Historic US Drought and It’s Effects on Crops, Herds and YOUR Pocketbook

If you eat, you need to read this post.

Photo by Shotaku

Many of you know that I was an Army Officer for 11 years-and a tenent of the Army writing style is “Bottom line up front”–ie start with your main point. So here it is:

Over 50% of the US is being effected by the worse drought since the 1950’s. There are serious crop losses-most notably in corn and soy-that will cause increases in food prices on just about everything you buy in the next 6-9 months.

Now let me get you there. I’m going to be throwing a lot of information at you, and I will be citing my materials where appropriate and listing sources at the end of the post. I’ve read a lot in the last few days and am going to attempt to distill down and organize this information to make it as easy as possible to understand.

Please-read this information and understand it!

Let’s start with LAST year. In 2011 approximately 29% of the US suffered a drought, 12% an “extreme drought”–Texas was particularly hard hit, along with a large swath of the southern mid-west. Crops failed, water was scarce. Ranchers who couldn’t afford to feed or water their herds sold off cattle. This initially caused a drop in prices due to the larger volume of beef suddenly flooding the market. Of course once that beef was gone the long term effect was the rise in beef prices we’ve seen in the last 6 months or so.

Even if these ranchers kept their breeding females and bred them right away-a cow’s pregnancy lasts 9 months and a steer is typically at least a year old before it is slaughtered, so it would take almost 2 full years to build their herds back up. And since the reason for the sales was inability to feed and water their herds, I doubt many of them started breeding again immediately.

On to the extremely mild winter of 2011/2012. This was a mixed blessing agriculturally. Ranchers and farmers didn’t have to spend money moving snow around, heating barns and feed costs were down (animals don’t need as much feed to put on weight and stay warm in mild weather). Many crops such as corn were able to be planted early. However there are some negatives to a mild winter. In some areas snow is counted on as a ground insulator and the spring snow melt is an important part of the moisture cycle. Exposed ground can be eroded by the wind. The mild weather can also allow most pests and weed seeds to survive in the soil.

In April 2012 corn was being planted at a record pace and things were looking good. Then in mid June it got dry, really dry. As days and then weeks passed without rain farmers and ranchers got more and more concerned.

According to UPI:

Nearly 61 percent of the continental United States — from California to Arkansas and Texas to North Dakota — is under moderate to extreme drought, the government’s U.S. Drought Monitor said…the largest such area since December 1956. (UPI-US Drought Pushes World to Food Crisis)

The U.S. Department of Agriculture (USDA) has designated 1,297 counties in 29 states as disaster areas. Tom Vilsack, the US Agriculture Secretary, says the situation is very serious:

More than three-quarters of the nation’s corn and soybean crops are in drought-affected areas and more than a third of those crops are now rated poor to very poor, Mr. Vilsack said. The price of corn has already increased in recent weeks by 38 percent and the price of beans is up 24 percent. … Mr. Vilsack said the drought would result in price increases for food into 2013. (NY Times-Worsening Drought Puts Food Supply at Risk)

There are many comparisons being made to the drought in 1988. Since many of us lived through that drought (probably without even noticing) you may think that means you know what is coming. But according to the Wall Street Journal this year is different:

The drought also arrived when stockpiles of corn and soybeans were already thin. The U.S. has endured damaging droughts before, notably in 1988, But back then, the storage bins were relatively full, while this time, they are getting close to empty. (Wall Street Journal: Price Check-Drought May Hit Grocery Tabs)

I know some of you might be thinking right now “So what? I don’t really eat that much corn or soybean.”

Corn goes into so many of the foods we buy that shortages can end up having a greatly magnified effect, one that can push food prices higher across the board…The majority of corn grown is fed to livestock, including chicken and cattle. As it gets more expensive to feed those animals destined for the slaughterhouse, the end-product chicken nugget or hamburger patty gets more expensive as well. (Daily Finance: Your Daily Forcast, High Temperatures Higher Food Prices)

That’s right-corn is fed to our food-beef & milk cows, pork and chicken. The difference for the rancher isn’t just that the cost of feed has increased, it’s that many ranchers typically grow their own feed crops. Now instead of growing their own feed at a minimal cost they will have to go out and buy the feed-not at the normal cost but at the elevated drought cost. Of course that is IF they can even find it.

