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Why Are Food Prices Rising – Understanding the Effect of Droughts

By Emily Guy Birken

droughtLike many people, I don’t have a strong understanding of the relationship between weather events and our food supplies. And, like most Americans, my food comes in plastic bags and shrink-wrapped Styrofoam trays, completely divorced from the farmers who grew it. The ups and downs of the cost of food are a mystery to me.

In order to better understand what causes the fluctuating price of our food, I spoke to Christopher Hurt, professor of agricultural economics at Purdue University. He helped illuminate the often complicated subject of how much we pay for what we eat. One of the most surprising things that Professor Hurt shared with me was the fact that droughts are considered natural disasters. For many of us, the words “natural disaster” connote a short, overwhelming event that is over within a day or two. No one rushes for shelter when a drought is coming, nor is anyone’s life at stake in the midst of a drought.

The Economic Impact of Droughts

Despite the fact that they cause no widespread panic, droughts are like hurricanes and tornadoes in that they leave a great deal of expensive destruction in their wake. In fact, Professor Hurt explained that of all the different types of natural disasters, major droughts tend to have the most severe economic repercussions.

The National Drought Mitigation Center (NDMC) is a government program that, among other things, estimates and tracks the economic impact of major weather events in the United States. The program has been around since 1980, and in that time, Hurricane Katrina has been by far the largest economic event in terms of natural disasters, causing $146 billion in damage and loss.

However, the second largest economic loss due to natural disaster was the Midwest drought of 1988, with a cost of $77.6 billion. (Both figures are in current dollar amounts.)

The reason why the 2012 drought is such a serious event is because the NDMC estimates that it could cause the second- or third-largest economic loss due to natural disaster since 1980, costing $70 to $80 billion.

Professor Hurt was quick to point out that although an $80 billion loss does sound incredibly dire, it’s important to remember that food production is a $1.2 trillion sector of our economy. While food prices will be affected by this major natural disaster, we will not be facing a lack of availability of any of our favorite foods any time soon.

How Droughts Affect Food Prices

Since I first became aware of the severity of the drought of 2012, I have been waiting for my grocery bill to rise precipitously. But most of the negative effects of the drought will take some time for the average grocery shopper to feel. In fact, you may find that the cost of your sirloin and pork chops has dropped recently.

This has to do with the economics of livestock farming. When a drought raises the price of feed, farmers need to find a way to make their herds economically sustainable. They do so by liquidating (that is, slaughtering) a portion of their breeding herds. That leaves them with fewer mouths to feed when the price of corn goes up, and gives them an extra influx of cash via the sale of that meat. What it means for consumers is that there is a short-term surplus of meat on the market, making prices lower.

However, we shouldn’t get used to those lower prices, since the reduction of herds means that there will be fewer animals available for slaughter in the coming months, driving the prices up again. The USDA, which tracks the changes in food prices from year to year, estimates that inflation of meat prices will be about 5% in 2013. To put that in perspective, the food inflation rate for all edibles in 2011 was 3.7% – which was already much higher than the usual annual inflation rate of 2%.

This rise in meat prices will take some time to stabilize as well, because of both the profitability outlook for farmers and the length of the reproductive cycle. Assuming that it takes a year for profit projections to start looking up, it will then take another nine months of gestation for cows and four months of gestation for pigs in order to return the herds to pre-drought levels. Then, it will take one to three years before the new livestock is ready for slaughter. That puts us into 2016 before beef and pork supplies – and prices – return to normal.

As for chickens, the shorter reproductive cycle of 8 to 10 weeks means that the supply can bounce back more quickly. It’s more likely that there will be a return to normal chicken supply by fall of 2013.

Farmers’ reduction of their livestock will also have one more effect on our grocery bills. Since there will be fewer cows available for milking and hens for laying, dairy and egg prices will also go up. Like their meat counterparts, the prices should stabilize once the economic outlook improves and the size of herds and flocks have returned to pre-drought levels.

Corn and Grain Dependence

Meat and dairy prices are indirectly affected by drought, but the availability of corn and grain is directly related to the weather. However, the price of food products containing corn and grain is affected by many factors, and in fact has been rising for several years independent of the current drought.

grocery prices are on the rise

Other Factors That Contribute to Rising Food Prices

Professor Hurt identified two specific reasons why we have been seeing escalating food prices over the past five years: bio-energy and the rapid economic growth of developing countries.

Bio-Energy

In 2005, Congress placed requirements on gasoline refiners and importers to increase the use of ethanol in fuel. Ethanol is a crop-based gasoline substitute that is usually created from corn, although it can be made from the sugars of nearly any crop. The 2005 mandate and the 2007 Energy Independence and Security Act mean that more of our national corn crop is diverted to fuel rather than food or livestock feed. This is done in the hopes of eliminating the United States’ dependence on foreign oil.

