Drought Has Food Prices Set to Spike in 2013

by Dan Burrows | October 16, 2012 10:51 am

Drought Has Food Prices Set to Spike in 2013

Food prices ticked up just 0.1% last month despite the worst drought to hit the U.S. in almost a half-century.¬†Unfortunately, those almost nonexistent price increases won’t last.

No, we’re not headed for a food-price cliff like we are a fiscal cliff in 2013, but with corn and soy prices still awfully close to record highs, the cost of meat, dairy and, well, just about everything we eat is set to jump soon.

Corn and soy are ubiquitous in processed foods, finding their way into everything from high-fructose corn syrup to breakfast cereal to ice cream, but they’re also a primary feedstock for chickens, cows and hogs.

As a result, the two commodities trade essentially in lockstep and affect prices for almost everything Americans eat.

Prices for corn and soy are forecast to ease somewhat in 2013, according to the World Bank, partly because those high prices in themselves will tamp down demand. Furthermore, a bumper corn crop coming from Brazil has pulled prices down from those record highs in the past week.

But there’s no getting around it: The worst drought to hit the American agricultural heartland since 1954 — as well as disappointing yields in parts of Asia and Europe — is going to send food costs sharply higher by the end of this year and beyond.

Cattle eat corn, and higher costs for feed have ranchers paying more to raise their herds — or slaughtering them early to avoid those higher costs. The combination of higher costs and lower supply has prices for beef and veal set to jump 3.5% to 4.5% this year versus 2011, according to data from the Bureau of Labor Statistics. Even worse, beef and veal prices are expected to jump another 4% to 5% in 2013.

Pork prices will rise 1% to 2% in 2012 and another 2.5% to 3.5% next year. Poultry is expected to increase 3.5% to 4.5% by year-end, and then tack on another 3% to 4% in 2013.

In related movements, eggs will rise 2.5% to 3.5% in 2012 and another 3% to 4% next year. Meanwhile, dairy products will cost 2% to 3% more by the end of 2012 and jump a further 3.5% to 4.5% by the end of 2013.

And the biggest increases in 2012 will be seen in prices for fats and oils, which are expected to jump 5% to 6%. They’ll moderate somewhat next year, but still tack on another 2% to 3%.

Any way you look at it, food is getting more expensive next year. All food is forecast to cost an additional 3% to 4% in 2013, according to the BLS. That means that even if you’re lucky enough to get the standard 3% annual raise, it will all go to stocking your cupboard and fridge — and then some.

Apart from the drag those higher prices will have on discretionary consumer spending, it also makes life harder for food companies. For example, Tyson (NYSE:TSN[1]), the biggest meat, chicken and pork producer, is forecast to suffer a 6.3% drop in profits this year and a decline of more than 12% in 2013. That comes despite rising sales because higher costs will take a bigger bite out of the bottom line.

Whether you’re a consumer or an investor, higher prices for food are on their way, and they will surely be tough to swallow.

As of this writing, Dan Burrows held no positions in any of the aforementioned securities.

Endnotes:
  1. TSN: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSN

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