But that’s not all. Corn is in EVERYTHING. It makes the high fructose corn syrup that seems to be in almost every product. It is the cornstarch that is used as a thickener in even more things. Corn is even the filler in your dog and cat food. And let’s not forget that corn is used to create the ethanol that is 10% of every tank of gasoline these days.

(note: Sweet corn, the corn we actually eat as a vegetable, is not being affected seriously by this drought according to the USDA. So ironically your actual can of corn on the shelves might not be affected)

And crop loss isn’t the only thing costing ranchers and farmers money. The folks who can are using electric irrigation for their crops:

Alex Carter, who farms 3,500 acres of rice and soybean in southern Missouri, told CNN he’s been running electric irrigation twice as much as most years because he’s only gotten two inches of rain since March. Farmers have plenty of water for irrigation from wells, but the expense is a killer. Typically wells run for 12 hours, but they are running continually now, draining power and business accounts. “A lot of guys have to go back to their banker to ask for more money” to cover added pumping costs, he said. But they have to keep the pumps going. (CNN: US Drought Biggest since 1956 Climate Agency Says)

The heat itself is reducing the output of laying hens and milk cows as well. Just like humans-when it’s really hot, they don’t feel like eating much. When they eat less, they produce less eggs or milk

Temperatures in the 90s and above mean cows give less milk, and sky-high feed prices are making it more expensive to feed them. Add to that the cost dairies must pay for fans and sprinkler systems to keep the animals cool during long hot days and nights.

Milk prices are actually the lowest they’ve been in 18 months because of surpluses built up over an ultra-mild winter and spring…By August, the cost of a gallon of milk at the supermarket could rise by 10 to 15 cents and by Christmas an additional 25 cents on top of that, says Mary Ledman, chief analyst with the Daily Dairy Report in Libertyville, Ill. (Indy Star: Drought Expected to Drive Up Cost of Milk, Cheese)

And we aren’t the only ones experiencing drought:

The knock-on effect of such soaring prices was already being felt around the world, where drought has also hit other grain exporters who are starting to cancel previous sales and leave hungry countries in the Middle East and elsewhere scrambling. (Chicago Tribune: Grain Prices Set Records as US Drought, Food Worries Spread)

The effects of this drought have already started to show in the economy, even if it hasn’t filtered down to the supermarket yet:

Retail prices might not reflect the impact for months, but investors already are bidding up contracts to buy other food commodities in future months. They also are dumping shares of companies that face rising bills to secure supplies, indicating skepticism among analysts that companies will be able to raise prices enough to compensate, given the tepid economy and persistently high unemployment.

Share prices for chicken processors Tyson Foods Inc. and Pilgrim’s Pride Corp. are down 22% and 40%, since the end of May, respectively. Dean Foods, which markets milk under brands like Garelick Farms and Land O Lakes, is down 22.5%. The firms didn’t comment.

In my very simple understanding of the stock market-a stock drops because the smart folks who study these things think it’s a BAD INVESTMENT. I may be reading something wrong, but if chicken and milk prices are going to go up but investors don’t want a piece of that action then they think that despite the increase in product cost the company isn’t going to be making much money. That suggests to me that they don’t expect the average American to be spending that money. That does NOT sound like a good sign to me. (note: if I am misinterpreting this please feel free to share your viewpoint in the comments-I am NOT an analyst!)

All of this is lovely, just lovely eh? As my grandmother used to say, forewarned is forearmed! Knowing that this is coming is much better than being caught unawares.

So. . . what can we, the consumer, expect to see?

Well, milk and eggs come to market in a much quicker cycle, so I would expect to see eggs and milk increase sooner. Cheese had to be produced and aged, so that would follow later. I would not be surprised to see a short term drop in meat prices as even more ranchers and farmers sell of their herds on several fronts-beef, pork, chicken-followed in 6-9 months by a sustained sharp increase.

