"The Cost and Consequences of the U.S. Drought"

From Knowledge@Wharton:

The 2012 farming season may be in its waning days, but the consequences of this year’s drought, the worst of its kind in 25 years, are yet to be known.

The U.S. Department of Agriculture estimates that the drought will push retail food prices up by between 3% and 4% in 2013. That’s a higher-than-average number, but only barely: over the last 20 years, average annual increases have been between 2.5% and 3%. Next year, most of the cost increases will be centered on animal products, like eggs, beef and dairy, which were particularly affected by not only this year’s drought but a similar dry spell across cattle farm-heavy stretches of the southwestern United States in 2011.

The life cycle of American agriculture means that most drought-spurred food price increases won’t be seen until the first quarter of 2013. But the drought is already pushing up food prices globally: An August report from the World Bank recorded a 10% increase in global food prices in July compared to a month earlier. The report noted that the jump was due to the drought in the United States as well as a poor farming season in Europe.

“The United States is one of the biggest food producers in the world. This drought is not going to just impact the marketplace here; it’s also going to hit in China, Africa, everywhere,” says Z. John Zhang, a Wharton professor of marketing. “You can certainly imagine that the impact is going to be a lot bigger in developing countries than in the United States.”

Other effects of the drought are yet to be determined. Consumers will take a hit in the wallet, but that should be relatively short-lived -- and short-term food price spikes can easily be absorbed by small changes in consumer behavior. “Normally, consumers have some way to deal with a food price increase,” Zhang notes. “You can substitute for meat in your diet; you can eat a few more vegetables. As when gas prices go up, people will find a way to cope.”

But just how bad the farm industry was hit and how long it will take to shake off the drought’s effects are subjects of much concern in agribusiness circles....MUCH MORE