Drought to drive up food prices, singe pocketbooks

  • Article by: MIKE HUGHLETT , Star Tribune
  • Updated: July 25, 2012 - 11:02 PM

Prices for milk, eggs, poultry and beef are expected to rise.

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A cornfield in drought near Delano, Kan.

Photo: Mashid Mohadjerin, New York Times

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The severe drought that is starving crops throughout the nation's farm belt is also likely to drive up prices in the grocery aisle.

Beef will go up 4 to 5 percent as a result of this summer's dry weather, the government forecast on Wednesday, while dairy products are likely to increase 3.5 to 4 percent and eggs by a similar amount.

The main reason is the prospect of a weak corn harvest that is already driving up the cost of that key agricultural commodity. Corn can be found in everything from soft drinks to baby food, but nearly half of the crop is used to feed livestock.

"It's having a huge impact on us," said Steve Olson, head of both the Minnesota Turkey Growers Association and the Chicken and Egg Association of Minnesota. "The fear is that there's not going to be enough feed to go around."

The data from the U.S. Department of Agriculture is the first government estimate of how much prices could rise next year because of the drought that has gripped most of the country this summer, producing a lower-than-expected yield in not only corn but also soybeans and several other commodity crops.

Corn is now selling at about $8 a bushel -- up 50 percent from where it was priced at just a month ago. Soybeans are at a record price of almost $17 a bushel, up from $13 just two months ago. Food prices overall rise about 1 percent for every 50 percent increase in corn prices, because corn is used in dozens of products, the Agriculture Department said. "These are very corn-intensive operations," said Bruce A. Babcock, an agriculture economist at Iowa State University, referring to raising livestock.

According to the government, 88 percent of the this year's corn crop is now affected by the drought. Seventy-seven percent of the crop for soybeans, which is also used in animal feed, is affected.

Minnesota is among the nation's top five producers of corn and soybeans, but its crops are among the nation's healthiest, as far as moisture goes. Around 60 percent of Minnesota's corn and soybeans are still in good or excellent condition. But corn and soybean prices are set by broader U.S. drought conditions, and Minnesota's $8 billion livestock industry is feeling the pain. The state is the nation's third-largest hog producer, and about two-thirds of the cost to raise a pig is feed, particularly corn.

Feed prices for state hog producers have risen about 30 percent since the drought started, said David Preisler, executive director of the Minnesota Pork Producers Association.

Minnesota dairy farmers are particularly feeling the pinch of soybean meal prices that are up by about two-thirds over the past couple of months. "The price of this is really putting the hurt on us," said Patrick Lunemann, president of the Minnesota Milk Producers Association. Many dairy farmers grow their own feed corn, but rely on the open market for soybean meal for feed, he said.

The price of alfalfa silage, another feed source for dairy cows, is on the rise, too, even though Minnesota has had a relatively decent hay crop. Livestock farmers in other states have seen their local alfalfa crops scorched, driving up demand -- and prices -- for Minnesota-grown hay.

The commodity price run-up comes at a particularly inopportune time for the entire food chain -- livestock growers, packaged food makers and consumers. Since 2011, the nation's food makers, including Austin-based Hormel Foods and Golden Valley-based General Mills, have been partly passing down their rising input costs. But this year they've been increasingly meeting consumer resistance.

Because of the dry weather, cattle farmers in a number of states have started selling off or culling cattle because of ruined grass for grazing and the price for corn for feed has skyrocketed. Preisler said that some Minnesota hog producers have already decided to leave the business, because given soaring feed costs, "they just can't afford it." Pork and beef prices could fall in the short-term, but the prices of beef, pork, chicken, eggs and dairy are expected to rise significantly around November, economists say.

The New York Times contributed to this report. Mike Hughlett • 612-673-7003

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