• Drought expected to take toll at checkout

    Grocery stores around the nation may soon see a ripple effect of the drought, with animal-based, perishable foods costs increasing by nearly 5 percent in the coming year. NBC's Janet Shamlian reports

    By Janet Shamlian, NBC News

    FORT WORTH, Texas –  At a grocery store in Fort Worth, shoppers walk the aisles with coupons in their hands and off-brand products in their carts. A still-recovering economy has many looking to save a few dollars on their food bill, a job that is expected to become more difficult before year's end.  

    See our full drought coverage here. And on Wednesday, Aug. 15, watch NBC News, CNBC, MSNBC, The Weather Channel and Telemundo for daylong, network-wide coverage of the drought.

    The lingering and pervasive drought that's taking its toll on farmers and ranchers across America's heartland now is expected to soon impact families across the country in the form of higher prices at the market.  

    How much higher is a tough question.  

    Rising costs
    While the USDA predicts a 3 to 5 percent increase on everything from cereal to steak, some economists believe price hikes will come closer to 10 percent.

     

     

    One study suggests a family of four will spend $600 more in 2013 to buy the same products they purchased last year.  

    "I'll be more careful about how much I buy so there's no waste and be careful what I buy," one woman told me as she was choosing oranges in the produce section.   

    Slideshow: America's farmland baking in drought

    Drought conditions plague much of the United States after a summer of scorching temperatures and a lack of rain. The dryness is affecting America's farmland, threatening crops like soybean and corn.

    Launch slideshow

    The pictures of wilted crops and hungry cattle – so prevalent this summer – tell us beef and corn will affected. But experts say even items like chips and peanut butter will be more expensive at this time next year.  

    “I think we’re going to see price increase across the board,” said Bernard Weinstein, an economist at Southern Methodist University. “Because corn, in particular, is such a ubiquitous product – it’s used in the manufacture of most processed foods. “

    So the ripple effect will mean price hikes down every aisle – on products like cereal and chips.


    "I will try to find the best price because we don't have a lot of extra money to spend on groceries," said one woman visiting from Ohio and shopping with her daughter.

    The biggest hikes are expected to be on some of the staples – dairy, eggs, poultry, pork and beef.

    However, beef prices may actually ease a bit in the short term, as ranchers who can't afford to feed their cattle are selling them off early – so there's a healthy supply hitting the market now.

    But next year at this time, there will likely be shortages.  So things like hamburger meat, sometimes considered a budget-friendly meal, may soon be priced more like steak.  

    North Carolina, the second largest poultry producer in the nation, is facing big challenges as the price of grain rises. NBC's Anne Thompson reports.

    ‘You’ve got to eat’
    Talking to shoppers in this Texas market, they're aware of what's coming and resigned to it.  

    "Food is not a discretionary item," one man said as he put a carton of eggs in his basket. "You've got to eat."  

    From farmers’ pastures to our own kitchen tables, the drought of 2012 will exact a high toll.

    More coverage of the drought: 

    Drought sends Mississippi into ‘uncharted territory’ 

    ‘Best year ever’ for some farmers outside drought region   

    Forced to sell cattle during drought, dairy farmers ‘just keep praying’ for rain

    Americans tell their story of #Drought2012 

    In drought-stricken Wisconsin, farmers helping farmers  

    Emergency well drilling brings relief to farmers stricken by drought

    Have you been affected by the worst drought in more than 50 years? Share your photos with us on Instagram, Tumblr or Twitter with the tag #Drought2012. You can also upload your photos in the box below. 

  • Consumer prices may ease soon despite drought-driven spike

    AFP

    The Drought-stricken corn grows in Missouri Valley, Iowa. Corn prices have soared to record highs.

    By John W. Schoen, NBC News

    Though severe drought conditions have raised the cost of food this summer, consumers may have seen the worst of the price impact at the grocery store.

    Higher food prices helped lift the closely watched Producer Price Index by 0.3 percent in July, the fastest pace in five months. At the same time retail sales rose 0.8 percent, the first increase in four months and well ahead of expectations, signaling that the sluggish economy may be picking up momentum.

