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USDA economist: Drought shouldn’t significantly affect prices until 2013
 
By DOUG SCHMITZ
Iowa Correspondent

WASHINGTON, D.C. — The severe drought that ravaged most of the Midwest this summer won’t likely affect overall food costs for the remainder of 2012, but will raise grocery prices in 2013, according to a USDA economist.

“We’re still looking at 2.5 to 3.5 percent, and that is because most of the impact of the drought, which is the big story right now for food prices, is expected to be felt in 2013,” said Ricky Volpe, an economist at the USDA’s Economic Research Service. “We’re looking at grocery store prices to go up 3 to 4 percent, which is a range that does not include historically-normal food price inflation, which is about 2.8, 2.9 percent.”

In turn, he said beef prices will be one of the highest food costs in 2013. “The highest inflation, the highest forecast we’ve set is for beef and veal prices to go up 4 to 5 percent in 2013, but I need to note that is not entirely because of the drought,” he said.

Volpe said the whole sector has seen structural inflation since the start of 2011, mainly because of low inventories.

“The drought is expected to exacerbate this into heightened inflation throughout 2012 and into 2013, but when people look at these forecasts and they see high numbers for beef and veal, they shouldn’t think that’s because the price of corn is going up,” he said. “There are bigger, more long-term issues with those foods.”
Volpe said consumers shouldn’t see higher produce prices this year or in 2013.

“Probably the most important in the minds of most consumers (are) fruits and vegetables,” he said. “They’re having a great year for prices so far in 2012 and 2013. We do expect normal, year-over-year food price inflation on the order of 2 to 3 percent for those foods.”

Volpe said the most important variable in how the drought is now affecting food prices is higher corn prices, “which drives up the price of feed and, in turn, the price of animals that go to slaughter or animal products. However, more long-term down the road into 2013, possibly into 2014, we’re going to see these higher corn and soybean prices built into packaged, processed, more shelf-stable foods.”

Moreover, in 2013, the USDA predicts overall grocery prices to increase between 3-4 percent, compared to this year.

Shane Ellis, a field specialist for Iowa State University’s Iowa Beef Center, said retailers will increase the price of choice cuts of beef, which could peak around $5.50 in 2013, “incrementally during the last quarter of 2012 and into 2013, rather than make large jumps in price that could scare consumers out of purchasing meat.
“They don’t want to sticker-shock customers with huge price increases,” he said. “They’ll keep it consistent and gradual.”
Chad Hart, an ISU extension and outreach grain markets specialist and associate professor of agricultural economics, said the current high grain prices will cause grocery prices to peak in 2013, “but it will take several months for those increases to show up on store shelves.

“Today’s commodity prices won’t show up in food prices until six to nine months from now, usually,” he said. “It takes time for the high corn and soybean prices that we see today to interact with what we pay at the grocery store. The food prices that we see right now are reflecting commodity prices from a few months ago.”
10/25/2012