DROUGHT finally started to make its effects felt at the grocery store in the final quarter of 2012.
In the latest update of the consumer price index (CPI), U.S. Department of Agriculture economists noted that in the final three months of 2012, higher corn prices trickled down into a host of food items on supermarket shelves.
According to the Economic Research Service (ERS), from October to December, prices rose for most foods that heavily rely on corn-based animal feeds: beef, poultry, other meats, eggs and dairy products (Figure). Milk prices rose nearly 3% during the quarter, egg prices increased 1.7% and prices for beef, poultry and other meats rose roughly 0.5%.
Of interest, pork prices bucked the trend as rising inventories and slower exports pressured retail prices down from the historically high levels seen early in 2012. For the quarter, pork prices fell slightly more than 3%.
ERS economists said last year's drought was unlikely to affect food prices much in 2012; rather, the overall impact of the harsh growing season will truly be felt this year.
USDA's current projection is for food price inflation of roughly 3-4%.
According to ERS economist Ricky Volpe, the inflation forecast represents an annual increase that is above the historical average, with inflation expected to be most pronounced for animal-based food products in the first half of the year. Higher feed prices are cited as the biggest culprit in driving consumer food costs higher.
Looking at December's food price data, the CPI for all food increased only 0.2% from November to December and was roughly 1.8% higher than the December 2011 index. Beef prices may be where consumers notice the largest increase, with December's beef index 4.6% above December 2011, but poultry prices actually increased more year over year, at 5.7% above 2011.
The price trend for pork, however, is the first evidence that meat supplies may actually be keeping a lid on meat prices, at least for now.
Economists Steve Meyer and Len Steiner, in their "Daily Livestock Report," pointed out last week that while much of the current market talk has focused on "weak demand," beef and pork supplies appear to be a much bigger issue.
"We are trying to get U.S. consumers to purchase more beef, pork and poultry meat than they did last year while, at the same time, charging them more money for it," they wrote. "You can do that if demand for your product has gone up, but that is a difficult proposition as the economy is stuck in low gear and consumers face higher energy costs and higher real taxes."
Market analysts generally assumed, at the start of 2013, that tighter meat supplies would force prices higher, and while prices may have trended higher as retail and foodservice customers tried to book their needs in anticipation of prices going higher, beef and broiler production has been running higher than last year during the past six weeks. In fact, output has tallied 2% and 6% above the previous year for beef and broilers, respectively, while pork output has held steady.
Meyer and Steiner noted that packers might finally be responding to the disparity in supply and demand by throttling back production in the most recent few weeks. If supplies, indeed, begin to shrink as expected, food price inflation in the first quarter of the year could look much different than it did in the final quarter of 2012.