Restaurants hit with higher food prices caused by drought; small, local eateries struggle most

This summer's oppressive drought scorched Midwestern crops, raising the cost of feed, dairy and meat. Those high prices are impacting the size of restaurant menus across the U.S., with small, local eateries feeling the pinch the most. The cost of food now rivals labor as the top expense for most restaurants, Tiffany Hsu of the Los Angeles Times reports. Owners are reducing menu offerings, shrinking portion sizes and considering staff cuts. (L.A. Times photo by Francine Orr: patrons eat at Smokin' Jonny's BBQ in Gardena, Calif.)

Restaurant prices have been rising for more than a year, with wholesale food costs increasing by 8.1 percent in 2011, Hsu reports. The increases will continue, but at a quicker pace, because the price of corn, which is a key component in livestock feed, powdered sugar, salad dressing, and more, jumped by 60 percent this summer. Chicken and turkey prices rose by 5.3 and 6.9 percent, respectively, and eggs now cost 18 percent more. Analysts expect overall food prices to rise from between 5 to 20 percent by year's end.

Big chains are able to weather drought price hikes well, but small restaurants will suffer, Hsu reports. "The smaller mom-and-pop restaurants are going to get hit with the drought very shortly," Motley Fool analyst Don Krueger told Hsu. It's forcing small restaurant owners to make tough decisions. Restaurant consultant Kian Abedini told Hsu more restaurants are using small plates and tapas dishes to save money. He's also noticed cheaper cuts of meat on menus, along with more curry and rice dishes. Pickled items are showing up as well because they're less expensive than fresh foods, Abedini said.(Read more)

Drought is likely to cost consumers next year

The massive drought that hit many U.S. farmers hard this summer will be felt by consumers next year in the form of higher food prices, according to The Food Institute. A family of four will likely spend $351.12 more on food in 2013, about $6.75 a week. The data was gathered by calculating the actual financial effect of the drought, which reduced corn yields, causing feed prices to rise, making livestock producers unable to afford it.

The increase will be felt most at meat counters, Lisa Keefe of Meatingplace reports. Annual costs of meat will rise about $44 next year for a family of four and about $30 for a two-person home. Beef costs would account for almost one-third of those estimates. Fresh produce will be the next most expensive, adding about $23.44 to a family's annual grocery spending. "These spending predictions could vary as substitutions are made in one category or another," Keefe reports, adding that consumers could choose to spend more on canned and frozen products to offset higher prices for fresh meat and produce. (Read more)

Drought expands slightly; weather patterns indicate little or no relief should be expected in early 2013

The worst drought in more than 50 years has expanded slightly for the third consecutive week, according to the U.S. Drought Monitor. Exceptional drought, the most severe category, now covers 6.2 percent of the U.S., up from 6.1 percent last week. All levels of drought increased to 64.2 percent from 63.4, the highest percentage this year.

There were "minor improvements" in the Midwest, Northeast, mid-Atlantic, Arizona and the Great Basin, Brian Sullivan of Bloomberg reports. Drought has caused corn and soybean prices to rise as the size of harvests shrunk, creating hardship for livestock and dairy producers who could no longer afford feed. It has also caused Mississippi River levels to drop in some places, making river travel difficult to impossible. (Read more)

Relief from drought conditions may be years away. Iowa State University extension climatologist Elwynn Taylor said the La Nina weather pattern causing the drought will likely stick around through early 2013. An El Nino pattern that would bring enough rain to quench U.S. soil isn't anywhere on the horizon, Jeff Caldwell of Agriculture.com reports. "If weather patterns respond to a neutral or to an early 2013 development of La Nina," Taylor said, "it will be likely that the U.S. corn yield will fall below the 30-year trend line for a fourth consecutive year." (Read more)

Drought's short-term impact on food prices pales in comparison to global, long-term factors

The massive drought that hindered much of the Midwest's food production caused food prices to rise this summer, and they will probably rise more, but Science Daily reports much broader factors will have a longer and heavier impact on rising food costs than any U.S. drought.

Food marketing professor John Stanton told Science Daily that price increases from drought are short-term, while increasing demand from the rest of the world for crops including corn will affect prices for years. "The biggest cost in a box of corn flakes isn't the corn," Stanton says. "It's everything from the price of oil to transport the product to the marketing and the packaging. So something like the cost of oil will have a much more lasting effect on the price of your cereal than the supply of crops." (Read more)

Crop insurance companies expect big losses

The insurance industry is expecting its largest-ever loss in agriculture as the Midwest's worst drought since 1956 brings billions of dollars in claims from corn and soybean farmers.

