Drought has little impact on USDA food price forecast

WASHINGTON, July 25 – A new USDA food price forecast released today, the first since the severity of the drought was understood, shows little variation from its late June forecast in part because the extent of crop damage and livestock liquidation is still to be determined.

“We do not yet have specific estimates of how the drought will affect food prices,” USDA’s Economic Research Service said as it forecast an increase of 3-4 percent in retail food prices in 2013. “This will be estimated once we know the severity of the drought and, in turn, how much of the corn crop is destroyed.”

ERS said it expects to the impact of sharply higher prices within two months for beef, pork, poultry and dairy, especially fluid milk, but the full effect of the drought on packaged and processed foods such as cereal and corn flour likely will take 10-12 months to reach retailers.

The major change in today’s forecast from the previous estimate sees beef prices rising by 3.5-4.5 percent this year, less than the June forecast, following last year’s 10.2 percent increase. A similar 3.5-4.5 percent increase forecast in poultry prices, however, is up from June. “The drought has the potential to increase retail prices for beef, pork, poultry, and dairy products first and foremost – later this year and into 2013. But in the short term, drought conditions may lead to herd culling in response to higher feed costs, and short term increases in meat supply.”

Historically, ERS said, if the farm price of corn increases 50 percent, then retail food prices as measured by the Consumer Price Index (CPI) increases by 0.5-1 percent. More generally, as an overall commodity price index increases, about 14 to 15 percent of that increase is passed on to retail prices for products that use that commodity as an ingredient.

Food at home, which accounts for 60.4 percent of consumers’ food expenditures, is forecast up 2.5-3.5% this year and 3-4% next year. Food away from home, which takes the other 39.6 percent, is seen up 2-3% this year and 2.5-3.5% next year. ERS sees all meat, poultry and seafood – which gets 12.9 percent of the food bill – rising 3.5-4.5% this year, 3-4% next year

“Half-way through the 2012 crop year almost 40 percent of agricultural land is experiencing severe or greater drought, which makes the 2012 drought more extensive than any drought since the 1950s,” ERS said. It said that 62 percent of farms are located in areas experiencing drought, with about two-thirds of U.S. crop and livestock production in areas of at least moderate drought.

ERS said that its next farm income forecast, to be released Aug. 28, would reflect the impact of the drought, based on USDA crop estimates in widely-anticipated the Aug. 10 crop report.

To see the full report go to:  http://www.ers.usda.gov/data-products/food-price-outlook.aspx.

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