Drought heading from croplands to a meat counter near you

CHICAGO Thu Aug 30, 2012 12:10am EDT

A worker waits for customers at a meat counter in the Broadway Market in Buffalo, New York April 10, 2011. REUTERS/Eric Thayer

A worker waits for customers at a meat counter in the Broadway Market in Buffalo, New York April 10, 2011.

Credit: Reuters/Eric Thayer

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CHICAGO (Reuters) - The worst drought to hit U.S. cropland in more than half a century could soon leave Americans reaching deeper into their pockets to fund a luxury that people in few other countries enjoy: affordable meat.

Drought-decimated fields have pushed grain prices sky high, and the rising feed costs have prompted some livestock producers to liquidate their herds. This is expected to shrink the long-term U.S. supply of meat and force up prices at the meat counter.

The U.S. Department of Agriculture expects beef and veal prices to rise as much as 4.5 percent this year, and as much as 5 percent in 2013. Pork products could jump by up to 3 percent this year, and as much as 3.5 percent next year.

At a time when high unemployment and rising gasoline prices have U.S. consumers flinching, any rise in grocery bills could chill discretionary spending of the middle class, placing a further drag on the economy.

"It'll put a hardship on people who are already suffering," said Bob Goldin, executive vice president at food industry consulting firm Technomic. "For most other consumers, it'll be an added burden to their finances."

Food prices in 2013 are expected to grow faster than normal for the fourth time in seven years. A recent forecast from the USDA has food costs jumping as much as 4 percent.

Historically, food in the United States has been cheap compared to what people spend other countries. In 2010, Americans spent just 9.4 percent of their disposable income on food, according research by USDA's Economic Research Service (ERS).

The total economic impact of the drought -- along with a federal regulation that requires gasoline to contain ethanol made from corn -- could be as much as $30 billion including ripple effects to the agricultural economy and elsewhere, estimated Bill Lapp, president of Advanced Economics Solutions, an economic research firm that studies the food industry.

EXPENSIVE HOLIDAY MEALS

The first bite to consumers' wallets will likely arrive by Halloween at the end of October, with certain cuts of chicken and other products derived from livestock that rely heavily on corn for feed, said Ricky Volpe, research economist with USDA's Economic Research Service.

As Americans begin to prepare for holiday baking, the price of milk and eggs is also expected to rise. By 2013, nearly every aisle in the grocery store will see an uptick in pricing, Volpe said.

"Are consumers going to feel this? Of course," Volpe said.

LIVESTOCK FARMERS HURTING

The drought hit corn and soybean farmers first, but now some livestock producers are forced to make a grim choice: to pay double the normal price -- or more -- for feed, or simply and send their animals to slaughter.

Many chicken farmers have decided to thin their flocks. Sanderson Farms, the No. 4 U.S. chicken producer by volume, posted better-than-expected profits on Tuesday with help from higher prices, but said it would cut production to protect future earnings from rising feed costs, operating plants at 6 percent below capacity until conditions changed.

Hog farmers, too, are cutting back and losing money on each animal they send to slaughter.

Some feel they have no alternative. The number of animals have built up on some farms, as producers would not move them in hot weather. Others are hurrying to market to avoid the autumn seasonal price drop.

With producers rushing to sell, processors are trying to control the flood of protein into the market to avoid driving down the price of pork and beef. By purchasing fresh meat and putting it into storage, meat processors can sit on supplies for later use.

That is creating an unexpected bounty for the public refrigerated warehousing industry, which is beginning to field sales calls.

The boomlet, though, will likely be short-lived, as meat supplies dwindle and prices rise, said Tom Poe, president of Crystal Distribution Services in Waterloo, Iowa.

U.S. PORK INDUSTRY LOSING BILLIONS

Things are likely to get worse for hog farmers. In a statement released Monday, said Chris Hurt, University of Purdue extension economist. Hurt forecasted that some pork producers could lose as much as $60 per head by year's end, an all-time record high.

Overall, the U.S. pork industry could see $4 billion in losses for the 12 month period representing the last half of 2012 and the first half of 2013, he said.

"The hardest decision is whether I want to fight this battle," said Bill Tentinger, 63, who has run his family's hog farm in Le Mars, Iowa, for more than four decades.

In recent years, he enjoyed an advantage over some of his peers: He had enough land to grow most of his own grain to feed his 10,000-pig operation. But the widespread drought stripped his land of moisture, and him of his relatively cheap source of feed.

Now, he's scrambling to find a substitute. It's not easy. There is simply too much competition - livestock producers, the export markets, the renewable fuel industry - for not enough grain.

COMMODITY PRICES SURGE TO RECORD

With more than half of all U.S. counties designated as disaster zones this growing season, yields plummeted and prices soared. In July, corn prices at the Chicago Board of Trade sky rocketed to a all-time record high $8.49 per bushel, while soybean futures reached an all-time high of $7.77-3/4.

Wheat prices have zoomed up too, despite a healthy U.S. harvest. Farmers increasingly are reliant on the crop as an alternative feedstock. Fears are mounting that drought damage in the former Soviet Union may cut export supplies.

Even hay has become all too scarce, a particularly difficult reality for cattle ranchers. USDA estimates that, as of late July, nearly 70 percent of hay-producing areas have been impacted by moderate or more intense drought.

(Editing by David Gregorio)

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Comments (3)
mutt3003 wrote:
Not to worry, the Fed will just remove food from the inflation list and we will remain at a supposedly 2% inflation rate. Or just as likely, processed food manufacturers will make packaging smaller and only raise prices a little, saying they are looking out for the consumers.

Sep 01, 2012 7:39pm EDT  --  Report as abuse
Marla wrote:
Um, there’s a simple answer to this supposed problem: EAT LESS MEAT! You’ll spend less, and live longer.

Sep 01, 2012 12:06am EDT  --  Report as abuse
Marla wrote:
Um, there’s a simple answer to this supposed problem: EAT LESS MEAT! You’ll spend less, and live longer.

Sep 01, 2012 12:06am EDT  --  Report as abuse
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