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Food Prices Heading Higher: Midwest Drought Takes Heavy Toll

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The record heat and lack of rainfall in the nation's Corn Belt have caused corn stalks to shrivel and fertile planting soil to become arid, pushing corn and soybean prices to record levels - corn alone has gained more than 37 percent since early June.

The desert-like conditions will almost certainly result in higher food prices for consumers in the coming months and potentially into 2014 as extreme weather conditions are expected to cause tight supply and rations of corn, soybean and wheat.

Bill Lapp, president of commodity consulting firm Advanced Economic Solutions, says rising commodity prices will result in a 4 percent to 5 percent increase in food prices next year. The pressure on corn prices means beef, poultry and pork producers will see their expenses soar; corn is the primary feed ingredient for the nation's livestock. Lapp notes beef prices are already at all-time highs and poultry producers are already suffering from negative margins. He predicts this summer's drought probably won't hit consumers until early 2013, because food producers have hedged against rising prices this year, but the effects could linger well into 2014.

The drought hasn't impacted grocery store or restaurant bills yet, but industry executives are already bracing for the impact.

"While costs have been relatively stable overall so far this year, the recent extreme weather will likely put pressure on our food costs later in the year and into 2013," Chipotle Mexican Grill CFO John Hartung said on the restaurant chain's conference call Thursday evening.

Here are some of the grim stats for the worst U.S. drought since the late 1980s:

  • More than 50 percent of the continental U.S. is experiencing moderate-to-extreme drought conditions. The hardest hit regions have been the Southern to Central Rockies, Central Plains and Ohio Valley.
  • The U.S. government declared that 1,297 counties in 29 states are federal disaster areas.
  • June was the fourth-hottest month in the U.S. since 1880, according to the National Oceanic and Atmospheric Association.
  • The government cut its corn production forecast by 12 percent last week and the Department of Agriculture projects corn yields are 11 percent under trend so far this year.

The reduced corn crop — which Lapp expects to be 10 percent to 20 percent lower because of the extreme heat — also impacts the transportation industry. Reuters reported that oil companies might buy less ethanol than the federal mandate. Ethanol production has fallen by more than 9 percent in the past month to its lowest level in more than two years, according to government figures. Forty percent of corn grown in the U.S. is used for ethanol and Lapp notes that this is the first extreme drought since those ethanol mandates took effect in 2007. Ethanol prices are nearly on par with gasoline prices, a difference of just 25 cents per gallon.

Lapp says the drought — which could be the worst in the U.S. in the last 50 years — has one unintended consequence for grain farmers: bigger profits. Dwindling supply means farmers can sell their yields at a premium on the market. More than 80 percent of corn and soybeans are insured, according to the New York Times. Lapp also expects that the federal government to provide disaster payments to farmers affected by the drought.