By now you've almost certainly heard about the intense drought scorching much of the Midwest this summer. Clearly farmers and ranchers are feeling the effects of the drought most immediately, but the damage done this summer is likely to cause a ripple effect that touches us all, even as soon as next year. On Wednesday the USDA announced that food prices are set to increase between 3% and 4% in 2013 as a result of this summer's shortages, with poultry, milk and beef prices experiencing the greatest price hike. Why those three in particular? The main reason is because corn, soybeans, and wheat are all used as animal feed. The Wall Street Journal reports that corn futures are up 44% and soybean futures are up 26% since June 1. As a result, "farmers are expected to pass at least part of that cost increase on to their customers, eventually leading to higher prices on grocery-store shelves."
The exact amount of food inflation and its effect on consumers is unknown, and will depend on a variety of factors, including lower energy prices, which could offset the higher crop prices. Price increases will roll out at different times and in different ways: for example, to stave off the inevitable rise in feed prices, cattle ranchers have begun slaughtering cattle at a faster pace, which will likely lead to a temporary boost in beef production and keep the price stabilized, if only for a short while. Chicken and turkey prices will show the first price increases, as they grow more quickly than larger animals, and 70% of chicken feed is corn.
The Wall Street Journal cites peanut butter as a case study in how the situation could play out in the coming months:
Last summer, a drought in Southern states devastated the peanut crop, and by September, around harvest time, government data showed double-digit year-over-year retail price increases in percentage terms for the popular spread. By December, prices were up 27% and, most recently, 39% last month.
The most alarming statistic in the report, although not the most surprising, is that poorer Americans will feel the impact of higher food prices the most: "For Americans in the bottom 20% of income, food typically takes up more than a quarter of household income, compared with about 10% for wealthier Americans." A gallon of whole milk, which cost $3.36 last month, is projected to be up to $3.50 to $3.75 by the end of the year, and even higher in the new year.
Read More: Price Check: Drought May Hit Grocery Tabs at The Wall Street Journal
Related: Even Dairy Farming Has a One Percent