    The increase in producer prices was driven in part by a jump in light truck prices, up 1.6 percent, and pharmaceuticals, up 0.9 percent. At the grocery store, wholesale prices rose a sharp 0.5 percent in July, on top of the same price rise in June. Over half that jump resulted from higher prices for beef and veal, which climbed 3.8 percent, according to the government.

    But with livestock producers facing steep increases in the cost of feed grains, the rise in meat prices may soon reverse course, according to Michelle Girard, an economist at RBS.

    See our full drought coverage here. And on Wednesday, Aug. 15, watch NBC News, CNBC, MSNBC, The Weather Channel and Telemundo for daylong, network-wide coverage of the drought.

    “Because it's so much more expensive to keep them and feed them, you may actually get more cattle being brought to slaughter, so beef prices may actually in the very near term have downward pressure," she said.

    To help slow that price drop, and cushion the drought's impact on livestock producers, the White House announced Monday that the federal government will buy $170 million of meat and poultry. The increased demand generated by the government will help offset the expected glut of supply as livestock producers rush their herds to slaughter to avoid spiking feed costs. 

    Corn and soy harvest forecasts were slashed last week after the worst drought in 50 years destroyed millions of acres of crops. Corn prices last week hit record levels of nearly $9 a bushel. Wheat and soybeans also hit multiyear highs.

    But those spikes are expected to ease as demand eases, beginning with those livestock producers who are trimming herds. Ethanol producers facing soaring corn prices have also scaled back production.  

    Rising crop prices have also spurred foreign plantings in recent years, which may blunt the impact of this year’s shortfall in the U.S., according to a recent report on the drought's economic impact from the Federal Reserve Bank of Kansas City. Since 2003, for example, the former Soviet Union has added 48 million acres of crop production and South American nations have planted an additional 42 million acres, according to the report.

    “High prices could entice further expansions in global production that could lead to lower prices,” the report said. “The best cure for high prices might be high prices.”

    U.S. consumers will also be shielded from the recent sharp spikes in grain prices because the cost of those raw materials make up a relatively small share of the overall price of finished food products. Commodities like corn and wheat make up roughly 14 percent of the retail cost of food, according to the USDA. The rest of the price posted on the supermarket shelf represents processing, packaging, shipping, marketing and other production costs.    

    The Kansas City Fed report estimates this year’s drought could add about 4 percent to retail food prices next year. Since the cost of food makes up about 14 percent of the Consumer Price Index, the drought would contribute just 0.6 percent to overall inflation, according to the Kansas City Fed economists.

    Consumers facing higher food prices are also getting some relief from a recent fallback in gasoline prices. Energy prices fell 0.4 percent in July for the fifth month in a row, according to the government’s inflation report. Wholesale gasoline prices fell 3.1 percent last month.

    The summer surge in corn prices has sparked calls for a waiver of the government‘s mandates and subsidies promoting corn-based ethanol. Some 40 percent of the U.S. corn crop is diverted to produce the gasoline additive, which raises fuel octane and lowers air pollution.

    But a waiver of those mandates appears unlikely – largely because refiners would be hard-pressed to cope with a shortfall in ethanol production. 

    “Our gasoline logistics and distribution system is so entrenched with ethanol that we need it and very difficult for the refining system to change," said Andy Lipow, president of Lipow Oil Associates.

    With no end in sight to the parched conditions, areas and businesses hardest hit by drought are already feeling the economic impact. But overall losses in the farm belt are expected to be reduced by the widespread use of federal farm insurance, which covers farmer’s losses from crop failures.

    So the overall economic impact of this summer’s crop shortfall is expected to knock less than a tenth of a percent off gross domestic product, according to Paul Dales, economist at Capital Economics.

    “This is clearly not a disaster for the total economy, but when growth is just 2 percent every little bit counts,” he said.

    CNBC's Rick Santelli breaks down the latest numbers on retail sales and producer prices, with Beth Ann Bovino, S&P deputy chief economist.

    More money and business news: