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Amid unusually widespread drought, warnings on food prices

The drought has already raised the price of corn following lowered USDA crop projections that some experts say are still optimistic. Look for meats to lead the way as food prices rise.

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“The prices and the impact of a drought probably will not likely be seen in the grocery aisles until later next year, 2013,” he said.

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But according to farmer Steve Ford, who is  an associate professor of economics at  The University of the South in Sewanee, Tenn., the outlook may be gloomier than government statistics project.

"My sources in the Midwest tell me that the drought is actually worse than indicated in USDA's recent yield estimates,” he says via e-mail. He says the USDA estimates of a 12 percent decline in corn yields were from “overly optimistic initial yield estimates.” He suggests that farmers will more than likely see close to another 10 percent decline in yield.

Even so, he adds, projected corn production in 2012 is still higher than the levels in 2010 or 2011.  What will make the difference is global demand, which is higher. As far as the economics of livestock, he points out that much of the adjustment to higher feed costs has already been made through reductions in animal numbers.

However, he adds, “it will still be hard for those remaining in business this year. The issue will be how many will remain in business until grain prices decline.”

How hard your bottom line is hit depends on where you are in the food chain, says Scott Rothbort, publisher of The LakeView Restaurant & Food Chain Report and president of Lakeview Asset Management in Milburn, N.J.

Large companies such as Kellogg’s and General Mills hedge their losses in the marketplace, protecting themselves from small price gyrations of the marketplace for up to six months. Restaurants and other food vendors do the same, with longterm contracts that lock in price stability.

Even farmers have crop insurance to cover their losses, a federal program that by some estimates may top $30 billion in 2012. “But prices for the average consumer at the grocery store will be more problematic,” he says, adding, “certainly fresh produce, meat, and baked goods will be impacted.”

The weather may not help out any time soon, points out Clark University drought expert Christopher Williams.

This drought is unusual, he says, because normally they tend to be “patchy,” meaning that while one area of the country is experiencing drought, others are compensating with other weather.

But what makes this drought “so impressive is that it is largely continuous.” More than half the country is engulfed by this drought, he points out, adding, “that makes it special,” and the longer term impact less clear. 

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