The U.S. drought is mostly a problem for poorer countries

August 27, 2012

This summer, the United States has slogged through its worst drought in half a century, causing corn and soybean crops to wilt across the Midwest and Great Plains. The effects appear to have been dramatic at first glance: Corn prices have shot up 60 percent since June. Soy prices have risen by more than one-third.


(Scott Olson/Getty Images)

And yet, as agricultural economist Michael Roberts explains, this isn't likely to pose a crippling problem for most consumers in the United States. The USDA estimates that U.S. food prices will increase just 3 to 4 percent in 2013. Mostly, it's a nightmare for poorer, developing countries.

Over at his excellent blog "Greed, Green, and Grains," Roberts explains why the rise in corn prices will have such a small impact on things like the price of beef or chicken at the grocery store:

Take meat, for example.  There are only 3-5 pounds of corn used to make an additional pound of beef, and between 2 and 3 pounds of corn for a pound of chicken or pork.   The calculation isn't particularly straightforward, but these numbers are probably about right "on the margin," as economists like to say. This can vary a bit from operation to operation or how it's measured, but feed use efficiency has risen a lot over the last couple decades with the growth of confined animal feeding operations, or CAFOs.

Let's says 5 pounds of corn per pound of meat.  There are 56 pounds of corn in a bushel and since June prices have increased from about $5 to about $8 per bushel.  This means the amount corn in your quarter-pound burger have increased from about 11 cents to about 18 cents.  If there is market power by processing companies or retailers, retail prices would go up by less than this amount (this is basic microeconomics, but I'll save the details for another time).  So, you'll have to squint to see the effect of this year's drought on prices at grocery stores and restaurants.

(Note: If you'd prefer to see this all in graph form, click here. Corn supplies have often jumped up and down dramatically in the past decade, while meat prices have barely budged in response.)

Now, Roberts' post isn't necessarily a defense of industrial-scale farming, which can have plenty of other adverse side effects — from intensive fossil-fuel use to dead zones in the Gulf of Mexico to the rise in antiobiotic-resistant diseases. But one thing U.S. industrial farming has done over the years is keep down the sticker price of food at the grocery store. For the most part, the price of commodities like corn represents just a fraction of the cost of producing food in the United States. The cost of labor, capital, as well as the profits that accrue to retailers, make up a much bigger portion of food costs.

So a bad drought might cause corn prices to soar, but most American shoppers will hardly notice. Most corn farmers will make out okay as well, as about 90 percent of corn acreage is covered by federally subsidized crop-insurance programs, as my colleague Alyssa Botelho recently reported. (Of course, the latter is expected to cost taxpayers about $10 billion this year, so that's not exactly free.) The main group affected by the drought will be U.S. livestock producers, who will see their profits thinned as they're forced to cull their herds.

Rising food prices, however, are a much, much bigger problem in the developing world: "About 2 billion people still live on $2 a day or less," Roberts notes in a separate op-ed at CNN. "Many of them live in urban areas of developing countries. Often, they must spend half or more of their income on food, the bulk coming from staple grains like corn, wheat and rice. For these people, a huge rise in grain prices is more than noticeable — it can literally break their budget."

This was particularly evident back in 2008, when global food prices hit record highs. Consumers in the United States barely felt it, but riots broke out in dozens of countries around the world from Cameroon to Egypt to Bangladesh. In Haiti, more than five people were killed and the government was toppled as the price of rice, beans, and fruit rose more than 50 percent. Some analysts have argued that a similar food-price spike in 2011 helped drive the Arab Spring protests in the Middle East.

Will we see similar upheavals this year? That's not yet clear. In July, researchers at the New England Complex Systems Institute released a study predicting that the U.S. drought should drive the United Nations's global food index above 240 by the end of the year — which, they argue, is well above the threshold necessary to trigger global conflict. As economist David Lobell notes, this study hasn't been peer-reviewed, so that's one big caveat right there. But the NECSI researchers do make a very specific prediction with their model, so we'll be able to see in fairly short order whether they're right or wrong.

Related: What we know about climate change and drought.

 

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Sarah Kliff | August 27, 2012