Drought Had Minor Impact on ’88 Food Prices

Despite last year’s Midwest drought, which appears to be entering its third year in many areas, the effect on food prices appears to have been minimal, according to the Agriculture Department .

For all of 1988, retail food prices--a key element of the consumer price index--rose 4.1%, the same as in 1987. In Los Angeles, the rise was even less, 3.4%.

The outlook for 1989 appears to be little changed from that moderately rising trend, with food prices expected to increase from 3% to 5%, Denis Dunham, the USDA economist who tracks food prices, told a Food Marketing Institute briefing in Los Angeles last week.

While grain prices increased 30% because of short supplies, the effect of drought was lessened by the nation’s then-bulging storehouses of corn and other commodities. In addition, the government opened additional grazing land from acreage set aside for conservation. Moreover, Dunham said, farm costs account for only about 30 cents of each retail food dollar--and only 8 cents in the case of the commodities most affected by the drought, such as wheat flour, corn meal and soybean oil.

“After products leave the farm, marketing agencies perform many functions in bringing food to our tables,” Dunham said. “These include storing, processing, packaging, transporting and retailing food.”

Some Big Increases

Those charges account for 70% of each food dollar spent in grocery stores, he said. And they have shown a long-term increase of 4% to 6% a year. That has accounted for most of the increase in retail food prices recorded in this decade of generally sagging crop prices, he said. As a consequence, “the drought caused less than one-fourth of the increase in food prices in 1988, and is expected to account for even less in 1989.”

While only modest price increases are expected this year, some items will be significantly more expensive because of increased feed costs due to drought. Egg prices, for one, are expected to rise 15% to 20%.

Dunham said beef prices will rise by 3% to 5% this year, less than the 7.6% increase in 1987 and 5.3% in 1988. But there are indications that the average retail price paid per pound of beef may still top the record $2.85 set late last year before slipping back this month to $2.81 a pound.

If so, the record would reflect a number of factors. These include declining consumption as consumer preferences turn from red meat to white and to fish. On the other hand, there is increased demand for certain leaner cuts of beef at a time when the national cattle herd stands at its lowest level--fewer than 100 million head--in more than 20 years.

Overall, however, beef consumption is expected to continue its long-term slide this year, falling to 66.8 pounds from the 72.1 pounds per person last year. For the first time, beef will constitute less than one-third of the nation’s meat consumption of 221 pounds per person. And chicken is expected to surpass beef sometime next year as the nation’s favorite meat.

Dunham said the department has yet to set up a drought watch, even though the National Weather Service reports severe to extreme drought conditions prevailing in much of the northern Great Plains, northern Rockies and parts of the Midwest.

Some Suffering Drought

Precipitation also remains below normal in California, which has so far escaped the effects of drought over the past two years because of the state’s extensive storage and irrigation facilities.

Experiencing extreme drought at this time, according to the weather service, are Montana, the Dakotas, central Minnesota, eastern Iowa, northwestern Illinois and much of Wyoming, eastern Idaho, central Washington and eastern Oregon. The northern Great Plains and northern Rockies need as much as 8 inches of above-normal rainfall to end the drought; Iowa and Illinois need 8 to 9 inches more than normal.

However, the most recent 30-day forecast calls for above-normal precipitation, according to the Climate Analysis Center in Washington. The weather service is expected to release its spring forecast after the commodities markets close today.