Tuesday, August 14, 2012

Drought Impact of Higher Corn Prices on Food Prices

Will Snell, Extension Ag Economist, University of Kentucky 

The widespread drought has caused much attention on the impact of the
rising price of corn on food prices.  While there is no doubt that the
higher corn prices we are observing are going to affect what we pay for
groceries, it varies considerably on the food product and the time period
being considered.

Overall, only about every 15 cents out of every dollar consumers spend on
food can be attributed to value of farm products.   Packaging, storage,
transportation, labor, profits, among other non-farm items comprise 85%
of what we pay in the grocery stores for our food.

The impact of higher corn prices has a much greater impact on the cost of
meats and dairy products than on processed foods (such as corn flakes)
and beverages (corn-sweetened soft drinks).

Most analysts conclude that even with the near doubling of corn prices in
recent months, a $3.50 box of corn flakes contains less than 10 cents of
corn, while a $1.50/liter soft drink sweetened with high fructose corn
syrup has less than a nickel of corn. Thus the recent escalation in corn
prices has only added a few pennies to the cost of many processed food
and beverage items that use corn as an ingredient.

Actually in the short-run, we could see meat prices decline (or at least
stablilize) due to the drought forcing herd liquidations and thus
inducing higher short-term meat supplies.  But as livestock inventories
shrink, future meat supplies will be lower and consequently we should
expect higher meat prices in the winter and early in 2013. Currently USDA
is projecting meat price increases of 3.5 to 4.5% in 2012.

Overall, USDA is projecting that food prices will increase 2.5 to 3.5% in
2012 vs historical annual food price increases of 2 to 2.5% which is a
surprise to many.  Some food products such as fruits and vegetables
(including corn on the cob) are produced with access to irrigation and
thus not as much impacted by the drought.  Another factor that could
limit food price increases is the current intense competition in the food
retailing industry. Finally many food items that are impacted by higher
corn prices, such as milk, meats, and soft drinks are often used as
loss-leader items as food retailers offer specials on these items to
attract customers to their stores.

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