Drought could lead to higher food prices

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The severe drought gripping the country — especially the key grain-producing states in the Midwest — could lead to higher grocery bills this fall.

After the USDA released crop projections for a fall harvest that was sharply less than a year ago, and even less than what market watchers were expecting, food industry analysts announced that the rising commodity prices could squeeze profits and lead food companies to increase the price of their goods. As food companies start paying higher prices for raw materials, analysts’ expect the cost of food on grocery store shelves will increase by 1 percent to 3 percent by this fall.

With the corn crop projected at a 7-year low, soybean production at a 6-year low and the wheat crop at a 20-year low, food makers could see the price of some of their staples — corn, soybean oil and wheat — rise by 20 percent or more.

"Food companies have such little pricing flexibility, and given that ingredient costs have been benign over the past few years they may use this as a reason to take some pricing," said Goldman Sachs analyst Romitha Mally to Fox News Channel.

The short crop also will lead to higher feed cost for industry giants Tyson Foods (poultry) and Smithfield Foods (pork) and Hormel Foods (pork). The price of corn is up 30 percent since mid-June at the Chicago Board of Trade. That price increase has prompted some producers to cull herds, which adds to the current meat glut, but could help push animal prices up as smaller inventories of livestock on feed start to appear.

Commodity-oriented food makers such as meat processors are more exposed to spikes than value-added packaged foods makers, with up to 65 percent of the cost of finished meat goods sold at retail tied to commodity costs, analysts said.

Fox News Channel



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