So far I haven’t seen anything to indicate that there will be actual shortages of things like milk or cheese, however I expect most people to use less of them:

Roger Hoskin, an agricultural economist with the Department of Agriculture’s Economic Research Service. “I can’t imagine situations where you’d have people standing in line to get milk at the dairy counter. But they might not want it at the price it’s selling at.” He adds that “you’ll see less cheese on pizzas and in salad bars.” (Indy Star: Drought Expected to Drive Up Cost of Milk, Cheese)

What affects your budget also affects the budget of corporations. The price on products will creep up (again, I would guess 6-9 months or longer) depending on how much corn, soy, milk, cheese or meat is required to produce it. Companies will likely try to keep the consumer cost level by changing the composition of their products to be less expensive-so more filler or smaller portions/boxes.

It’s also quite likely that the droughts will cause problems on an international scale:

The all-time-high corn and soybean prices — with corn closing just over $8.07 a bushel and soybeans trading as high as $17.49 — surpassed 2007-2008 peak {prices} that sparked food riots in more than 30 countries. (UPI.com: US Drought Pushes World to Food Crisis)

If you want more detailed and “official government” information, the USDA has an entire page devoted to the farm and food impacts of the 2012 drought.  They are due to give updated predictions on July 25th to incorporate the newest data.  Check out their report for full details–I’ll make sure to post an update once the data is released.

So what can you do?

I hate to give you a big old problem without any ideas on how to address it.  Guess that’s left over from my Army officer days as well-you don’t give the boss a problem without giving at least one possible solution for fixing it.

Obviously you and I can’t change the weather and make the crops grow.  But now that you have an idea of what’s going on you can make some educated decisions.  See, we are back to my grandmother and “Forewarned is Forearmed”.

So we know prices are going to go up across the board-probably most notably in meat, cheese and dairy.  Although we don’t know exactly how much it will go up, we know it will affect our overall grocery budget.  Depending on your personal situation you may want to consider some of all of these strategies:

1.  Stock up on items now that you believe will increase in price.  If you have the ability to preserve meat ( freezing or canning) or cheese (freezing) then you might want to keep an eye out for sale prices and stock up within your budget.  I would NOT recommend taking on any debt to do this–but if you can cut discretionary spending somewhere else and stock up on meat you probably won’t be sorry in the long run.

2.  Get out of debt.  Yeah, I know I ALWAYS advocate getting out of debt.  That’s because it is ALWAYS a good idea.  Specific to this situation, if you make some more drastic sacrifices to reduce your debt now, then hopefully you will have more resources available to deal with cost increases when they hit.

3.  Build a cash reserve.  I know that’s easier said than done, but having some extra cash saved up that can get plugged into the grocery budget as it creeps up can’t hurt!

4.  Adjust your diet.  Meat.  Cheese. Foods containing corn syrup.  All of these things aren’t great for you in large quantities anyway!  Why not start reducing your family’s intake of these items now? It will stretch what you’ve already bought, get your family used to eating less of those things and build your cooking skills.  Personally my meal plan goals include having one meatless meal, one soup meal and one bean meal a week.

Those are just a few quick ideas to get you started–I’ll be writing more extensively about these topics in the coming weeks.  Make sure you subscribe to Frugal Upstate’s email updates to catch all those posts and many more about gardening, cooking, and general frugality, sustainability and preparedness.  Also”like” Frugal Upstate on Facebook-we have tons of great conversations over there!

So what do you think? I love hearing reader’s thoughts, observations and tips in the comments!

Sources:

Examiner.com (2011): Extreme Heat Wave to Spread Across Chicago, US; Drought Conditions to Worsen
WFC Courier.com: Agriculture Feels Effects of Relatively Mild Winter
Emerging Money: On the Implications of a Record Corn Planting
UPI.com: US Drought Pushes World to Food Crisis
CNN: USDA Says 39 More Counties are Drought Disaster Areas
NY Times: Worsening Drought Puts Food Supply at Risk
Daily Finance: Your Daily Forcast, High Temperatures Higher Food Prices
Wall Street Journal: Price Check-Drought May Hit Grocery Tabs
CNN: US Drought Biggest since 1956 Climate Agency Says
Indy Star: Drought Expected to Drive Up Cost of Milk, Cheese
Chicago Tribune: Grain Prices Set Records as US Drought, Food Worries Spread