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Aug 8, 2012 ||
David Lehman ||
Click to view a full size infographic.
Roughly half of the United States – 1,584 counties in 32 states – is currently considered a drought disaster area. That’s contributed to a rise over the last three months in the price of wheat (41 percent) corn (29 percent) and soybeans (17 percent). Among other things, that means that at some point in the next year, we’ll likely see a noticeable increase in the price of food at the grocery store. As I wrote in my earlier post on the drought’s reach, the USDA puts that increase as high as 4 percent for 2013, with the price of beef expected to jump as much as 5 percent.
Though the U.S. drought is what’s causing the most concern now, it’s important to remember there are a number of factors that can move food prices up or down. To illustrate this, we put together the above infographic, which shows the economic, political and climatic forces that work together to move the price of food.
Prices are always moving slightly in one direction. For companies who process and manufacture the food we eat, that means they always have to manage the risk of one of these elements taking a dramatic turn, like weather has this year.
For example, food prices in 2008 increased more than what’s expected for 2013. A New York Times story mentioned at that time:
Some companies, like Kellogg and Heinz, have managed to offset the higher ingredient costs and post robust profits by using shrewd commodity hedges and by raising prices without losing many customers. They also benefited from a trend of consumers eating out less and buying more groceries.
That’s not to say every food company will flourish while their input costs are high. However, it does underscore the part our markets play in managing the price companies pay for grain, allowing them to pass fewer costs on to consumers.
David Lehman is managing director of commodity research and product development at CME Group.
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