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 increase food prices at the retail level.
With the ongoing drought expected to destroy or damage a portion of the field corn crop in Iowa and other states, an increase in the farm price of corn has already occurred and additional increases will depend on the extent of the drought. This will in turn, affect the price of other crops, such as soybeans, and other inputs in the food supply such as animal feed. Any effect on retail prices would depend on the severity of the drought and would begin to appear on supermarket shelves in the Fall.
•We do not yet have specific estimates of how the drought will affect food prices. This will be estimated once we know the severity of the drought and, in turn, how much of the corn crop is destroyed.
•We will likely see impacts within two months for beef, pork, poultry and dairy (especially fluid milk). The full effects of the increase in corn prices for packaged and processed foods (cereal, corn flour, etc.) will likely take 10-12 months to move through to retail food prices.
•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. This could decrease prices for some meat products in the short-term. That trend would reverse after time after product supplies shrink.
•Historically, 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 to 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.
•Sweet corn, eaten by humans, is distinct from field corn (used for feed) and is not being heavily affected by adverse weather at this point.
•The July 25 update to ERS's food CPI forecasts will include forecasts for 2013 and will incorporate the information available on drought impacts at the time of writing.