University of Illinois agricultural economists estimate the drought will trigger gross indemnities of about $30 billion, with an underwriting loss of $18 billion, Javier Blas and Alistair Gray of the Financial Times report. The U.S. government will take on about $14 billion of that, and private sector insurers will likely incur a loss of $4 billion. Economists Gary Schnitkey and Bruce Sherrick said some crop insurers are owned by public companies "who may not have realized the scope of losses that their crop insurance subsidiaries could generate." (Read more)

Meanwhile, the corn harvest is at its fastest pace ever because farmers planted early and the drought accelerated corn's maturity. About 6 percent of U.S. corn was harvested as of yesterday, compared to just 4 percent last week and none at this time last year, according to a Department of Agriculture report. About 26 percent of the crop was rated as mature, up from about 16 percent last week. Jeff Wilson of Bloomberg reports the trend increases the risk that wind and rain, perhaps from the remnants of Tropical Storm Isaac, will knock ears off stalks or blow plants over.

Would Obama's order to Pentagon to buy more meat raise prices for producers? Analysts disagree

The Obama administration has ordered the Pentagon to buy more beef, pork and lamb to try and help ranchers through the severe drought, prompting the Defense Department to determine whether it can afford to buy more. The military buys millions of pounds of meat every year to feed troops around the world.

Some analysts say the move would only help Obama politically, but others say it could be an opportunity for the Pentagon to pay less for meat it will eventually need and can freeze. Drought has forced up the price of corn, which livestock producers use as supplemental feed, and since they aren't able to make livestock heavier faster, they are forced to sell sooner than usual, Jennifer Rizzo of CNN reports. This causes more meat to be available, making prices drop, which also reduces the profit that ranchers have available to buy feed. Rizzo reports the mandate to buy more meat is an attempt to raise prices by taking more meat off the market.

Iowa State University economist Bruce Babcock told Rizzo the impact of these purchases is suspect. "The purchase is delaying the day of reckoning because ... it will raise their prices somewhat now and it will allow them to purchase more feed, but that feed cost isn't going to go down for a year," Babcock said. The livestock industry has to shrink by reducing herd sizes in order to afford corn in the future, he said. American Farm Bureau Federation economist Bob Young told Rizzo that even though the purchase would only make a small dent in the market, the move will ultimately help ranchers. (Read more)

To help livestock producers and limit meat prices, U.N. wants feds to halt mandated ethanol production

The United Nations is calling on the United States to halt its mandate for ethanol production in order to lower corn prices, which would help struggling livestock producers and mitigate increases in meat prices. Recent oppressive drought caused the U.S. Department of Agriculture to estimate a large decrease in the size of the U.S. corn crop last week, which forced prices to almost $9 a bushel.

About 40 percent of U.S. corn will be used for ethanol production as part of the government mandate, Javier Blas and Gregory Meyer of the Financial Times report. But UN Food and Agriculture Organization Director-General Jose Graziano wrote in a Financial Times opinion piece that a temporary suspension of ethanol production "would give some respite to the market and allow more of the crop to be channelled towards food and feed uses." (Read more)

Week's start on drought news: Wells dry up, crop insurance helps, pot shrivels, some areas gain

A cornfield in Bloomsdale, Mo., where wells
wells are going dry. (St. Louis Post-Dispatch)

"Everyone, most everything, needs water," Rick Montgomery of The Kansas City Star wrote Sunday in the first installement of his three-part series, "Chasing the Drought." "We just can’t always expect it to be there, not as the world’s population grows and its moisture content stays the same."

So begins the week's reporting on what is fast becoming the topic none of us can escape.

“This year’s drought is a great opportunity to look at the plans in place and better prepare for the next drought,” Michael Hayes, executive director of the National Drought Mitigation Center at the University of Nebraska told Montgomery. The reporter has traveled through seven Midwest states and "met with farmers, beef producers, worried weather experts, park managers and policy wonks" to find out how each would try to avert some of this pain down the road, if it can be averted. (More here)

Abandoned Main Street in post-irrigation
Happy, Texas (Scott Tong photo)

How much impact? Today, 36 states are projecting water shortages next year. For regulators, it's hard to limit the use of the essential resources, especially in states like Texas, where groundwater is part of your private property. American Public Radio's Marketplace visited Happy, Tex., a small town in the Panhandle that knows what it's like to run out of water. (Read more)

You can add residential water wells to the list of casualties claimed by the Drought of 2012, reports the St. Louis Post-Dispatch. "For months, farmers have been forced to drill deeper wells to water parched crops and feed livestock. But in recent weeks, homeowners across the state have reported that they can't perform basic tasks such as doing laundry or washing dishes, let alone even think about watering their flower beds. It's a difficult problem to quantify, because most private wells go unmonitored."

