The USDA has issued projections on the effect of the drought on food prices in the U.S. The report begins, “the most severe and extensive drought in at least 25 years is seriously affecting U.S. agriculture, with impacts on the crop and livestock sectors and with the potential to affect food prices at the retail level.” As of mid-August 2012, 60% of the farms in the United States were experiencing drought, with 28% experiencing “extreme or exceptional drought.”
The drought will destroy or damage a portion of the field corn crop in a number of states. The farm price of corn has already increased and this will affect the price of other crops. The earliest effects will be on pork, beef, poultry, and dairy, especially fluid milk. Drought conditions may lead to herd culling because of higher feed costs, which may lead to short term increases in the meat supply that could temporarily reduce prices.
Historically, if the farm price of corn increases by 50%, retail food prices increase by 0.5 to 1.0%. Even if all commodity prices doubled, retail food prices would only increase by 15%. But that can be a significant increase in the food budget for many Americans. The government expects that food price inflation should be between 3 and 4% next year, above the average 2.5 to 3% annual increase.
