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Consumers Could Feel Hit to Food Budgets Next Year

The Exchange

While a severe summer drought and extreme heat across the Midwest have taken the price of corn, soybeans and wheat on a sharp ride upward over the past several weeks, most consumers aren't likely to feel a major related hit to their grocery bills until next year.

Wednesday's monthly report from the U.S. Department of Agriculture has left its overall forecast so far unchanged for the rest of 2012, at 2.5% to 3.5% inflation for all food. But the USDA sees a rise of 3% to 4% across the board in 2013, as meat and other food products could finally feel the effects of the current arid weather conditions. However, for the time being, it still remains to be seen exactly how much of an effect this drought could have.

"The severe drought in the Midwest is expected to affect prices for corn and soybeans as well as other field crops which should, in turn, impact retail food prices," the report notes. But "the full extent of the drought and its effects on commodity prices are as yet unknown."

Poultry Could See Quicker Hit

The report notes that poultry is most likely to feel the effects of the drought first and see a revised price forecast to the upside this year; prices could rise 3.5% to 4.5% before 2013.

"The poultry category is the smallest animal category, and we expect to see more of an effect this year because they grow the fastest and will be first to be impacted by higher feed prices,"  Richard Volpe, an economist with the USDA, said in the New York Times.

Fats and oils were also revised upward, with a projected price rise of 4% to 5% this year. The price rise for beef and veal, on the other hand, was actually revised downward from the previous forecast for the remainder of 2012, although it's still set to jump up to 4.5% this year and up to 5% in 2013. Some economists have said beef prices could actually plummet before roaring up again, due to a sell-off of cattle as a result of the feed shortage.

Meat and poultry prices are always the most affected in a drought because feed prices are the chief cost of their production. Processed foods in the grocery aisle are not as quickly or deeply affected by changes in commodity prices because corn and other such ingredients represent a very small part of their production costs. Fresh fruits and vegetables are also less likely to feel the drought effects; fresh fruit prices, according to the USDA report, actually decreased 1.3 percent in June.

You should also prepare for higher prices in the dairy aisle due to the drought conditions; this will reverse a downward trend that  saw milk prices drop 0.6% in June and ice cream sink 2% below last June's level.

On a side note regarding poultry, chicken wing prices have already been slowly rising since hitting a low in the second quarter of last year, due largely to a sharp increase in demand.

But "wing cost/prices are an entirely different animal from chicken breast prices," says restaurant analyst Nick Setyan, from Wedbush Securities, adding that costs started increasing well before the drought.

Record Highs for Crops

After seeing some steep losses earlier this week on a forecast for desperately needed rain across areas of the northern and eastern Midwest, corn, soybean and wheat futures are around record-high territory again Wednesday amid concern that large production areas will remain parched and next week's rains, if they come, will arrive too late to save the corn crop (although they should help the soybean crop). Corn is the largest U.S.-produced agricultural product, with soybeans and wheat coming in a distant second and third.

Agriculture Secretary Tom Vilsack Wednesday named 76 more counties across six states "natural disaster areas" due to the weather, bringing the total to 1,234 counties across 31 states that have been severely drought-damaged. This entitles all farm operators in these areas to low-interest emergency loans.

"The president and I are committed to ensuring that agriculture remains a bright spot in our nation's economy by sustaining the successes of America's agricultural economy through these difficult times," Vilsack said.

As of last week, 45 percent of the U.S. corn crop was rated in "very poor to poor condition," according to the USDA. Thirty-five percent of the soybean crop was found to be in the same condition. Both of these ratings mark the lowest for these crops since 1988.

Not the Corn for Cookouts

Keep in mind that the corn in question is not the kind you butter and salt at a summer barbeque. Sweet corn production actually accounts for only 1% of all U.S. corn production. Field corn, on the other hand, is used to feed livestock (which consumers will eventually feast on or drink the milk of), create ethanol fuel and contribute to products ranging from high fructose corn syrup -- an ingredient in countless food and beverage items including cereal and soft drinks -- to chips, vitamins and plastic goods.

Earlier this week Breakout featured commodities trader Rich Ilczyszyn, who sees a near-future peak price for field corn at $9 a bushel -- the same target Goldman Sachs (GS) put on the crop -- then a sharp sell-off in the next 60 days. Corn is currently trading at around $8 per bushel. So investors might want to be wary. But what should consumers do to prepare for the possible drought-related spike in food prices ahead?

Bankrate has a few smart suggestions for food shoppers looking to ease the inflation pain.

  • First, avoid the "shrink-ray effect," in which grocery stores shrink packaging while keeping prices the same. This way, you might not realize you are actually paying more for what you get. Avoiding snack-sized packaged items and making your own at-home "snack bags" can significantly cut into what you pay, says Ellie Kay, author of the "60 Minute Money Workout."
  • When it comes to meat, which as noted above is expected to rise significantly, you may want to consider forgoing the more expensive fresh meat options and trying out the frozen, processed or canned choices.
  • While you may not feel the pain in restaurants at quite the same level as you will in the grocery aisle, you still could notice larger bills after a dining out experience or when visiting your favorite fast food joint. Kay suggests you look for gift certificates in your area at Restaurant.com. You also might want to skip the booze, or at least only partake during the happy hour.
  • Don't buy produce when it's out of season and likely to be pricier due to shipping costs. As Bankrate notes, "Buy oranges, asparagus, broccoli and corn in the spring, and cranberries, grapes, mushrooms, squash, pineapple, pears and sweet potatoes in the fall. Summer produce includes berries, bell peppers, cantaloupe, eggplant, peaches and tomatoes."
  • Always keep an eye out for sales, buy generic when you can and rethink your brand loyalty; your wallet may thank you later.