While the government has slashed its estimate of the soybean yield, made only a month ago, to the lowest level since 2003 and its estimate of the corn yield to the lowest level since 1995, Agriculture Secretary Tom Vilsack says 85 percent of farmers are covered by crop insurance, The New York Times reports.

It's safe to bet that these farmers aren't covered: Lauren Pack of the Dayton Daily News and John Caniglia of The Cleveland Plain Dealer report that the state's marijuana crop has suffered horribly in the drought. "The potent plant that thrives in fields and wooded acres across Ohio has suffered through an unusually brutal summer," he writes. In many places, plants are a fraction of the 4- or 5-foot height that is normal for this point of the growing season. Give it time; it's a weed, remember? (Photo from KEVO-TV, Brownsville, Tex., with story by Tina McGarry)

Of course, the drought is good news for farmers in places where it is absent, because it has driven up prices, but those effects can be broader and indirect, in areas where grains are not major crops. In western North Carolina, award-winning editor Jonathan Austin of the Yancey County News found a way to make the national story local in a region that is getting plenty of rain: "Some area farmers may want to consider taking a chance by buying some of the cattle flooding the market in the Midwest. The impact of the drought on food prices could also lead more residents to begin shopping locally," according to North Carolina State University's Arnold Oltman, a professor of agriculture and resource economy. Austin also reports the region's "availability of water may prove to be an economic boon to microfarmers, beef growers and others who look to the land for at least some of their income." (Read more)

Drought one of worst in history, but not necessarily economic disaster, Kansas City Fed bankers write

"Severe drought has ruined one of the most promising harvests in U.S. history," but a weather disaster doesn't mean economic disaster, Federal Reserve Bank of Kansas City Vice President Jason Henderson and economist Nathan Kauffman write in the latest edition of the bank's quarterly publication, The Main Street Economist.

Though the U.S. Department of Agriculture recently cut estimates of the corn crop by 12 percent and the soybean crop by 8 percent, but "USDA’s price and yield projections suggest that U.S. corn revenues could rise 12 percent above June estimates and approach last year’s record highs." (Chart based on data from Commodity Research Bureau.) "Similarly, total soybean revenues are now projected to increase 3 percent above June 2012 estimates. A similar revenue pattern emerged during the 1988 drought. Still, final revenue estimates for 2012 will hinge on future weather patterns, final production losses and price responses to harvest expectations."

Individual farmers' situations depend on their crop choices, marketing strategies, the weather and crop insurance, the report says, but livestock producers are worse off: "Estimates suggest that over 70 percent of all beef cows are in states with pasture conditions rated as poor to very poor. With two-thirds of U.S. hay production areas experiencing drought, alfalfa prices have jumped 15 percent since May. In an attempt to limit losses, ranchers weaned calves earlier than usual and increased the placement of feeder cattle into feedlots. Combined with the increased shipments of feeder cattle from Mexico, the influx of cattle into feedlots contributed to a 12 percent decline in feeder cattle prices since mid-June. . . . USDA expects feedlot operations to lose more than $200 per head this fall. . . . Hog and poultry enterprises are also bracing against rising feed costs and falling profits." But if short-term losses reduce livestock head count, prices are expected to rebound.

Henderson is the bank's vice president and Omaha branch executive. Kauffman is an economist. Their report also addresses the drought's effect on transportation, meatpacking, ethanol, food prices and all consumer prices. To read it, click here.

Faced with high grain prices from drought, meat producers are importing cheaper, foreign corn

Oppressive drought is inflicting much hardship on farmers across the U.S., forcing ranchers to shrink cattle herds and corn and fresh meat prices to soar. With all new estimates predicting no quick end to the dry weather, some livestock producers are beginning to import cheaper corn from overseas. (Photo: Corn & Soybean Digest)

Meat companies, including top pork producer Smithfield Foods, are importing Brazilian corn, something that "is an unusual thing," U.S. Grains Council Global Strategies Director Erick Erickson told Gregory Meyer and Samantha Pearson of the Financial Times. Bulk corn hasn't been imported to the U.S. since 2008, according to ports database Piers, and then it was in seed form, not for animal feed. Experts say meat companies can buy Brazilian corn at a $12 per ton less than U.S. corn, Meyer and Pearson report. 

