Americans may want to freeze the leftovers from Thanksgiving dinner, as retail food prices are expected to rise next year, sparked by the country’s worst drought in more than half a century.
The dry conditions sent corn futures to a record and wheat prices to the highest in four years. They had less of an effect on food costs than expected earlier this year because slowing economies and oil demand have offset price pressures, economists say. Thanksgiving dinner will cost only 0.6 percent more than in 2011, the American Farm Bureau Federation said, with a 3.1 percent jump in turkey prices leading the way.
Next year, retail poultry prices are projected to increase as much as 4 percent, beef by 5 percent and dairy products by 4.5 percent because of higher feed prices and as herds thinned by the drought tighten supplies, the U.S. Department of Agriculture said. The drought’s effects on food prices may linger as late as 2016, said Christopher Hurt, a livestock economist at Purdue University in West Lafayette, Indiana.
“We haven’t seen the full adjustment from the drought yet. That takes time,” Hurt said.
The drought in the Midwest and Great Plains drove corn yields to a 17-year low and may last at least through February. U.S. consumers will pay 3 percent to 4 percent more for food next year, a half-percentage point above this year’s expected increase, according to the USDA. The overall inflation rate in the year through October was 2.2 percent, according to the Labor Department’s Consumer Price Index.
The average cost of feeding 10 people the 12 items typically served during the holiday meal, including turkey, stuffing, potatoes and pumpkin pie, will be $49.48, up from $49.20 last year, according to the Farm Bureau. By raising feed costs for animals and commodity prices for processors, food inflation this year is about a half-percentage point higher than it would have been without the drought, said Bill Lapp, president of Advanced Economic Solutions in Omaha, Nebraska.
Other factors have put the brakes on any increase, making the short-term food-cost picture rosier than retailers and producers may have expected on Aug. 10, the day corn reached a record $8.49 a bushel, he said.
Oil, which touched a four-month high of $100.42 a barrel on Sept. 14, has since fallen 14 percent as Europe is mired in recession and the U.S. shows signs of economic slowdown, with consumer demand in the eastern U.S. temporarily damped by Hurricane Sandy last month. 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.
Crop prices themselves have declined, with corn down about 12 percent from its Aug. 10 record. Soybeans have dropped 16 percent in the past three months and wheat has slid 4.7 percent. Output of ethanol, which competes with livestock feed for grain use, fell 14 percent this year as of Nov. 9, according to the Energy Department.
The drop in crop prices and the slaughter of animals that were killed earlier than normal to save on feed costs have kept food inventories from falling as much as initially feared, Lapp said.
“We’re a long way from running out of bacon,” said Lapp.
Still, bacon prices are destined to start climbing in the first half of 2013, followed by increases in beef, Lapp said. Wholesale-pork carcasses have slumped 4.6 percent this year as producers culled herds, sending inventories of the meat to their highest September levels since at least 1915. They’re set to fall next year, with the lowest per-capita pork inventories since 1975 expected, according to USDA data.
The U.S. cattle herd, meanwhile, is the smallest since at least 1973, according to the USDA, a structural shift intensified by the drought, Hurt said. Any expansion in supply in response to higher prices won’t hit the marketplace until at least 2014 because of the amount of time it takes to raise a beef animal, he said.
Other food products may rise more rapidly because of their production cycle or the vagaries of the weather, Lapp said.
Prices for fresh fruits and vegetables, which have fallen 0.5 percent in the past year because of relatively calm weather in the regions where they’re grown, are always vulnerable to spikes because of frost, drought or floods that affect perishable products immediately, he said. Orange-juice futures last week had their biggest weekly gain since January on signs that cooler weather may threaten groves in Florida.
Egg and poultry products, including chicken and turkey, rise in price faster than cattle and hogs because they are produced and brought to market faster, he said. On the bright side, that means some of the drought’s costs are already baked into this year’s Thanksgiving turkey. At the same time, feed supplies aren’t going to improve radically any time soon, he said.
“These costs are being passed down,” Lapp said. “We are in a period of multiple years of food inflation being greater than general inflation.”