The Drought of 2012 will have wide-ranging consequences, from the prices at your local bakery now to the meat you buy for grilling next summer, says the economist in charge of the Omaha branch of the Federal Reserve Bank of Kansas City, Mo.
Jason Henderson's new analysis of the rural economy focuses on the drought, which he says “will be forever engraved into the annals of agricultural history.” Some excerpts of Friday's report:
How bad is it?
With 1,300 counties called disaster areas, two-thirds of U.S. corn, soybean and livestock production is sweltering in drought conditions. Predictions this spring of a bumper crop have shriveled to a 12 percent decline for corn and an 8 percent drop for soybeans. Estimates are steadily falling.
Will farmers lose?
Surprisingly, overall U.S. crop income could match last year's record because surviving crops will bring high prices.
Farmers who lose crops to the drought could collect as much as $300 per acre from crop insurance, and most farmers bought at least some insurance. But many farmers will have big losses; high grain prices don't help if you have nothing to harvest.
What about food prices?
Counting all types of food, prices could rise an average of 4 percent. Cereals and bakery products will cost more because corn prices already are up 40 percent, and milk commodity prices are up 17 percent. (Heat stress reduces milk production.)
Supermarket prices for beef and pork are falling as farmers sell off herds rather than buy expensive grain for feed or rely on dried-up pastures. The glut of animals headed for slaughter has cut prices paid for cattle by 12 percent.
Because of sustained high temperatures, consumers are buying less meat to cook outdoors, pushing down prices for beef and pork and cutting meatpackers' profits.
Next year, however, meat prices likely will climb by 8 percent or more because there will be fewer cattle and hogs.
What will consumers do?
As beef and pork prices rise, they buy more hamburger and less steak, choose cheaper restaurants, order lower-priced items from the menu, skip dessert and, if high prices persist, cut back other spending as well. The price crunch will hurt low-income families the most because they spend a larger share of income on food.
Will the drought add to inflation?
Yes, but only by 0.6 of a percentage point.
How long will this last?
Even if the weather returns to normal next year, prices will stay high in 2013 because of low supplies of grain and livestock. The high prices also will cut demand for grain and encourage farmers and ranchers to produce more, including those in Russia and South America.
As demand drops and farmers produce more, prices eventually will come down. “The best cure for high prices,” Henderson said, “might be high prices.”
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