Conservation Matters November 2012

The Texas Land, Water and Wildlife Connection

Consumer food prices remain relatively stable despite drought

By Danielle Kalisek

Drought Stunted WheatMost of Texas is still in some degree of drought. That, coupled with the drought in the Midwest United States, has caused crop production and livestock to be effected, but how does this translate to consumers and ranchers?

So far in 2012, grocery price increases have been moderate. However, further drought could lead to multi-year effects on livestock and some crops, bringing increased prices to consumers, said Texas A&M AgriLife Extension Service specialists.

"It's been really interesting given the horrible Texas drought of 2011; as we went into 2012 we certainly didn't think our crop prospects were very good, but they've done amazingly well," said Dr. Mark Welch, AgriLife Extension economist in grain marketing and policy in the Department of Agricultural Economics at Texas A&M University.

"We've had above average wheat yields, with the wheat crop harvested primarily in June, and our corn crop has come in well above average. In fact, early estimates from USDA are that this could be a record high average corn yield for the state of Texas, contrary to what's happening elsewhere in the country."

Timely rainfall enabled Texas grain production to respond well and have generally a very good crop for 2012, he said. Drought elsewhere has led to record high corn prices and high prices for wheat, creating a profitable situation for Texas grain producers.

At the same time, record level corn-selling prices led calf prices to decline sharply at the auctions, said Dr. David Anderson, AgriLife Extension economist for livestock marketing also in Agricultural Economics at Texas A&M.

"We still have cattle prices higher than they were a year ago, but they are a heck of a lot lower than they were just a few months ago," he said. "They went down because the cost of feed to feed the cattle went up, and that's typically what happens."

Welch said it is a little early to know what will happen on the price of consumer products.

Dairy and meat products might have price impacts sooner than other products, Welch said. "In most of our processed food items, particularly those that are grain based, the price spike we are seeing only started in June, so we've only had a few months of this run up in prices. It's relatively short-lived, but if it continues we'd expect some impact to the consumer at the grocery store or meals away from home."

One consideration is that in food consumption of grain products, the value of the grain in the final product is relatively small when compared to the other costs associated with food production, he said.

"The value of wheat in an average price of a loaf of bread is about 11 cents, so about 7 percent of the value of bread is wheat," Welch said. "It's all the other costs—transportation, shipping, processing, advertising, marketing—associated with getting a loaf of bread to the grocery store that increases the price.

"Given those numbers, you can double the price of wheat and have really a relatively minor impact on the final price of the food product."

2008 was the last time an increase in grain prices was similar to the current situation, and there were strong concerns of food inflation at that time, Welch said. But during that increase, energy prices were soaring to record high levels. Several studies, he said, have documented the energy component of manufacturing and processing systems is more important than the raw grain product that goes into that food item.

"If these high prices do persist and particularly if we see higher energy prices over the next months, then we could see compounding effects, and we could see higher food inflation at that point," Welch said. "But right now it's so early that we really haven't seen it to this point."

On the livestock side, the drought particularly affects cattle and other range livestock, Anderson said.

"Last year being the driest year on record, we had the largest one-year decline in beef cow herds on record," he said. "If we move to the drought this year, it is so much more widespread through the Plains and into the Corn Belt. The effects we are getting are skyrocketing feed costs and those costs then increase the cost of producing all our meats—beef, pork, chicken, turkey, dairy. It really leads to higher costs across the board."

Reduced meat production is expected to be seen because of this, and seeing that reduction takes time, more so for some than others, Anderson said. For instance, it takes more time on the cattle side than it does with broilers, because it takes less time to raise chickens.

"In a drought like this what typically happens is we're forced to sell a lot of cows because at some point because you just can't afford to feed them anymore," Anderson said. "The effects of this drought will be reduced meat production next year and reduced milk production and eggs and everything else until prices of those products rise enough to offset the higher costs."

Anderson explained that because of the nature of producing meat, it's actually been in the past few months that feed costs have skyrocketed to the current record levels. Historically, corn prices were already high, but now prices are at record high levels.

"Once those feed costs go up, livestock producers have to adjust their production to those higher costs," he said. "The beef we are going to produce this year and next year, those animals are already alive. Calves were born in the spring, they will go to feedlots and 18 months from the time they are born they will be finished steer/heifers coming out of the feedlot for beef.

"Those animals are already alive, and we're going to produce that beef. It's the time after that where the drought's high costs forces us to reduce our beef cow herds, and it's after that that our beef (supply) really declines even more."

High beef prices have become common in recent years, Anderson said.

"We already have had historically very high prices for all of our meats at the retail level, and it's because over the last five years, we've been cutting meat production in the United States because of high feed costs and increasing exports," Anderson said. "We've been transitioning since late 2006 to a much higher cost environment to produce meat.

"I expect that next year we are going to see higher meat prices than we are this year because of the effects of the drought, particularly the drought in the Corn Belt and then our drought here (in Texas) that is continuing as well as the drought in the Great Plains that effects a lot of beef cows."

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