U.S. drought drives up food prices worldwide

Thursday, August 9, 2012 - 9:00am

The drought that's drying up the Heartland isn't just an American problem. It's causing food prices to surge worldwide.

Food prices jumped 6% in July, after three months of declines, according to the United Nations' monthly Food Price Index released Thursday. The main drivers behind the increase? Grain prices. And more specifically, corn prices, which have hit record highs in recent weeks.

Food is a major U.S. export, so the drought affects prices around the globe.

According to the U.N. report, global corn prices surged nearly 23% in July, exacerbated by "the severe deterioration of maize crop prospects in the United States, following drought conditions and excessive heat during critical stages of the crop development."

"I think it's going to have a big impact [on consumers,]" said Sam Zippin, analyst at Sageworks, a financial information company. "Corn is in almost everything."

Food prices have been creeping up throughout the United States, as hot temperatures across the Midwestern and Western parts of the nation have dried out crops and driven up the price of corn and grain.

The U.N. index of cereal prices soared 17% last month, creeping closer to its all-time high set in April 2008.

Paul McNamara, associate professor at the University of Illinois' College of Agriculture, said that grain prices could rise still further, as cattle ranchers back away from corn, the most expensive feed, and substitute grain instead.

McNamara said the increases in corn prices and the weak harvest will put pressure on policy makers to change the current U.S. policy towards ethanol, which mandates that nearly 10% of the nation's fuel supply comes from corn.

Aside from corn, some of the most dramatic increases in food-flation in the U.S. have been in ground beef and steak. Fats and oils are also affected because they use soybeans, which have been hurt by the drought. And that translates into higher prices for margarine and peanut butter.

The U.N.'s price index of oils and fats notched up 2% in July.

And the price of sugar -- another household staple -- spiked 12% in July, though the U.S. drought wasn't to blame.

"The upturn was triggered by untimely rains in Brazil, the world's largest sugar exporter, which hampered sugarcane harvesting in July," said the U.N. "Concerns over delayed monsoon in India and poor precipitation in Australia also contributed to the price increase."

The worldwide price of meat actually declined, by nearly 2%. The drop was caused in part by ranchers culling their herds to curb prices they have to pay for feed, which contains corn.

But the price decline is only temporary, said McNamara.

"You might have some extra supply this year as people liquidate their herds," he said. "[But] you're going to have, a year from now, tighter supplies as people reduce their herds in the U.S."

The international price of dairy products was unchanged.

On Friday, the U.S. Department of Agriculture is scheduled to release its World Agricultural Supply and Demand Estimates, a forecast of supply and demand for U.S. crops and livestock, as well as crops from around the world.

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