Drought-Driven Commodity, Food Prices Force Industry Change

From farm to fork, the drought has its grip on all sectors of the food and agriculture industry

Published on: Nov 30, 2012

Agriculture and food industry experts agree that the drought has been a key driver behind changes on the farm, restaurant and retail food front.

In a presentation Thursday sponsored by Corn & Soybean Digest, Corinne Alexander, Purdue University agricultural economist, explained that the drought caused the lowest corn yields since 1995, playing havoc with livestock and commodity markets.

"We've got total supply around 11.8 billion bushels, substantially less grain available than what had been available in previous years," Alexander said. "So at that point, we're in a situation where all users of corn have to ration their usage."

Alexander said such reductions in usage have an impact on all users of corn, including non-feed and fuel, as well as livestock.

From farm to fork, the drought has its grip on all sectors of the food and agriculture industry
From farm to fork, the drought has its grip on all sectors of the food and agriculture industry

"The livestock industry will have to reduce their corn usage by 10%," Alexander said, noting that the hog industry has been particularly responsive through 3% herd thinning and a focus on feed efficiency.

"What that means is come early next summer, we will have less pork available, and therefore higher prices," Alexander said. "But by the second or third quarter 2013, we're expecting the hog prices would have increased enough so that [producers] would be back in a break-even situation."

The silver lining for the livestock industry, Alexander said, is that next fall when corn yields start returning to normal and prices drop, producers will have a good opportunity to snap up falling corn prices and return to profitability.

Of poultry, pork and beef, Alexander expects chicken prices to decrease by late 2013, mostly due to the shorter period of time to grow a chicken to market weight.

Beef, however, which takes nearly three years to raise and market, won't see a reduction in price until 2013, Anderson says.

The impact of corn prices is also weighing heavy on the foodservice and retailing sectors, as consumers begin to notice higher prices – especially for beef – creeping into supermarkets and restaurants next year.

Andy Harig, director of government relations for the Food Marketing Institute, pointed out that consumers have already made changes to shopping habits to counteract impacts from the 2008 recession, and will likely make more changes in response to higher food prices.

"We can see that consumers have already made a number of changes in their food-buying habits to respond to the recession – we see this even at high-income levels," Harig said. "We expect a lot of these changes are going to be permanent."

Harig expects consumers to react similarly to drought-driven higher prices, by substituting cheaper proteins such as chicken for more expensive proteins.

Retailers are working to adapt to food price increases, too. Some grocery stores have already "locked-in" prices on staple items, allowing them to budget. Price deals and coupons have also been used as a tool to keep customers coming through the door.

"There are efforts underway to make this a smoother, more efficient process, but to some extent it's difficult for people to not feel the impact of this," Harig said.

Just as consumers may buy less of more expensive proteins, restaurants may, too. John Barone, president of Market Vision, Inc., explained that changes in the beef industry – including decreased use of lean finely textured beef – have presented hurdles for restaurants.

"The fact that most retailers and chain restaurant companies stopped using LFTB means that we have lost the ability to convert 50s fat trimmings, which are very plentiful, into 90s lean trimmings which are very scarce in the U.S.," Barone said, boosting prices for 90s.

"Beef represents the biggest challenge for food service operators for at least the next two years," Barone added.

Restaurants will likely respond to the higher beef prices by putting a larger emphasis on dishes made with chicken. While poultry slaughter has been declining, breast meat is still plentiful due to the average bird size.

Bottom line, Barone said, there are many wild cards that could affect restaurant performance beyond the drought, but contracting ahead for some goods may improve restaurant basis.