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Predicting Price Increases from the Drought

Predicting Price Increases from the Drought

About two-thirds of the United States — mostly across the Midwest and in the South — has endured what climatologists have described as this country’s most severe drought in more than 50 years. Nearly half of the entire U.S. corn crop is rated poor to very poor; soybeans aren’t faring much better.

The short-term impact can be found on the fields and ranges of all the farmland affected by the disaster. Consumers will encounter the longer-term repercussions in the nation’s food stores, where a rise in retail prices is expected to last well into next year.

To get another perspective on the outlook, we reached out to Jie Zhang, associate professor of marketing and the Harvey Sanders Fellow of Retail Management in the University of Maryland’s Robert H. Smith School of Business.

She said consumers can expect to see price increases soon in fresh produce, with other categories to follow.

“The more profound and widespread impact is through chain reactions in the supply chain due to rising prices of commodity crops, especially corn,” she says.  “Rising costs of corn can lead to price hikes in a wide range of grocery products, from eggs, dairy, poultry, beef, to packaged foods such as snacks and cereals. These effects can take many months to show up. One thing is for sure, consumers will feel the pinch when paying their grocery bills.”

Zhang teaches retail management and has published research in marketing and management journals such as Marketing Science, the Journal of Marketing Research, and Management Science. In a brief interview, she elaborated on her comments.

REFRESH: What commodity prices can supermarket retail buyers and food manufacturers expect to see increase first? Will all supermarket categories be affected? What’s the anticipated timeline of these increases?

ZHANG: We have already seen prices for commodity crops, especially corn, soybeans, and wheat, going up substantially. Not all, but a broad range of supermarket categories will be affected. Retail buyers are likely to see price hikes in fresh produce first (in weeks if not already), followed by eggs, milk, other dairy products, poultry, and meats (in a few months), and then extending to a variety of packaged foods (within a year or so). 

REFRESH: Is there one crop in particular that is most vulnerable to price changes because of the drought?

ZHANG: One crop that has the most widespread impact on this nation's food production is corn. Corn is not only a key raw ingredient for many processed foods and beverages (including the use of corn syrup), but also a main feed for (non-organic) cattle and poultry.

REFRESH: How dramatic will price increases be? Has any estimate been made of the overall threat?

ZHANG: There have been a variety of estimates. For example, the U.S. Department of Agriculture estimates that food prices will go up by 3% to 4% over all next year. You can find more information on their website.

REFRESH: How will the drought impact organic production (both fresh produce and feed)? Given the special production requirements, will price increases be more dramatic than conventional items?

ZHANG: I'm not an expert of organic farming. My impression is that there has been research showing that the organic farming system is actually more drought-resistant and climate-tolerant than conventional farming.

REFRESH: What’s the long term impact of the drought? How long would price increases last?

ZHANG: Price increases will definitely continue into next year. In fact, for certain categories, such as packaged foods, the price increases will mostly manifest next year. 

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