Will the Drought Drain Your Wallet?

August 16, 2012

“It is a historic drought, and it’s having a profound impact on farmers and ranchers all across many states,” – President Obama

According to government officials, we are experiencing the worst drought in over 50 years, and it has caused more damage than expected to corn and soybean crops, heightening calls for a suspension of ethanol quotas to divert another global food crisis.

According to the latest weekly crop progress report from the US Department of Agriculture (USDA), half of the nation’s corn crop was in poor condition, as well as 39 percent of the soybean crop. About 60 percent of all US farmland is estimated to be affected - more than one-half of America's counties are currently designated as drought disaster areas. According to the Agriculture Department and many other US officials, the drought is going to drive up food prices next year, but what exactly will that mean for consumer budgets?

Food accounts for about seven percent of consumers’ daily living expenses, but increasing food prices would lead to American’s cutting back in other areas of their lives – another hit to the already hurting economy. USDA estimates consumers will spend an extra $615 on groceries next year

Rick Whitacre, a professor of agricultural economics at Illinois State University, said consumers may see modest increases in prices in grocery stores due to tightened corn supplies because the grain is so ubiquitous; found in everything from cosmetics to cereal, soda, cake mixes and candy bars. Whitacre believes the bigger fallout will come in 4 to 6 percent price increases for beef and pork, with many ranchers having sold off their livestock as feed costs rise and the drought burned up their pasturelands.

Other foods likely to be affected? Dairy products, and fats and oils, particularly soybean oil. The USDA says that the majority of price impacts at retail are likely to be felt in 2013, SupermarketGuru believes we’ll be feeling it at the checkout sooner.

What other possible affects can the drought have? Analysts are already warning of instability in Africa, where corn is a major staple, as well as an increase in popular unrest in China, where food prices are expected to rise at a time of increasing hardship for the country's vast low-income, workers and peasants. As previously mentioned higher food prices could also lead to reduced consumer spending on other goods, contributing to a further slowdown in the global economy, with unpredictable social consequences.