The impact of the 2012 U.S. drought

The most severe and extensive drought in at least 25 years is seriously affecting U.S. agriculture, with impacts on the crop and livestock sectors and with the potential to affect food prices at the retail level.

The U.S. Department of Agriculture’s Economic Research Service (ERS) anticipates the following key impacts:

• We will likely see the earliest impacts for beef, pork, poultry and dairy (especially fluid milk). The full effects of the increase in corn prices for packaged and processed foods (cereal, corn flour, etc.) will likely take 10-12 months to move through to retail food prices.
• The drought has the potential to increase retail prices for beef, pork, poultry, and dairy products first and foremost - later this year and into 2013. But in the short term, drought conditions may lead to herd culling in response to higher feed costs, and short-term increases in meat supply. This could decrease prices for some meat products in the short term. That trend would reverse over time after product supplies shrink.
• 31 percent of all livestock produced (by value) is in areas with minimal drought, 18 percent in areas with moderate drought, and about half is in areas with severe or worse drought. Poultry farms are the least likely to be in areas affected by drought, while 78 percent of cattle production (value) is in areas with moderate or greater drought. However, livestock operations throughout the country are indirectly impacted by the drought through increased feed costs.
• A significant amount of soybean acreage is also in the drought-affected region. After a large reduction in estimated 2012 soybean yields in August and a small additional reduction in the September USDA assessment, estimates for October and November were raised as late-season rainfall improved yield prospects in many States. The latest yield forecast now stands at 39.3 bushels per acre, 10.2 percent above September's forecast and up 4 percent from October, but well below initial forecasts of 43.9 bushels per acre. Soybean yields at this level would be the lowest since 2003.
• Wheat is widely produced across much of the drought-affected area of the Midwest, but most of the wheat in this region is harvested in the spring and early summer, so it reached maturity before the dry conditions materialized.

Click here for additional information on the potential impacts of the drought on key commodities and food prices.