are sending hens to slaughter before they’ve gone through their normal cycle of laying and hatching, and they are beginning to trim the number of chicks that are put into houses to grow to become market ready chickens,” explains Roenigk.

It takes about 6 weeks from the time a chick is born to when it is market ready, so it will be a few months for the market to readjust to the overall culling. According to the Consumer Price Index, poultry prices will increase 3% to 4% in 2013.

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Pork If you’re looking for a deal, this could be the best time to stock up on pork. There is currently a glut on the market because producers, spurred by high feed prices, rushed to liquidate hogs at the end of the summer. “Producers are reducing breeding herds by selling sows and keeping back fewer gilts – young female pigs,” explains Steve Meyer, pork industry analyst and president of Paragon Economics. “They’re also selling pigs at a lower weight to try and avoid feed costs on those last few pounds.”

This in turn has led to very low prices at the wholesale level. Whether these bargains make it to the meat counter at your supermarket, however, isn’t necessarily a given. Retailers are keen to stabilize prices as much as possible. They avoid making reductions even when meat comes to them cheaper because they know that eventual increases and short supplies will be sure to follow, sooner or later. “When prices go up dramatically it’s much more noticeable to the consumer who’ll say, what the heck happened to my pork chops, or my sausages,” says Meyer.

True enough, the mechanisms to restrict pork output will eventually drive prices up. But, this won’t happen until late 2013 because the biological time frame for pigs is about a year, says Meyer. “There’s a significant time lag involved, and by the time the costs get passed down to the consumer, it’s so far down the road that people forget why it’s happened.”

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Beef As with pork and chicken, the beef industry has been rushing to reduce herd sizes in response to soaring feed prices. But this isn’t a recent measure. 2011 was also a very dry year, and Texas, Oklahoma and parts of Kansas – all heavy cattle producing states - suffered drought. Consequently, producers began to liquidate their stock last summer, which meant that they started off this year with already diminished herds, explains Kevin Good, senior market analyst at Cattle Fax. Since beef supplies were already headed down, the recent haste in liquidating fed cattle (animals that are finished in feedlots) hasn’t meant a glut in the market for cuts like steak. Ground beef, on the other hand, is currently enjoying lower prices. This is the result of vast numbers of dairy cows being sent prematurely to slaughter, as “hamburger” meat doesn’t come from fed cattle but rather from dairy cows that are no longer productive.

So, how then will the cost of steak and other cuts be impacted by the drought? “It takes about 60 bushels of corn to finish a fed steer or heifer in the feedlot setting. With corn prices jumping $2 from July, that’s an extra $120 cost per head,” explains Good.

Luckily, the consumer will only bear a relatively small amount of that increase when they come to shop for their beef dinners. As there are several different segments to the beef industry, a surge in cost gets mostly absorbed within the supply chain and just a fraction gets passed to the retail level. For example, the rancher with sun-scorched, desiccated pastures will wean his calves earlier to avoid losses, and will increase the placement of cattle into feedlots, explains Mike Miller, senior vice president of global research for the National Cattlemen's Beef Association. “And since the price of corn has increased so dramatically, feedlot operations will buy those calves and feeder cattle at a lower price to try to make up for the higher costs they’ll bear in finishing them,” says Miller. Nonetheless retail increases will come with tighter supplies, and Miller anticipates that consumers could face an increase between 6% and 10%. But, raising a market ready steer or heifer takes about 3 years, so with this in mind it’ll be the end of 2013 if not 2014 before this increase takes hold.

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Fruits and veget... It might seem logical that out of everything in the grocery store, the produce section would be most affected by a lack of water and intense heat. But no, commercially grown fruits and vegetables have more or less emerged unscathed from the drought.

The reason being most domestically grown produce that’s sold in supermarkets, including sweet corn, is irrigated anyway and so not affected by a lack of rain. Even if there is diminished local supply, retailers can turn to imports to keep stocks up so consumers don’t need to worry about ample fluctuations in price. Small-scale growers that sell at farmer’s markets, on the other hand, have had to raise prices on their harvest. “Our customers are more understanding of increases because you can explain directly why prices have gone up,” says Ross Peterson of Laughing Stalk Farms, an organic vegetable farm in Southeast Missouri.

For Peterson the combination of extreme heat and lack of rain was a potent and devastating mix. “This badly affected the germination of a lot of our crops, especially our salad mix,” says Peterson. “We ended up having to raise our salad prices from $7 a pound up to $8 a pound.” But it wasn’t just wasted seeds that refused to germinate that added to costs at Laughing Stalk. Peterson and his partner had to invest in expensive shade cloth to protect their yield, not to mention the costs of constant irrigation.

Unfortunately, the worst has not yet passed since the drought has damaged fall produce that has yet to be harvested. “Our winter squash and pumpkins were planted in the middle of the summer when the drought had already set in. We even had them on irrigation but they couldn’t take the heat,” says Peterson. “We don’t have any pumpkins, and we’ve lost more than half our yield of squash.”

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Packaged foods It’s well known that processed foods can contain a number of corn products and by-products, including high-fructose corn syrup. It’s no wonder then that this has incited fear that our favorite packaged products will shoot up in price.

But shoppers need not worry. The more food is processed, the less susceptible it is to the ebbs and flows of commodity prices, as these ingredients comprise such a tiny percentage of the costs that go into packaged items. According to the USDA, the “farm share” of a typical $1 food purchase is 14.1 cents. The remaining 85.9 cents is accrued to industries in post-farm activities such as processing, packaging, transport, advertising and sales. Even if food companies face higher costs, their first reaction is almost never to increase the retail price of their goods. Instead they work on reducing costs in other ways such as reformulating their packaging to be less expensive, or downsizing their product by putting less in a container but still charging the same. “While a consumer might not notice if their regular $8 can of coffee weighs a little less, they will definitely notice if $8 becomes $10 and they aren’t getting any more for the extra money,” explains William Snell, of the Department of Agricultural Economics, University of Kentucky.

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