Most extensive drought in the US since the 1950s
23 July 2012
FACTS: Forty percent of agricultural land has been affected by the US drought.
ANALYSIS: The USDA states that the drought has rapidly increased over the past month and that 62% of farms are located in areas experiencing drought. It reveals that about two-thirds of all crops and two-thirds of all livestock are produced in areas that are experiencing at least moderate drought but that 44% of cattle production and almost 40% of corn and soybean production are in areas experiencing at least severe drought. It states that a striking aspect of the 2012 drought is how it rapidly increased in early July during a critical time of crop development for corn (the period of pollination and kernel formation) and other commodities. Corn and soybean are the two major crops in the livestock food chain and will record significant falls in yield as things stand. Estimates may have to be further lowered. The winter wheat crop had reached maturity before the dry conditions could meaningfully affect yields; the spring wheat crop is mostly grown in areas unaffected by drought. This explains why the price of wheat has risen by much less than the price of corn and soybean.
The USDA points out that historically if the farm price of corn increases 50%, then retail food prices (as measured by the CPI) rise by 0.5% to 1%. More generally, as an overall commodity price index increases, about 14-15% of that increase is passed on to retail prices for products that use that commodity as an ingredient. Within two months, the increase in commodity prices will be reflected in the price of beef, pork, poultry and dairy products. The USDA expects that the full effects of the increase in corn prices for packaged and processed foods (cereal, corn, flour etc) are likely to take 10-12 months to move through to retail food prices. The transmission of commodity price increases in retail meat prices could be delayed if animal slaughterings rise as a response to drought conditions and higher feed costs.