Why scorching heat could mean higher food prices

4:43 AM, Jul 12, 2012   |    comments
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CHICAGO - Drought conditions and high temperatures that have seared crops across the Midwest could mean higher prices soon for grocery products containing corn, and meat could be more expensive next year.

The Department of Agriculture on Wednesday dropped the estimated average U.S. corn yield by 20 bushels per acre, from 166 to 146, and blamed "scarce rainfall coupled with record-breaking temperatures." It said conditions are the worst since 1988. Lower soybean yields also were predicted.

Smaller harvests mean higher prices. The forecast sent December prices for corn up as much as 30 cents to $7.48 a bushel at the Chicago Board of Trade. The USDA predicted the corn harvest will total 12.97 billion bushels, down 12% from a month ago. It still would be the third-largest on record.

Besides increasing costs for manufacturing the thousands of products that contain corn - everything from cereal to soft drinks - higher grain costs have a ripple effect, says Scott Shellady of Trean Group, a Chicago-based brokerage.

"If you can't feed cattle because the price of corn is too high, cattle go to slaughter," he says. That translates into ample meat availability and lower prices this year, but "in six months time, we won't have any cattle."

That could mean higher prices for meat and dairy products next year, says Corinne Alexander, an agricultural economist at Indiana's Purdue University. "We're seeing multiple years where price levels are increasing," she says. "It puts a lot of pressure on consumers' budgets."

Data by YCharts

Chris Hurt, another Purdue agricultural economist, says food inflation, which had been estimated at 2.5%-3.5% for this year, likely will rise to 3% to 3.5%, and "more of that will be coming at us in 2013."

Tomm Pfitzenmaier of Summit Commodity Brokerage in Des Moines says he worries that farmers' markets for corn will shrink if prices are too high for ethanol plants to buy it. "I'm afraid that for every bushel we lose in production, we lose demand," he says.

Higher prices benefit farmers in the short run and can help cover their losses from lower yields. Some of them, Pfitzenmaier says, "are going to have to pretty quickly decide how much help they're going to get out of crop insurance," which is locked in before the growing season.

Pam Johnson, who with her family farms 2,700 acres of corn and soybeans in Floyd, Iowa, says weather the next 7-10 days is critical for her corn crop because the plants are pollinating now. Some rain is forecast Friday and Tuesday.

"We definitely are concerned, but we're not panicking yet," she says. "Pray for rain."

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