Bloomberg News

Fuel Costs Plus U.S. Drought Equals Higher Food Prices

August 24, 2012

U.S. consumers, already paying more for food due to the worst drought in five decades, may soon see prices at the supermarket rise further because of fuel costs.

“Gasoline is the wild card” of food inflation, said Chad Hart, an economist at Iowa State University. “Anytime you have oil and gas prices moving up, that will hit us on the food dollar.”

Energy and transportation accounts for about 8.2 cents of each dollar spent on food, compared with about 4 cents for farm commodities, according to the U.S. Department of Agriculture. Processing, labor, packaging and other costs dominate the retail and restaurant prices of food, making the cost of corn less important to consumers than the price of the gas needed to transport it, according to USDA data.

U.S. consumers may pay 3 percent to 4 percent more for food next year, up from as much as 3.5 percent more this year, as the effects of drought work their way onto supermarket shelves, the Department of Agriculture said last month in its first forecast for 2013. Beef may rise as much as 5 percent in response to tight supplies of corn, which is used to feed cattle, the USDA said in its monthly report, which will be updated today.

Corn and soybean futures reached record highs this month on the Chicago Board of Trade, and wheat touched the highest price since 2008 as dry conditions worsened in the Midwest and Great Plains.

Oil Prices

Oil, meanwhile, is up 13 percent over the past year on international instability and tight supplies. The nationwide average price of regular gasoline at the pump gained 0.2 cent to $3.718 a gallon Aug. 22, AAA data showed. Gasoline has climbed 39.2 cents since July 1, according to the AAA, the nation’s largest motoring organization.

Even with domestic production gains, gasoline prices in the U.S. will probably rise 5 to 10 cents a gallon by the Sept. 3 Labor Day holiday before falling in the fourth quarter, Adam Sieminski, head of the U.S. Energy Information Administration, said in an interview Aug. 22.

Much of the damage to U.S. crops caused by dryness has already taken place, Agriculture Secretary Tom Vilsack said in an interview Aug. 16. Vilsack said he thought food inflation next year will probably be in the range of last month’s forecast while saying that oil could change that.

“If oil prices keep going up as they have recently, that could have a greater impact on food costs than what’s associated with what’s going on with the drought,” he said.

Food Inflation

Food costs have risen 1 percent so far this year, the government said earlier this month. Retail-food costs rose 3.7 percent in 2011, according to the USDA. Higher energy prices can also deter food inflation, said Bill Lapp, president of Advanced Economic Solutions in Omaha, Nebraska, by making it harder for companies to pass on costs to financially strapped consumers.

Higher commodity prices affect everything from meat purchased by McDonald’s Corp. (MCD:US) to the grain bought by General Mills Inc. (GIS:US) to the sweeteners used by Coca-Cola Co. (KO:US) The U.S. drought may have a bigger impact on people in poorer countries that import food than on Americans themselves, said Johanna Nesseth Tuttle, director for food security at the Center for Strategic and International Studies in Washington.

“Poor and middle-income countries rely on the stability the U.S. harvests bring to global food prices, so they suffer more when our production drops,” she said in an e-mail. World nutrition costs rose 6.2 percent last month, the biggest spike since November 2009, the United Nations said earlier this month.

To contact the reporter on this story: Alan Bjerga in Washington at abjerga@bloomberg.net

To contact the editor responsible for this story: Jon Morgan at jmorgan97@bloomberg.net


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