Tags: lapp | food | prices | drought

Lapp: Food Prices Could Rise 5% in 2013 Due to Drought

Tuesday, 24 Jul 2012 08:24 AM

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A crippling drought that has decimated the U.S. corn crop will send food prices climbing as high as 5 percent next year, said Bill Lapp, president of commodity consulting firm Advanced Economic Solutions.

Corn prices have risen almost 37 percent since early June thanks to the drought.

Many expect consumers to feel the drought’s effects on food prices in grocery stores and in restaurants next year, as food producers have largely hedged against rising prices this year.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

“In terms of food inflation, we’ve had slowing food prices in 2012, which is still going to be increasing but at a lower rate than 2011. But I think the bigger impact comes in 2013, when we could push food prices up at an annual rate of 4 to 5 percent at that time,” Lapp told Yahoo.

“It’s important to know that if you take all the crops grown in the U.S., corn represents more than half of the total weight or volume, so it’s a very, very important crop in terms of its impact on other crops,” Lapp added.

Corn is a chief input in many foods, from breakfast cereals to beef and poultry as well.

“It’s the primary feed ingredient in the production of beef, chicken, pork, turkey and dairy, as well,” Lapp said, adding other crops will suffer from hot and dry weather as well.

“It competes for these acres with the other crops, so we are impacted by what’s going to lead to about a $30 billion increase in the cost of corn indirectly through the feed costs and through the resulting increase in other crops such as wheat and rice and soybeans.”

Restaurant owners are already bracing for higher costs.

“While costs have been relatively stable overall so far this year, the recent extreme weather will likely put pressure on our food costs later in the year and into 2013,” John Hartung, Chipotle Mexican Grill’s chief financial officer, said on the restaurant chain’s recent conference call, Yahoo added.

Financial experts agree the forecast for the sector does not look good.

“We’re seeing increasing areas of moderate to severe drought across Nebraska and Iowa, and nothing has improved in Illinois. In fact, things have gotten worse,” said Sterling Smith, an analyst with Citigroup, according to Reuters.

“The areas around the Nebraska-Iowa border in particular have been some of the better-performing areas where we haven’t seen as much damage,” Smith added. “There is going to be, over the next eight days or so, intense heat and no rain so I think we’ll see further crop losses coming from there.”

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

The drought might also boost the price of ethanol, which is added to gasoline, The Washington Post reported.

Weather forecasters do not expect rain in the Midwest anytime soon, according to The Post. A high-pressure system will probably stay put over the Rockies and the central United States and send rain across southern Canada.

"We have not seen this kind of weather in at least 30 years. Farmers in many areas are resigned to the fact that they have anywhere from modest losses to complete losses of their crop," Lapp told The Post.

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