This doesn't mean the U.S. is being forced to stop corn exports; the Department of Agriculture estimates 40 percent of globally traded corn will come from the U.S. But international merchants still selling last year's U.S. corn crop are "growing nervous" about slowing exports, Meyer and Pearson report. (Read more)

Drought prompts some representatives to press House leaders to vote on Farm Bill

Lawmakers in both parties are pressing House Republican leaders to bring the stalled 2012 Farm Bill to a vote, some citing the oppressive drought that continues to worsen, devastating crops and increasing corn and meat prices. The Senate passed its version of the bill, and the House Agriculture Committee passed its own version, but sources say House leaders won't bring the bill to the full House, at least before the Nov. 6 election.

Led by South Dakota Republican Kristi Noem and Vermont Democrat Peter Welch, 38 Republicans and 24 Democratic House members sent Speaker John Boehner, right, and other House leaders a letter asking them to "make this legislation a priority." The letter does not specifically mention the drought, but does say the bill should be discussed by the House to ensure that "we have strong policies in place so that producers can continue to provide an abundant, affordable and safe food supply." Both the Senate version of the bill and the one stalled in the House would provide increased crop insurance to farmers to help protect against losses like those being caused by the drought.

Senate Agriculture Committee Chair Debbie Stabenow told Kim Geiger of the Los Angeles Times that Boehner needs to bring the bill to the floor, and "We need to add some additional disaster assistance for 2012 as part of that." Boehner said last week that no decisions about the bill will be discussed at this point, Geiger reports. Aleta Botts of the University of Kentucky's Cooperative Extension Service created a set of flow charts outlining the different courses of action lawmakers could now take to get the bill passed. Find the chart here.

Corn harvest estimate lowered drastically in wake of Midwest drought; grain prices soar

The worst Midwest drought in 25 years is damaging crops more than previously estimated, forcing the federal government to lower the estimate for what was expected to be a record harvest. The Department of Agriculture said the corn crop will average 146 bushels an acre, a 20-bushel drop from last month's estimate, and the biggest drop since the drought of 1988.

The scaled-back estimate has sent corn and soybean prices soaring by more than a third over the past month, Charles Abbott of Reuters reports, which could most impact the world's poor if the drought continues. Traders had expected USDA to be more conservative in its news estimate, but were shocked by the new numbers. The chairman of the World Agriculture Outlook Board said the 12 percent cut was the largest he had ever seen. USDA cut its corn harvest projection to 13 billion bushels for 2012/2013, the lowest yield since 2003. As a result, it reduced corn ending stock forecasts by 37 percent. Soybean estimated yields were cut almost 8 percent to 40.5 bushels per acre, the second lowest since 2003. (Read more)

"Agricultural economists said their main concern was the U.S. drought as the corn and soya crops enter their critical development phase," Emiko Terazono and Javier Blas of The Financial Times report. The USDA said in its report about the estimates that "the drop reflects sharply declining crop conditions resulting from limited rainfall since early April, coupled with excessive heat across much of the producing area in late June and early July."

Weather no problem in California: Almond farmers to harvest third record crop in as many years

Thanks largely to excellent weather, California’s almond industry is pointed toward a third consecutive year for a record crop and its second 2-billion-pound crop in a row, reports Dennis Pollock of Western Farm Press. Growers are hoping to sustain prices in the $2 per pound range.  A U.S. Department of Agriculture forecast issued June 29 revised this year’s crop upward to 2.1 billion meat pounds. That’s up 5 percent from May’s subjective forecast and 3 percent above last year’s crop. The expected pounds per acre for 2012 are 2,690, compared with 2,670 for 2011.

“This number is about where buyers had in mind that the crop would be,” said Frank Roque, general manager of Panoche Creek Packing in Kerman, Calif., one of largest independent almond packers in California."We grew our business 13 percent last year and hope to grow it this year.” Don Cameron, general manager of Terra Nova Ranch Inc. at Helm, said that the demand is there "to use every bit of the crop, and the prices to farmers should remain at good levels. This is what the market needs."  Michael Kelley, president of the Central California Almond Growers Association, called the almond industry’s growth “a great story of sustainability for the state."

Almond growers are preparing for a harvest that is expected to be earlier than usual, possibly in the first or second week of August. Cooler temperatures in late June helped the nuts to reach proper size and also gave a boost to the hulls, the uses of which include cattle feed. (Read more)