The Effect of the Drought on Food Prices and Availability

Todd Davis

Senior Economist

Agricultural Outlook Forum 2013: Managing Risk in the 21st Century

Outline Drought and Effect on Crop and Livestock Production

Farm Price Impact on Consumer Expenditures

Policies Providing a Farm Safety-Net

Ripped from the Headlines ***

• Why Iowa's drought is a global problemCNN Money.com – August 9, 2012

• Severe Drought Seen as Driving Cost of Food UpNY Times.com – July 25, 2012

• Historic drought to bring higher food prices, experts sayFox News.Com – July 17, 2012

*** The July WASDE was released on 7/11/12 and the August WASDE on 8/10/12

For Some States, 2013 could be the Third Consecutive Drought Year

Source: NOAA

Source: NOAA

Source: NOAA

* Wyoming and Nebraska facing worst drought in 117 years

Source: NOAA

JANUARY 1 TOTAL CATTLE INVENTORYU.S., Annual

80

90

100

110

120

130

140

1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 2003 2008 2013

Mil. Head

C-N-0102/04/13

-1.6 Percent2013 = 89.3 Million Head

Livestock Marketing Information CenterData Source: USDA-NASS

CATTLE ON FEEDUS Total, Monthly

9.5

10.0

10.5

11.0

11.5

12.0

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Mil. Head

Avg.2007/11

2012

2013

C-N-1001/26/13Livestock Marketing Information Center

Data Source: USDA-NASS

DECEMBER 1 ALL HOGS AND PIGSU.S. Inventory

45

48

51

54

57

60

63

66

69

72

1987 1990 1993 1996 1999 2002 2005 2008 2011

Mil. Head

H-N-0812/28/12Livestock Marketing Information Center

Data Source: USDA-NASS

DECEMBER 1 HOG BREEDING HERDU.S. Inventory

5.0

5.5

6.0

6.5

7.0

7.5

1987 1990 1993 1996 1999 2002 2005 2008 2011

Mil. Head

H-N-0912/28/12Livestock Marketing Information Center

Data Source: USDA-NASS

BROILER-TYPE HATCHING LAYERS Average Number On Hand During Month

49

50

51

52

53

54

55

56

57

58

JAN MAR MAY JUL SEP NOV

Million

Avg.2006-10

2011

2012

01/24/13Livestock Marketing Information CenterData Source: USDA-NASS

2013 Winter Wheat Seedings

Source: USDA-NASS

2012 2013 Change February 16, 2013Drought Percentile

U.S. Winter Wheat 41,324 41,820 +496Kansas 9,500 9,300 -200 5thTexas 5,700 5,800 +100 16th Oklahoma 5,400 5,500 +100 9thColorado 2,350 2,200 -150 9thMontana 2,300 2,100 -200 9thWashington 1,700 1,650 -50 91stNebraska 1,380 1,480 +100 0South Dakota 1,320 1,200 -120 7thMissouri 790 1,000 +210 29th

---------- Thousand Acres ----------

About 21.78 million Acres seeded in states with 10th Percentile or less (52% of Winter Wheat Seedings)

Corn, Soy and Wheat Production from 1996-2017 (P)

Source: USDA-NASS, USDA-ERS

Biological Lag of Rebuilding Herds / Flocks

How do Farm Prices Impact Consumers’ Food Expenditures?

Source: USDA: ERS

Source: USDA: ERS

Since 1993, Farm & Agribusiness share of the food dollarhas declined from $0.145 to $0.101 with an average of $0.124

Source: USDA: ERS

% of Disposable Income Spent on Food

1970 13.9%1980 13.2%1990 11.5%2000 9.9%2011 9.8%

At home is 5.7%

Source: USDA: ERS

Per Capita Daily Food Expenditures (2005 Dollars)

1970: $6.54/day

2011: $10.22/day

Source: USDA: ERS

% of Household Expenditures on Food Worldwide

United States 6.7

Egypt 43.6Ukraine 38.2Russia 31.2Mexico 22.7China 21.3Argentina 21.2Brazil 15.9Japan 14.7Canada 9.7

US has Lowest Expenditures of 84 countries

% Household Expenditures Spent on Food in 2011

Risk Management Tools to Help Farmers Continue to Produce

Example: Return over Variable Costs with RP Insurance for an Iowa Corn Farm

Note: APH Yield = 180 bpa; Projected Price = $5.75; 85% Coverage Level

Source: Iowa State University Extension Budgets for 2013

Variable Costs = $405/acre and Cash Rent = $276/acre

Harvested Yield ROVC RP Total171 $9 $191 $200162 -$27 $227 $200153 -$63 $263 $200144 -$100 $299 $200135 -$136 $336 $200126 -$172 $372 $200117 -$208 $408 $200

Harvest Price = $4.03

Policies Providing a Safety-Net

• Crop Insurance is the Foundation for a Farmer’s safety-net

• A new Farm Bill will provide policy certainty to producers, lenders, and other participants in the supply chain

• Given the drought maps, would you invest $681/acre in corn without the security provided by crop insurance?

Summary

• Farmer’s share of the food dollar is small and declining

• Drought impact on livestock sector is significant and often over-looked by media

• When U.S. returns to near-trend yields and stocks rebuild, poultry and pork have capacity to expand faster than beef• Relatively more expensive beef than

pork/chicken• Loss of beef market-share

Thank You for Your Attention!