Part of this push for bio-fuel came from agricultural lobbyists, who were hoping to increase the market for corn. What it means is that 40% of the U.S. corn crop now goes to ethanol production, rather than to food production. This is part of the reason you have already seen a steady increase in food prices prior to this year’s drought. Corn is used in everything from cereals, to sodas, to cooking oils, to bread, to yogurt, to salad dressings, and much more – not to mention its important role in feeding livestock.

With a major share of the U.S. corn crop being promised to the bio-fuel industry, there is less available for our foodstuffs. Unfortunately, this also means that in the wake of a drought, prices will rise much more than if there were no such ethanol mandate.

Specifically for corn and grain products, prices will rise and remain high until the next normal corn crop is harvested in late summer and fall of 2013. Until then, you can expect to see higher prices for cereals, baked goods, cooking oils, and anything sweetened with high fructose corn syrup.

Global Economic Growth and Food Prices

Professor Hurt further explained that the past five years have also seen some incredible economic growth in developing countries, specifically in China. This type of economic growth tends to have a transitional effect on the diet of that country’s inhabitants.

Diets in rapidly developing countries tend to go from grain-based to protein-based – that is, from eating locally grown grains to eating meat, eggs, and milk that is either imported or requires imported feed. This large additional market for food products has helped to raise our domestic food prices. Add an unexpected and completely unpredictable drought into a food sector that is already dealing with additional demand for both bio-energy and emerging foreign markets, and it is clear that prices will go up.

drought

What Higher Food Prices Will Mean

While this drought is certainly serious, it is not going to cause fundamental changes to how Americans buy and eat food. Professor Hurt emphasized several times that availability will not be an issue. Although food prices will reflect the severity of the drought, we will still see the abundance we are used to at the supermarket. It will all simply come at a higher price.

Another positive aspect of the American food system is that it affords us with a great deal of choice. There will be reasonable nutrition alternatives for about the same price, provided you are willing to change your habits. For example, if you are accustomed to purchasing filet mignon, you might choose to purchase a lower-quality steak for the same price that you used to pay for top-of-the-line beef. If you ate sirloins and flank steaks prior to the price changes, you might switch to round steak. The options will all be available, and you can make the best financial and nutritional choice for your budget.

Families have already begun to take steps to mitigate the rise of food prices. For instance, according to Forbes, American meat consumption is down 12.2% since 2007, partly due to rising costs. With food prices rising in the coming year, we can expect more Americans to start changing their eating habits.

It’s also important to note that the food and restaurant industry has tried very hard to keep up with the changes in food prices and the habits of Americans. For example, low-cost and value retailers have been doing very well since food prices started rising over the last five years. Both no-frills discount grocery chains, such as Aldi, and chain restaurants – from fast food establishments to sit-down restaurants – have capitalized on the average family’s need to stretch food dollars. By offering value menus, two-for-one meal deals, and inexpensive off-brand options, the value restaurants and retailers have made it possible for even cash-strapped families to still enjoy good food and evenings out.

Final Word

While the coming rise in food prices is somewhat disconcerting, we can take comfort in the fact that with savvy grocery shopping strategies and a willingness to try new recipes and foods, we can keep the costs of our grocery bills and restaurant dining at about the same price point as before. The drought will affect food prices and our budget, but it will not change the level of abundance or the number of choices that we are accustomed to.

Have you noticed a rise in your grocery bills? If so, have you changed your dietary habits or choices to compensate?

Emily Guy Birken
Emily Guy Birken is a writer, recovering English teacher, and stay-at-home-mom. She lives in Lafayette, Indiana, with her mechanical engineer husband and toddler son. Her musings on life and parenting can be found at The SAHMnambulist.

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  • http://www.themoneyprinciple.co.uk/ John@TheMoneyPrinciple

    The food prices that you pay in the store does not reflect the price the farmer receives. Nor the number of sell/purchase decisions taken while the food is being grown or on its way to your plate. One of the biggest issues is the way that the financil markets magnify the effects of some natural disasters while ignoring the less fashionable. Some way of reducing the number of trades in this will ameliorate the variability in food prices and give the farmer a better return.

  • social_trader

    Low cost often equals low quality. Despite restaurants cutting costs and passing the savings on to customers, the end result is a poor quality often inedible meal. Unfortunately due to the rise in prices of just about everything else, the food industry has suffered. Food is a commodity that everyone has to have in order to survive. However, eating out or buying ready made is becoming less of an alternative. Personally, I would predict that 2013 will see high numbers of restaurants going out of business. Specifically the kind of diner that has appealed to the working and middle classes.

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