Drought could inflate food prices

Drought could inflate food prices

Persistent drought in California could reduce overall production for fruits, vegetables and dairy products.

THE U.S. supply and prices of fruits, vegetables, nuts and dairy products potentially could be affected by the moisture deficiency in California.

More than 94% of the 80,500 farms and ranches in California — a state that accounts for 15% of total U.S. cash farm receipts for crops and 7.1% of revenues for livestock — are experiencing some degree of drought (Table).

Although parts of the state recently received rainfall and modestly increased reservoir storage, the moisture was not nearly enough to lift the drought status for California (Map).

The impact on U.S. food prices will be highly dependent on the severity of the drought and how it affects production and planting decisions by California farmers.

More than 8 million acres in California — one-third of the total land in farms and the majority of cropland — are irrigated from groundwater or from on-farm or off-farm water supplies.

The U.S. Department of Agriculture estimates that about 1 million irrigated acres are particularly vulnerable to drought conditions.

With most of the state and federal water projects issuing "zero allocations" of water to farms as result of a third consecutive year of drought, agricultural producers are left to offset the shortfall of surface water with groundwater intervals, which are expensive and difficult to obtain.

Moreover, the state's livestock sector — which contributed $12 billion in 2012 — is more directly exposed to exceptional drought than the crop sector.

The majority of California's dairy production is currently in counties under severe or extreme drought condition, and 99% of the state's milk sales are from counties that are currently eligible for drought disaster assistance.

In addition, the dairy and livestock sectors are reliant on alfalfa hay production. With California being the leading state for alfalfa production and accounting for nearly 11% of U.S. production in 2013, the drought could drastically increase feed costs as dairy and beef producers seek alternative forage options.

The reduction in total production and rising operating expenses resulting from the continuous drought will drive up food prices in the grocery store.

Since California is a major dairy-producing state, drought-reduced milk production and alfalfa availability could increase the fluid milk price tag.

Furthermore, prices for retail fruits and vegetables are much more closely tied to farm commodity prices than many other foods are, according to USDA. Since fresh produce undergoes little processing, packaging and advertising and also is highly perishable, any increase in prices shows up in the supermarket within one month.

While USDA has forecasted normal food price inflation for 2014 of 2.5-3.5% over last year's levels, there is potential that inflation this year could actually soar above historical averages when the impact of the California drought is combined with persistently high prices for meat.

 

Exposure to drought in California

 

Market

-Drought exposure* as % of market value-

 

value (2012),

Exceptional

Extreme

Severe

 

billion $

(D4)

(D3)

 (D2)

All farms in California

44.7

54.13

32.10

7.95

Crops

32.4

50.82

36.59

7.85

Livestock and products

12.2

62.05

21.68

8.11

*Drought Monitor category.

Source: U.S. Department of Agriculture.

Drought could inflate food prices

 

Volume:86 Issue:17

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