Inflationary effect of U.S. drought on food prices to be felt for years – Drought most costly disaster since the 1980s

By Richard Gootee
14 September 2012 NEW HARMONY, Indiana – The summer’s extreme drought is on track of being one of the nation’s costliest natural disasters since 1980, according to Chris Hurt, a Purdue University agricultural economist. Speaking to nearly 100 area farmers during a breakfast presentation Thursday at the Posey County 4-H Fairgrounds, Hurt said this year’s drought, could become the second-most expensive weather event ever, ranking behind only Hurricane Katrina. In addition to direct impact on farm incomes, it will have a residual inflationary effect on grocery prices for years to come, he said. Commodity prices, Hurt said after his presentation, account for about 20 percent of a finished product’s price tag at the grocery store. Consumers, he said, should expect spikes in the cost of several food products for the next couple of years because of this summer’s dry conditions, even if farmers have bumper crops next year. “We expect the inflation to be about 3.5 percent this year, and then 3 to 4 percent in 2013, that’s the whole bread basket. You’re going to see that impacts will vary from product to product.” Hurt said. “For example, things like bakery products, wheat, cereal, sweeteners and high-fructose corn syrup … those higher prices are already being built into our food this fall.” But there will also be a spike in meat prices in a couple of years because livestock farmers have had to adjust to the conditions as well. “Then you will have a lag on the impact of animal products. Those will tend to be more into 2014, especially the last half of 2014,” Hurt said. “(There) will be less beef, less pork, less chicken, less turkey in late 2013 and 2014.” This year’s drought, he said, was similar to the conditions the of the 1988 drought and accompanying high heat, which currently holds the No. 2 spot in terms of economic damages. According to the National Climatic Data Center, that adjusted for inflation, that drought had an economic impact of more than $77 billion. Hurricane Katrina cost more than $140 billion. “This drought had a lot of parallels to the 1988 drought, in terms of severity (and) in terms of even timing,” said Hurt, who noted that severe droughts affect a much wider area than other natural disasters. “We don’t know what the final number is going to be of damage as assessed by the government, but its reasonable to think that it’s going to be in the category of that 1988 drought.” As of earlier this week, more than $1.4 billion had been paid in early insurance claims already filed, according to Agriculture Department statistics. Overall, Hurt told farmers, the drought, coupled with extreme heat this summer, has reduced the predicted national corn harvest by more than 25 percent — from 15 to 11 billion bushels. He noted, though, that increased prices is good news for those farmers lucky enough to have some harvestable crops. “In this room, there could be financial returns from A to Z, from higher-than you expected before the drought to financial tragedy,” Hurt said. Current corn prices are at more than $7.70 per bushel. But, of course, Hurt said, higher prices don’t help farmers whose entire fields were wiped out by the weather. Crop insurance, too, will allow most corn farmers who lost crops to stay stable financially, though he noted that about 30 to 35 percent of the state’s farm acreage is not covered by such insurance. […] Though consumers will feel the effects of drought for years to come at the grocery store, Hurt said there is no data to suggest that the drought will continue into the next growing season. In fact, it was noted several times Thursday that 2011 brought heavy rains, which also plagued many area farmers. […]

Inflationary effect of drought on food prices to be felt for years