Extreme weather could push food inflation even higher

But as extreme weather events increase in frequency or become even more intense, unpredictability is increasingly becoming an economic liability.

As the United States continues to grapple with high inflation, the effects of prolonged droughts and extreme weather events could help keep the heat on prices for an extended period of time.

“The long droughts we’re seeing [present] There was an increased risk that inflation would remain higher for a longer period of time,” said Charlie Dougherty, a Wells Fargo economist who recently wrote a report on the economic state of American agriculture.

Extreme heat and drought have only added to the problems facing America’s farmers, including the supply chain effects of Russia’s war on Ukraine, which has driven up the price of inputs such as fertilizer; national labor shortage; and inflation and high energy prices, highlighted the economists.

“When you put it all together, farmers and ranchers have been under extraordinary cost pressures,” Dougherty said. “And the higher costs are being passed on to consumers.” The rise in food prices is one of the main factors driving inflation, according to the latest CPI data.

Most fruits, nuts and vegetables come from drought-stricken states like California and Texas, the American Farm Bureau Federation said in a recent market update.

The drought and its aftermath “are likely to make American consumers pay more for these goods and partially rely on foreign supplies or reduce the variety of items they buy at the store,” according to the Farm Bureau. “Drought conditions in the U.S. also threaten access to certain items like almonds, which California produces 80% of the world’s supply.”

While most specialty crops are holding up, one of the hardest hit crops in California has been rice, according to Aaron Smith, the DeLoach Professor of Agricultural Economics at UC Davis.

Rice acres are down 55 percent this year, Smith said, according to U.S. Department of Agriculture data. Prevented increase in planting hectares or land intended for cultivation, but prevented by natural disasters or inadequate water supply.

California, second only to Arkansas among U.S. states in rice production, generates about $900 million annually, he said. California is a major producer and exporter of the medium-grain rice found in sushi and risotto dishes. While the acreage decline has a significant impact on U.S. rice production, the effects can be mitigated through other sources, he said.

“If you look at it from a global perspective, which is what drives the price of rice, California is not a very large producer relative to the rest of the world,” Smith said. “The local impact is very big; the global impact and the consumer impact right now, not so big.”

A worker walks through a parched sunflower field as extreme weather conditions, including record-setting heat waves, are the latest sign of climate change in the western United States, where wildfires and severe drought have become a growing threat, from Sacramento near  , California, USA, 18 August 2022.

Globalized economies and trade serve as a buffer, said Josué Medellín-Azuara, an associate professor of environmental engineering at UC Merced who studies climate change adaptation and agriculture, the environment and urban water use.

“I don’t think we’re in a food security situation right now, but it’s really just a reminder that warmer temperatures may bring more challenges to the production of many of the agricultural products that we traditionally see,” he said. “It is recognized that underground reserves will not always be there to help deal with future droughts unless we use them more sustainably.”

Bad weather

In far western Minnesota, a few miles from the South Dakota border, Anne Schwagerl and her family run a 400-acre organic farm.

Last year, Schwagerl and other farmers in the North Star State faced the worst drought they’ve seen in decades. Some of the yields were cut in half on his family’s farm, where they grow crops such as corn, soybeans, oats and rye.

This year it brought rain. By mid-June, about 75 percent of the state had seen above-average precipitation levels, according to the Minnesota Department of Natural Resources.

“We had a very difficult fall crop and then a wet winter, which was great,” Schwagerl said. “We needed that rain, but then it just kept coming, and we had a very wet late spring. So it was this drafty feeling of knowing that this could change. [at] drop of the hat.”

A newly planted corn field at Anne Schwagerl's Prairie Point Farm in western Minnesota received 3.5 inches of rain after a severe storm in the spring of 2022.  The downpour came a month after Schwagerl and other Minnesota farmers faced the worst drought in decades. "stiffening"  nature of extreme weather, he said.

And in the last two years, the intensity of these weather events has only increased and relatively rare meteorological phenomena such as derechos, long-lasting and powerful wind storms, have entered the vernacular like gas cans that can crush grain bins. . , he said.

“2019 was a historically wet year. All year long, we couldn’t miss any rain for love or money,” he said. “2020 was Covid, our first Covid year, where everything was on lockdown. And then in 2021, we went through a once-in-a-generation drought.”

It seems more like you can’t use those words like “once in a generation” because they keep happening. Does that still make sense?” he added.

Schwagerl is uneasy about what 2023 may bring in terms of input costs, commodity prices and weather.

“We’re riding this never-ending roller coaster at the same time as everyone else,” he said.

Component factors

Ariel Ortiz-Bobea, an applied economist at Cornell University who works in agricultural and resource economics, is optimistic that the private and public sectors will invest in research and development and other mechanisms to improve productivity and conserve resources. He has expressed concern about the impact of global events such as the least developed countries and the war in Ukraine.

“If things get more politically hairy, those [drought] events become more painful,” he said.

Extreme weather can also have a negative impact on business results, according to research by UC Davis management professor Paul Griffin.

Griffin’s research on the heat effect found that every degree rise above 77 degrees Fahrenheit (25 degrees Celsius) results in a 0.63% annual loss in sales and a 0.16% reduction in profit margin. Stock prices On average, they dropped 22 basis points in response to a heat wave, Griffin found.

On Monday, July 11, 2022, corn crops were killed by extreme heat and drought during a heat wave in Austin, Texas.

“The result of this is that if sales are reduced, then companies will have an incentive to raise prices,” he said.

The extent to which extreme heat, drought and, more broadly, climate change will affect prices and inflation is very difficult to estimate, Smith said.

There are more costs in the price of a product than what consumers pay at the grocery store, including wages, materials, production, processing, transportation, distribution, retail and marketing, he said. Farmers and ranchers receive 8 cents for every dollar spent on food at home and away from home, according to the Farm Bureau.

“All these costs are much higher than the actual value of the food that the farmer produces in the food pie,” he said. “So when we’re looking at food prices and worrying about things that could drive up food prices, we should probably be paying more attention to those processing and transportation and marketing costs than what’s happening on the farm.”

Russia’s war in Ukraine fueled a sharp rise in oil prices, which filtered through key inputs such as fuel and fertilizer; and complicated already troubled supply chains, further raising costs for all businesses that help bring farm produce to the table.

However, the possibility of extreme weather could further deplete groundwater and limit future cropping potential, Smith said.

“That probably means, as we look forward, fewer acres of the different fruits and vegetables that are grown in California and eaten by people across the country,” he said. “So, inevitably, prices will go up in the long term, maybe not this year, but they will go up.”