5 Ways the Drought Could Dry Up Your Wallet

Low yields are causing food inflation that's just beginning

   

The July Consumer Price Index, released yesterday morning, showed inflation in the past month was … well … nonexistent. The recent rise in food, clothing and shelter costs was offset by falling energy prices, despite the fact that crude oil is on the way up again.

Still, the Midwest drought is one of the worst in recorded history, and while the overall price of food may have only increased 0.1%, some snacks are getting hit harder than others.

The summer began with the most corn planted in a decade and is ending with the lowest yield since 1995. Throw in harsh global conditions, especially in Europe and Brazil, and it’s no wonder corn prices are nearing record highs — nearly $8 a bushel.

For soybeans, the story remains much the same: Drought, low yield, high prices. The question, though, is what that really means for consumers. After all, few people buy bucket loads of these crops directly.

Here are five foods that are feeling the effects of a parched summer:

1. Beef

The drought has hit animal feed especially hard. In the short term, though, that actually means more farmers are taking their livestock to the market early to avoid the high cost of feed. Even with that happenings, prices still reached record highs in July, but a price drop could be around the corner as those beef cattle get sold for slaughter rather than get fed ever-costlier corn.

But that can’t last forever. When that trend ends, supply will dwindle and prices are likely to shoot up even more dramatically. Consumers are expected to feel the effects the most in 2013 — and possibly even in 2014. Burgers, for example, may be priced more like steak.

2. Chicken and Pork

Again, the main food for chickens is corn, so the story is much the same. The increase in chicken prices has been much more modest than other foods, but is still significant. And pork, which was already moving higher before the drought, is in a similar boat. Plus, there are few substitutes for the corn and soybeans these animals eat, so the effects will be especially hard to avoid.

In the short term, though, the announcement that the USDA will be buying up to $170 million in meat could help all kinds of products. But next year probably won’t be pretty for carnivorous consumers, or for meat and protein companies like Tyson Foods (NYSE:TSN).

3. Milk

This is getting a bit boring. Dairy product prices have remained pretty well contained of late, but they could also see spikes in the coming months or year. The food chain here is simple — cows make milk, cows eat corn, corn is expensive.

4. Soft Drinks

Yes, corn is the culprit again. Good ole high fructose corn syrup is a staple in soft drinks, so their prices are marching upwards as well. Coca-Cola (NYSE:KO), for one, was forced to raise prices this summer and also saw earnings take a hit as a result of the high cost of corn. And Pepsi’s (NSYE:PEP) prices did the same.

5. Peanut Butter

This simple spread skyrocketed starting in the spring — but from a different drought. A dry season in the Southeast earlier in the year resulted in many farmers using their peanut land for other crops.

The result was expensive: Supply dwindled, peanuts prices spiked and thus the price of peanut butter jumped around 50%. J.M Smucker (NYSE:SJM), for one, has been struggling lately.

The outlook, though, is much better for this snack. More land and more production in countries like Argentina is expected to increase supply and lower prices in the near future.


Article printed from InvestorPlace Media, http://investorplace.com/2012/08/5-ways-the-drought-could-dry-up-you-wallet/.

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